Mitsui to Double Power Capacity in Five Years, Add Renewables

Mitsui & Co., Japan’s second-largest trading firm, plans to more than double its power-generating capacity within five years to profit from a global shift to spot electricity sales rather than long-term contracts.

The company seeks to own as much as 12,000 megawatts of power capacity, compared with 5,200 megawatts now, and is targeting projects in southeast Asia, North America, the Middle East and Africa, Yasutaka Fukumori, deputy head of strategy at Mitsui’s infrastructure unit, said in an interview. Mitsui also wants to bolster its share of renewable projects to 10 percent of its investments from 3 percent now, he said.

“Globally, the trend is heading toward spot trading,” Fukumori said. “It’s happened in the U.K., continental Europe, America, and Australia with the market liberalization, and it’s happening bit by bit in Asia and elsewhere.”

Starting in the U.K. in the 1980s, liberalization of the power industry allowed independent generators to compete with national utilities, buying and selling electricity on dedicated exchanges. While this can reduce generating costs, exchange trading has made power prices more volatile. In Germany, Europe’s biggest economy, benchmark contracts to deliver electricity next year have exceeded 90 euros ($124) a megawatt-hour and dipped below 48 euros within the last three years.

Japan’s market, controlled by 10 utilities that generate, transmit and sell almost all the country’s power, allowed Mitsui to invest in only 10 megawatts of power.

Power Assets

Japanese traders, with offices and operations around the world, have the opportunities to move in on power assets in other countries, said Penn Bowers, an analyst with CLSA Asia-Pacific Markets in Tokyo.

Mitsui agreed this year to study investing in Russian wind and hydro-power projects with state-run OAO RusHydro after the country dismantled its national utility and set up a power exchange to foster competition. Mitsui has investment units tracking the industry in the United Arab Emirates, Australia and Puerto Rico among others, according to its website.

The company eventually plans to enter the Chinese and Indian markets, which are currently difficult for foreign companies to access, Fukumori said.

Mitsui, which posted $55 billion in revenue last year, entered the power business in the 1980s as a minority investor in a coal-fired power plant in Pakistan, a project funded by the World Bank. By buying a 3 percent stake in the Hub Power project, Mitsui won a power-equipment order, