JAKARTA – Indonesian coal giant Adaro Energy is challenging the handful of companies that dominate the country’s power generation with an ambitious plan to build 5,000 megawatts of capacity by 2019, searching for a new growth driver amid sluggish coal demand.
Indonesia is experiencing strong economic growth, and per capita power consumption is expected to double by 2025. But the Southeast Asian nation is already only meeting about 90% of total electricity demand. President Joko Widodo is pushing for the construction of another 35,000MW of generating capacity by 2019.
The government lacks the resources to take on the entire campaign by itself, so it plans to entrust 70% of the planned expansion to independent power producers. A number of private-sector companies, including those from abroad, are preparing to enter a market where state-run utility PLN has an 80% share.
The big challenge
Adaro is leading the pack. The company currently makes over 90% of its sales from mining and exporting coal, but CEO Garibaldi Thohir told The Nikkei in an interview that he hopes to turn power generation into one of the company’s “three pillars,” along with coal and logistics.
Its first major project — a 2,000MW coal-fired plant in central Java — suffered a nearly four-year setback due to problems with land acquisition. But Thohir was confident of its potential, and said he would have walked away if it wasn’t going to be profitable. The consortium in charge, which includes Japan’s Electric Power Development, or J-Power, and Itochu, inked an agreement in June to receive a total of $3.4 billion in loans from the Japan Bank of International Cooperation and nine other institutions.
Adaro will also bid for the construction of large-scale power plants in the islands of Java and Sumatra in an auction scheduled to happen by the end of the year. The entire project is expected to cost about $6 billion to $7 billion. Thohir anticipates no problems with funding, given potential support from such international organizations as the China-led Asian Infrastructure Investment Bank.
The company’s shift to power generation was triggered by the sluggish coal market. The economic slowdown in China, the world’s leading coal consumer, has dampened global demand. Adaro was forced to cut output in 2015, resulting in a 30% drop in sales for the year. It is now pursuing a domestic-oriented business model instead of relying on foreign markets.
Other Indonesian coal miners are making similar moves. Bukit Asam is planning a 1,240MW power plant near its coal mine in southern Sumatra in partnership with a Chinese company. Leading mining contractor United Tractors will also build a 2,000MW plant in central Java with Japan’s Sumitomo Corp. and other partners.
But Adaro’s massive coal reserves — the largest in the country — and integrated supply chain give it an edge over competitors. The company’s main mine in South Kalimantan Province churns out roughly 110,000 tons of coal a day, which is then transported to the coast and loaded onto large ships. Adaro plans to ship up to 150 million tons of the fuel from the mine to the Java power plant over 25 years.
Despite a decline in earnings, the company still has a better financial position compared with many of its rivals and apparently has an easier time raising the massive amounts of funds necessary to build power plants.
Technical shortfalls
There is some cause for concern. Over half of Indonesia’s electricity comes from coal, but the government plans to gradually increase the share coming from natural gas and renewable energy in order to fight global warming.
Thohir has voiced plans to achieve a balanced energy mix over the next decade, but Adaro currently has little know-how on any energy source other than coal. While it is already planning a partnership with a Singaporean conglomerate on gas-fired power plants, the company needs to pursue similar arrangements with more foreign players if it wants to turn Thohir’s power generation ambitions into reality.