Mitsui to exit from Paiton Energy, shifts from fossils to renewables
The end is near for Japan-based Mitsui Group’s investment in coal-fired power plants (PLTUs). The group’s general trading company Mitsui & Co. is weighing up selling its stake in PT Paiton Energy, one of the biggest independent power producers (IPP) in Indonesia1 . One of the reasons for Mitsui’s planned exit from Paiton is that the company wants to slowly shift its focus from fossil fuels to renewable energy. But sources said that Mitsui could no longer cope with changing regulations in Indonesia and the fact that Java Island has become unattractive because of an oversupply of energy.
Paiton Energy runs three PLTUs at Paiton Power Complex in Probolinggo, East Java, generating approximately 13,500 gigawatt hours (GWh) of electricity per year, around 10 percent of the annual electricity consumption on Java. The company holds a long-term power purchase agreement (PPA) with state-owned electricity company PLN to provide 2,045 megawatts (MW) of electricity, around 6 percent of the total installed capacity in Java.2
Mitsui & Co. is the biggest shareholder in Paiton Energy with a 45.5 percent stake. Other shareholders are Qatar-based Nebras Power with a 35.5 percent stake, a joint venture between Tokyo Electric Power Group and Chubu Electric Power Group called Jera with a 14 percent stake, and local energy producer PT Toba Bara, which owns the remaining 5 percent stake. The three foreign shareholders are reportedly planning to sell their stake totaling 95 percent with Mitsui and Nebras’ divestment estimated to be worth more than US$1 billion.3 Unlike Mitsui, which wants to sell all its stake in Paiton, Nebras will only sell a portion of its stake.
They want to exit or reduce their ownership in Paiton as Java has been suffering from an oversupply of energy, and the COVID-19 pandemic has further dampened demand for electricity.4 Indonesian Private Electricity Producers Association (APLSI) chairman Arthur Simatupang predicted that more investors would follow Mitsui’s path and walk away from PLTUs, especially in Java. He said the Java electricity system suffered from an oversupply of energy because the growth of electricity demand was not as high as projected. PLN Java, Madura and Bali business director Haryanto said the peak load in the Java-Bali electricity system is now down by 11.2 percent to 23,700 MW as a result of the pandemic.5
In addition, there has been pressure on global electricity players to move out of PLTUs for environmental reasons.6 The Mitsui group’s bank holding and financial services company Sumitomo Mitsui Financial Group (SMFG) announced on Apr. 16 that it would end lending for PLTUs7 and Mitsui is shifting its investment focus into renewable energy.
A representative from Mitsui said the company was working strategically on recycling its assets to strengthen its financials, as reported by Bloomberg8. Over the last two years, the group’s engineering leg Mitsui E&S has been struggling with losses, especially from Indonesian and Vietnamese PLTU projects. The company suffered a $648 million loss in March 2019 because it encountered problems in cooling water pipe installations for the Batang PLTU project in Central Java.9
In May 2019, the company announced that it would stop accepting new orders for thermal power plant civil engineering, withdrawing from the sector, instead focusing on engineering for chemical plants and renewable energy10. Mitsui & Co. and Japanese utility Shikoku Electric Power Co. are said to partner with local energy company PT Terregra Asia Energy to build and manage 10,000-kilowatt hydropower plant in North Sumatra. The total investment for the hydropower plant is worth $20 million, with Terregra holding a 50.25 percent stake.11
Mitsui E&S had sold roughly 100 billion yen ($930 million) worth of its operations and assets as of May 2020. Among the assets sold were its subsidiaries Showa Aircraft Industry and Mitsui E&S Plant Engineering as well as its solar power business. As reported by Nikkei Asian Review, the company has been scrambling to shore up finances eroded by the money-bleeding Indonesian power plant project. The report also added that the problems with the Indonesian project were compounded by the COVID-19 pandemic, in which multiple workers on the site tested positive for the virus in late March, putting work on hold in April.12
According to a high-ranking official in an energy company, some firms expressed their interest when Mitsui & Co. announced the plan to sell their majority shares in Paiton Energy.
One of them is local power producer PT Adaro Power. To carry out its plan to buy Mitsui’s shares, Adaro partnered with Shenhua Energy Company Ltd., a Chinese company currently working on building the 2 X 1,000 MW Java 7 coal-fired power plant in Serang, Banten. The two companies are said to be conducting due diligence to acquire Mitsui’s 45.5 percent share. If the transaction goes well, the deal is estimated to be worth more than $1 billion.
The same source also said that Mitsui had been considering exiting Paiton for some time, partly because the Japanese company believes the electricity business environment in Indonesia is no longer beneficial for its interests due to the ever-changing regulations in the past few years. Furthermore, Mitsui is reportedly tired of working with PLN. However, another source said that Mitsui was trying to enter the sustainable energy sector. Therefore, the company will slowly remove coal-based power plants from its portfolio.
Adaro’s plan to enter Paiton is not surprising to business players in the power plant sector. They believe Adaro has long been eyeing the opportunity to become a Paiton operator. So far, the company has also been supplying coal for several coal-fired power plants, including Paiton. Adaro has been supplying coal for Paiton since 2009. Adaro, along with coal producer PT Kideco Jaya Agong, supplies 8 to 9 million metric tons of coal to Paiton every year.
Aside from Mitsui, another Paiton shareholder, Nebras Power QSC, is also planning to sell 35.5 percent of its shares in Paiton Energy. However, Nebras is rumored to just sell some of its shares in Paiton.
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