Mitsui, Itochu to exit coal business in Indonesia
Japan-based Mitsui & Co. has finally found a way to pull out of its investment in PT Paiton Energy, an independent power producer (IPP) that operates one of the biggest coal-fired power plants in Indonesia. Mitsui has signed a sale and purchase agreement with RH International (Singapore) Corporation (RHIS), a wholly owned subsidiary of Thai-based power producer RATCH Group Public Company Limited (RATCH), to sell all of its stake in Paiton and the two entities in the Netherlands and Singapore related to the business. The transaction, part of Mitsui’s decarbonization strategy, is expected to be finalized before the end of the Japanese fiscal year in March 2022.1
Mitsui is not the only Japanese company that wants to leave the coal business in Indonesia. Trading company Itochu is also planning to divest all investments in the coal business by March 2024.2 In Indonesia, the divestment will affect the PT Suprabari Mapanindo coal mine in Central Kalimantan and PT Bhimasena Power Indonesia (BPI), a 2,000-MW coal-fired power plant currently under construction in Batang, Central Java. Itochu is a minority shareholder in Suprabari Mapanindo, sharing 20:80 ownership with publicly listed heavy equipment distributor PT United Tractors (UNTR).3
Meanwhile, Itochu owns a 32 percent stake in Bhimasena Power Indonesia, and the rest is divided equally between Japan-based Electric Power Development Co., Ltd. (J-POWER) and PT Adaro Power, a subsidiary of coalmining giant Adaro Energy, with each controlling a 34 percent stake.4 Itochu will start the negotiation to sell its stake in the power plant once the construction is complete and the power plant starts running.5
Japan has committed to reaching carbon neutrality by 2050. On its way there, the country recently set a new ambitious target of reducing greenhouse gas emissions by 46 percent in 2030, much higher than the previous goal of 26 percent, after receiving international pressure to set a higher goal. Prime Minister Yoshihide Suga said Japan would even push the reduction further to 50 percent.6
The Japanese government’s ambition has pushed its private sector to accelerate its efforts toward decarbonization. Japan set a record for the country with the highest number of businesses that are supporters of the Task Force on Climate-related Financial Disclosures (TCFD), a framework to report climate-related financial information, and more than 80 Japanese companies have introduced an internal carbon-pricing system to promote investments and measure progress toward decarbonization by setting a monetary value on carbon emissions.7 As 40 percent of Japan’s carbon emissions come from power companies, we will see businesses in the sector accelerate the shift to renewable energy.8
Mitsui & Co. is the biggest shareholder in Paiton Energy in East Java 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, estimated to be worth more than US$1 billion. The reason the companies want to sell their stake in Paiton is not only because of the decarbonization goal, but also because of profitability issues as Java has seen an oversupply of energy, and the COVID-19 pandemic has further dampened demand for electricity. (Read: Mitsui to exit from Paiton Energy, shifts from fossils to renewables)
Along with its stake in Paiton, Mitsui will also sell its stake in related businesses, which are a 45.5 percent stake in Minejesa Capital B.V. and a 65 percent stake in IPM Asia Pte. Ltd. IPM Asia owns most of PT Paiton Operation & Maintenance Indonesia (POMI), which is the operator of Paiton's power plant. According to Fitch Ratings, the change in Paiton Energy’s ownership will not affect the company’s rating, which currently stands at BBB-(Stable). Paiton's management said the change of ownership would have minimal impact on the company’s operations since the local team that operates the project is likely to be largely unchanged. Furthermore, RATCH and RHIS have extensive knowledge and experience in the power business in the Asia-Pacific, which place them in good stead to take over the project. Fitch believes they will continue to ensure the alignment of interest toward the common goal of operating Paiton’s power plant.9
A source in the government has confirmed Itochu's plan to sell its stake in coal-fired power generation in Indonesia. The main reason is because Itochu wants to reduce the proportion of coal-fired power plants in its portfolio. In return, Itochu plans to develop new and renewable energy (EBT). Another source said that Itochu had ambitions to focus on developing floating solar PV in Indonesia.
Itochu's plan to let go the coal-fired Batang power plant follows Mitsui's step of exiting from the Paiton power plant. A number of Japanese companies are now preparing to invest in the EBT sector in Indonesia. The foreign investors’ plans to enter the sector make state-owned electricity company PT PLN nervous.
A number of sources in the energy sector said that PLN actually objected to several clauses in the new and renewable energy bill (RUU EBT), which is being discussed in the House of Representatives. One of PLN's objections is that the state-owned company is obliged to buy EBT regardless of the production cost. In the eyes of PLN, the RUU EBT tends to benefit foreign businesses and investors rather than state-owned companies. While it opens up investment opportunities, it does not benefit PLN.
In addition, PLN also reportedly objects to the RUU EBT because the new regulation does not consider the contracts that PLN had previously signed with private power plants. The take-or-pay scheme, which is mandated by the government, has not yet been formulated in the bill.
Another thing that PLN complains about is that the purchase price of EBT follows the local cost of production. Meanwhile, based on Energy and Mineral Resources Ministry Regulation no. 50/2017, the purchase price is at least 85 percent of the local cost of production.
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