Project summary^1
Paiton Energy’s project is one of four similar-sized units at the Paiton power generating com-
plex on the northeast coast of Java, about 220 kilometres southeast of the city of Surabaya.
Jawa Power is another. The complex is intended eventually to have four projects and eight
units with 4,000 MW generating capacity.
Perusahaan Listrik Negara (PLN), the Indonesian state-owned utility, signed long-term
US dollar-based Power Purchase Agreements (PPAs) with 27 independent power producers
(IPPs) while President Suharto was still in power. Paiton Energy was the first and therefore
took the longest time to negotiate. It was intended to become a model for large private power
programmes. According to the project sponsors, being the first also explained why the
US$2.5 billion total cost of the plant was the highest of any of the Indonesian IPPs and the
tariff charged to PLN was the highest.
Problems for PLN and the IPPs began with the decline of the rupiah during the Asian
financial crisis, starting in 1997. As the rupiah continued to decline the IPPs’ dollar-denomi-
nated electricity tariffs became increasingly unaffordable for PLN. After Suharto fell from
power in 1999 PLN also argued that it had been forced to sign many of the contracts under
pressure from his regime. Many of the IPPs involved relatives or associates of Suharto as
local partners and none of the 27 IPP contracts had been awarded in an open bidding process.
Against this background both PLN and the new Indonesian government under President
Abdurrahman Wahid refused to make payments under the PPAs and the support letters. PLN
filed a lawsuit seeking to nullify its PPA with Paiton Energy and saying that the total cost of
power was twice that of power from other comparable plants. President Wahid ordered PLN
to drop the lawsuit and seek an out-of-court settlement. PLN and Paiton reached an interim
agreement in 2000 that enabled the utility to purchase power at a reduced rate, pending a full
restructuring of the PPA. After prolonged negotiations the original PPA was amended in
- Indonesia needed to settle its PPA disputes so that it could attract investors in additional
power projects to satisfy the country’s growing electricity needs.
Background
By 1994 Indonesia’s economy was growing at more than 7 per cent a year and electricity
demand was growing at more than 14 per cent a year. PLN had not been able to meet the
demand. Over 40 per cent of the country’s power was supplied by industrial power genera-
tors, largely in ‘captive’ plants built by industrial companies for their own consumption. It
was estimated that Indonesia would require an additional 24,000 MW of capacity, an increase
of 75 per cent, over the following 10 years, at a cost of US$35–60 billion. Most of this new
capacity would come from IPPs as part of the country’s independent power programme.
PT Paiton Energy is an Indonesian limited liability company owned by MEC Indonesia,
an indirect subsidiary of Edison Mission Energy Company, which is in turn an indirect sub-
sidiary of Southern California Edison Company (32.5 per cent); Mitsui Paiton, a wholly
owned subsidiary of Mitsui & Co. Ltd (40 per cent); GE Paiton (12.5 per cent); and PT BHP,
a special-purpose limited liability company formed by the Indonesian sponsors of the project.
The project originated in 1991 when the Indonesian Ministry of Mines and Energy
invited competitive proposals for the private development of two 600 MW units in the
Paiton complex. The sponsors retained Chase Manhattan Bank and the Industrial Bank of
PT PAITON ENERGY (PAITON 1), INDONESIA