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STRENGTHENING US-INDIA RELATIONS

US-India Energy Partnership

Finding Common Ground

Lydia Powell

BACKGROUND

India is the second-largest energy consumer and energy importer in the Indo-Pacific
region. Growth in energy demand and imports has peaked in China, the world’s largest
energy consumer and importer. But growth in India’s energy demand is expected to con-
tinue for the next three decades, making trade and cooperation with India in the energy
sector extremely important. India’s strategic vectors in the energy context are resilience
or the ability to adapt to changing markets, independence or low reliance on external
technologies and resources, and identity as a responsible, reliable regional and global
partner. India’s domestic goals in the energy sector, including self-reliance for strate-
gic autonomy, economic wealth maximization for material power projection, and social
justice for the provision of affordable energy, temper its strategic vectors. The success
of India’s energy partnerships with the US, like those with countries on every continent,
have depended on the bilateral relationship promoting India’s strategic agenda without
compromising its domestic goals.

AID AS THE MEANS TO ENERGY COOPERATION

In the 1980s and early 1990s, India’s energy production and distribution assets were
mostly government-owned, and energy prices were strictly regulated. There was little
scope for external intervention, and India-US energy partnerships consisted predomi-
nantly of aid-driven technical assistance. In the 1980s, the United States Agency for
International Development (USAID) supported installation of coal washeries in Dipika
and Korba, which paved the way for adoption of cyclone washers for high-ash non­
coking coal in India.1 The underlying logic for the US was that improvement in Indian
coal quality would reduce pollution and promote the use of steam turbines manufactured
by US companies. But coal washing did not take off in India, partly because of its impact
on affordability of electricity. India continued to employ domestically manufactured tur-
bines that were designed to use its own high-ash coal.

An Essay from Strategic Cooperation in the Indo-Pacific

 After economic reforms were initiated in the 1990s, USAID continued to channel aid to
programs for improving energy efficiency. Some of the energy initiatives between the
government of India and USAID created lasting efficiency improvements in energy gen-
eration, such as the 1995 program to reduce greenhouse gas emissions released per
unit of power generated from coal-based power plants, and to encourage the use of
biomass fuel from the sugarcane industry.2 Today, power plants of the National Thermal
Power Corporation, which was the Indian counterpart in the program, are among the
most efficient in India. The US-India Bilateral Project initiated in 2000 for energy conser-
vation and commercialization (ECO) helped set up the Bureau of Energy Efficiency (BEE),
to implement the country’s Energy Conservation Act of 2001. BEE is now the leading
energy efficiency and decarbonization program in India.

The Distribution Reform, Upgrades, and Management (DRUM) program was launched
in 2004 after India enacted the Electricity Act 2003 (EA 2003) to deregulate and reform
the power sector.3 The partnership between the Indian Ministry of Power and USAID
under DRUM aimed to accelerate power distribution reforms in India, but the program
had limited success. USAID’s failure to grasp the difficulty of increasing electricity prices
in India, and the political economy behind it, undermined the initiative. Offers of free or
subsidized electricity are instruments of socioeconomic and political transformation in
India, and discounts in electricity tariffs feature in election manifestos even today.

Aid was the primary instrument of USAID-supported programs, but the end was trade, as
most of the programs were tailored to move energy technologies to the marketplace and
commercialize market-driven energy products, services, and technologies. The trade
gains for the US were less than those for India. Following implementation of EA 2003,
power generation was opened to the private sector and foreign direct investment, but
American companies were outcompeted by companies from developing countries,
including China, in supplying plants and equipment to private power generators. For
India, the gains were significant, though unanticipated. The BEE is now one of the most
important institutions in promoting efficiency of energy use and in mediating reduc-
tion in the carbon-emission intensity of India’s economy. Reducing carbon intensity of
emissions by 45 percent from 2005 levels by 2030 is among three of India’s quantita-
tive targets in its upgraded nationally determined contribution (NDC) to the Paris agree-
ment on climate change. India also seeks to increase cumulative installed capacity for
power generation from nonfossil fuels to 50 percent and create additional carbon sinks of
three ­billion to five billion tons of CO2 equivalent through additional forest and tree cover.

