was considering as it negotiated were the opportunity to extend the 30-year term of the con-
tract; an opportunity to build another plant at the Paiton site; and the increased electricity
sales that would be possible after completion of the Java–Bali transmission grid. By that time
Paiton Energy’s shareholders had advanced additional US$300 million equity into the project
to cover debt payments and other expenses.^7
In May 2001 the Indonesian government decided to pay US$260 million to settle OPIC’s
claim in connection with PLN’s refusal to pay CE Indonesia after it was awarded US$572
million by an arbitration panel in 1999. While some lawmakers still felt that the Indonesian
government should not bail out overpriced power projects commissioned under Suharto, oth-
ers were more concerned about Indonesia’s image in the eyes of foreign investors, whom the
country badly needed for power and other infrastructure projects.
At a power seminar in June 2001 David Newell of Unocal Indonesia said that projections
of supply and demand indicated a power shortage by late 2002 or 2003. He explained that nei-
ther the government nor local banks had the capacity to raise the necessary funding, while
foreign investors were still holding out because of concerns about their legal protection and
the slow pace at which the country’s power sector was being restructured. Unocal, for exam-
ple, was unwilling to commit additional capital to the Indonesian power sector until it reached
a fair and reasonable resolution of the contracts for its own Salak and Sarulla power projects.
Newell cited data from the Asian Development Bank indicating that a power shortage in the
Philippines during the late 1980s had reduced GDP growth by 6 per cent. He said that,
according to Indonesian government data, a total investment of US$28.5 billion would be
needed to restructure the country’s battered power sector over the following 10 years. At the
same seminar Citibank’s country corporate officer, Michael Zink, said that Indonesia would
have to compete with its neighbours in attracting capital and that, according to the Asean
Energy Centre, Southeast Asian countries would need a total of US$69.5 billion to meet
growing power demand between then and 2010.^8
In July 2001 PLN’s finance director, Parno Isworo, said that his company needed US$2
billion to revive suspended power generation projects in order to prevent an energy crisis, but
before it could attract the investment that it needed to finance those projects, it would have to
agree on lower purchase prices from Paiton Energy and Jawa Power (Paiton I and II). He said
that resolution of the PPAs for these two projects would serve as a showcase to investors that
Indonesia could provide a conducive environment for new power projects. In June PLN had
finalised an agreement with PT Energi Sengkang to purchase power at 4.286 cents per kilo-
watt hour, representing a 36 per cent reduction from the original contract or a US$200 mil-
lion saving to PLN. Parno said that PLN was concluding negotiations with other IPPs and
intended to take over some abandoned projects, such as the Tanjung Jati-B power plant in
central Java. He estimated that PLN’s installed capacity in the Java–Bali grid would remain
stagnant at 18,608 MW until 2003, while peak load would rise by 18 per cent to 15,608 MW.
A PLN study had indicated that the Java–Bali electricity grid would need an additional 1,776
MW of power capacity by 2003 and another 2,432 MW by 2004 to maintain a minimum
power reserve margin of 30 per cent. However, if new capacity did not come on stream, that
margin could drop to 16 per cent by 2004, putting parts of the country in darkness during peri-
ods of peak demand. Parno added that Indonesia’s current transmission capacity was inade-
quate and would need an investment of US$600 million over the following three years. He
said that PLN would rely on ‘captive power’ from industrial power generators as a short-term
solution to meet potential shortfalls. Captive power capacity had increased in the early 1990s,
POWER PLANT