A next-generation business model
The Paiton coal-fired project in Indonesia was not just Asia’s first large-scale independent power producer, it was the start of a whole new business line for Mitsui.
In the 1990s, Mitsui embarked on a major change to its business model, shifting from trading toward investment. Paiton, a group of coal-fired power stations in Indonesia operative since 1999, neatly epitomizes that shift. Mitsui had been selling Japanese-made power-generation equipment to foreign countries, but in the 1990s it decided to deepen its involvement by building, owning and operating a power station of its own—such was the origin of Paiton.
Today, Mitsui is a major sponsor of Paiton Energy, an independent power producer (IPP refers to a power producer that is not a public utility) in Indonesia, which has three coal-fired power generation units at Paiton: Paiton I, two units with a combined capacity of 1,230 megawatts, and Paiton III, one unit with a capacity of 815 megawatts. Together they provide about 10% of the total electricity demand of the island of Java with its population of 140 million people. Power generation has grown to become one of Mitsui’s core business fields.
The road to success, however, was anything but smooth. When the project was launched in the early 1990s, Paiton was going to be the first-ever IPP in Asia. To tackle this challenge, Mitsui put together a multinational blue-chip consortium consisting of Edison Mission Energy, then the world’s largest IPP; GE Capital, the finance arm of General Electric, and thus was able to provide both finance and power-generating equipment, together with a local shareholder company.
Asia in Crisis
The capital expenditure involved in the Paiton project was huge by the standards of the time, so every possible step was taken to mitigate risks. Nonetheless, the Asian Financial Crisis of 1997 threw the project seriously off track. The rupiah lost six-sevenths of its value and the financing of the project had to be suspended and payment to contractors halted. Eventually, however, in 2002, the contracts for the power purchase agreement and for the loan agreement were successfully renewed after renegotiation.
The challenges continued. In 2004, Edison Mission Energy decided to sell all its overseas assets, Paiton included. By that time, Paiton had been operational for five years; Mitsui recognized that power generation could become not just an important, but a core business. Together with a new partner, International Power plc of the UK, Mitsui therefore acquired Edison Mission Energy’s portfolio of around 20 power stations. (International Power was later taken over by GDF Suez, now ENGIE. Currently, Mitsui and ENGIE have 40.5% each, Tokyo Electric Power Company has 14% and Saratoga has 5% of the equity in Paiton.)
Super Critical Technology
In 2007, Mitsui embarked on an expansion project, building Paiton III. Once again, a financial crisis, triggered by the September 2008 collapse of Lehman Brothers, intervened.
After some delay, construction eventually got under way in March 2010, finishing ahead of schedule in March 2012. The contractor was Japan’s Mitsubishi Heavy Industries (now Mitsubishi Hitachi Power Systems) and Paiton III showcases their supercritical-pressure coal-fired power generation technology. (Super-critical plants are more efficient than sub-critical plants, resulting in reduced carbon dioxide emissions.)
Looking forward, demand for electricity in Indonesia can only go up. While Japan, for instance, has a capacity of about 212 gigawatts for a population of around 125 million people, Indonesia has just around 40 gigawatts for a population of over 250 million people. Indonesian president Joko Widodo, who was elected in late 2014, has announced an electricity development plan targeting additional 35 gigawatts of generating capacity by 2019. Mitsui is keen to play its part in helping the government achieves its aims and to provide the power to drive the next stage of Indonesia’s economic growth.
The start of something big
Despite all the ups and downs along the way, Paiton was proof positive that Mitsui could develop, construct and operate a power generation project. Paiton also provided Mitsui with valuable experience and know-how to apply elsewhere. Mitsui now has a worldwide portfolio of over 50 power generation plants, covering both fossil fuels and renewables. Together these plants have a gross capacity of 38 gigawatts, of which Mitsui’s net capacity share is 9.6 gigawatts (as of March 31, 2015).
Power generation projects are now one of the primary focuses of Mitsui's infrastructure business. The economy may fluctuate, but demand for the basics—electric power, water and so forth—is a constant growth. Providing the infrastructure necessary for economic and social development and for the creation of a better environment is Mitsui’s mission.
Posted in September 2015