DIPLOMACY AS THE MEANS TO ENERGY TRADE

Since 1963, when India and the US signed the peaceful nuclear energy cooperation
agreement, the two countries have engaged in civil nuclear cooperation continuously,
except for two interruptions by sanctions when India tested explosive nuclear devices.
In 2005, India and the US signed the civil nuclear cooperation initiative, a framework that
lifted the three-decade-old US moratorium on nuclear energy trade with India. Then, in

2   LYDIA POWELL U US-INDIA ENERGY PARTNERSHIP

2008, a landmark nuclear cooperation agreement was signed. Civil nuclear cooperation
has continued to feature in all India-US energy partnership agreements since then.4

Nuclear energy should be central to energy cooperation between India and the US, but
the partnership has not delivered anticipated gains. The growth rate of nuclear power
generation capacity in India was lower after signing the nuclear agreement with the
US, though capacity utilization improved as India was able to access the international
market for nuclear fuel. US nuclear companies, for their part, are unable to invest in India
because of a fundamental incompatibility between international conventions and India’s
civil liability law.

In contrast, globally traded energy commodities like oil and gas, of which the US is
among the largest producers, have yielded to US diplomacy. By the late 2000s, India
emerged as the third-largest consumer of energy after China and the US as well as the
third-largest importer of oil. Oil and gas became a part of the US-India energy dialogue
launched in 2005 to strengthen energy security and promote stable energy markets.
In 2014, the US became a net exporter of natural gas, and it capitalized on India’s aspi-
ration to increase the share of natural gas from about 6 percent of its primary energy
basket to over 15 percent by 2030.

The market mediates liquified natural gas (LNG) purchases on commercial terms, but
competition from LNG exporters in the Middle East and Africa, two of India’s largest
sources of LNG, made US energy diplomacy in the late 2010s vital in securing long-
term gas-supply contracts. Today, the US is India’s third-largest LNG supplier after the
Middle East and Africa. The US became a net oil exporter in 2018 and in just four years
it emerged as the fourth-largest source of crude oil supply to India, displacing veteran
suppliers like Iran, Venezuela, and the United Arab Emirates.5 Though sanctions against
Iran and Venezuela helped to make this possible, India would have easily found alter-
native suppliers closer to home but for US energy diplomacy that successfully gained
market share in the growing Indian market for crude oil. The decision to accommodate
US crude gains significance given the fact that India is an extremely price-sensitive oil
market and US crude is expensive. In general, decisions on crude oil purchases are
influenced more by refinery-level economics than by state-level geopolitics, which
explains India’s ongoing purchases of Russian oil at a discount of over $30/barrel.
Affordable crude controls inflation and protects the poor, whose per-capita incomes
are about a thirtieth of that of the US.6

In the 2020s, India-US partnerships are more likely to pivot around renewable energy (RE)
for decarbonizing the energy sector to address the challenge of climate change. In this
context, the US-India Partnership to Advance Clean Energy (PACE), signed in 2009 for
research and deployment of RE, gains significance.7 The goals of the PACE initiative are
aligned to support India’s ambitious RE capacity target of 175 GW by 2022. So far, over-
seas investment in RE capacity growth in India comprises less than 20 percent of total
investment, and the US share is a small part of it.

HOOVER INSTITUTION U STANFORD UNIVERSITY   3

 RE has shifted the strategic advantage from ownership of concentrated energy stocks
such as coal, oil, and gas to technologies that can harness dispersed solar, wind, and
other renewable forms of energy. In this regard, the US holds a significant advantage, as
it was the second-largest RE patent holder, after Japan, in 2010–19.8 China’s dominance
in the RE supply chain shows that technological advantage must be combined with man-
ufacturing prowess to achieve cost-reducing scale advantages. Policies that stimulated
market growth, primarily economies of scale from China’s sprawling manufacturing base
for solar panels, accounted for a greater share of the exponential decline in cost—better
than 97 percent over three decades—than government-funded research and develop-
ment. India presents a unique opportunity to the US as a potential industrial base for the
low-cost production of fuels such as green hydrogen, which is essential for decarbon-
izing heavy industry. Unlike the solar and battery manufacture sectors dominated by
China, there is no incumbent leader in green hydrogen manufacture, which makes India
very attractive for US investment. US policy needs to look beyond private sector equity
investments in the clean energy sector in India. Equity investments invariably focus on
economic returns. But if the goal is to build supply chains to challenge China, long-term
strategies that include financial investment, technology support, and state-level coordi-
nation are necessary.

Deeper US engagement in India’s RE sector is unlikely to have a downside, as climate

change is equalizing vulnerability and forcing a convergence of interests of rich and
poor countries. The partnership will be the first to acknowledge that climate change may
not remain subject to the prevailing geopolitical winds, driven by security and trade con-
cerns, but will become a force that actively shapes geopolitics.

NOTES
1. ​Ipshita Nandi Banerjee, “USAID-India Partnership in Energy: An Evolution Story,” Powerline,
November 4, 2022, https://­powerline​.­net​.­in​/­2 022 ​/­11​/­0 4​/­usaid​-­india​-­partnership​-­in​-­energy​-­an​
-­evolution​-­story.
2. ​“USAID-Government of India Clean Energy Partnership,” USAID report, reprinted 2013,
https://­pdf​.­usaid​.­gov​/­pdf​_­docs​/­PA00JRNB​.­pdf.
3. ​Kevin Warr, Michael Gaffen, Arunachalam Rajagopal, and Meenu Mishra, “Evaluation of DRUM
and WENEXA,” USAID, April 2011, https://­pdf​.­usaid​.­gov​/­pdf​_­docs​/­PDACR528​.­pdf.
4. ​Dinshaw Mistry, The US-India Nuclear Agreement: Diplomacy and Domestic Politics
(Cambridge: Cambridge University Press, 2014).
5. ​From the data on the website of the Directorate General of Foreign Trade, https://­commerce​
.­gov​.­in​/­about​-­us​/­attached​-­offices​/­directorate​-­general​-­of​-­foreign​-­trade.
6. ​World Bank Database, “Per Capita GDP (Current US$),” https://­data​.­worldbank​.­org​/ ­indicator​
/­N Y​.­GDP​.­PCAP​.­CD.
7. ​Jason Donovan, “The Path to PACE: How US Diplomacy Accelerated Clean Energy Cooperation
with India,” Foreign Service Journal, July-August 2017, https://­afsa​.­org ​/­path​-­pace​-­how​-­us​
-­diplomacy​-­accelerated​-­clean​-­energy​-­cooperation​-­india.
8. ​James Nurton, “Patenting Trends in Renewable Energy,” WIPO Magazine, March 2020, https://­
www​.­wipo​.­int ​/­wipo​_­magazine​/­en​/­2 020​/­0 1​/­article​_­0 008​.­html.

4   LYDIA POWELL U US-INDIA ENERGY PARTNERSHIP

The publisher has made this work available under a Creative Commons Attribution-NoDerivs
license 4.0. To view a copy of this license, visit https://creativecommons.org/licenses/by-nd/4.0.

Copyright © 2023 by the Board of Trustees of the Leland Stanford Junior University

The views expressed in this essay are entirely those of the author and do not necessarily reflect the
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HOOVER INSTITUTION U STANFORD UNIVERSITY   5

 ABOUT THE AUTHOR

LYDIA POWELL
Lydia Powell has been with the Observer Research Foundation for
over twenty years, working on energy policy issues in the Indian context.
Her ­current interests include energy access, electricity sector reform,
carbon ­constraints on energy use, and energy security via clean coal and
­natural gas.

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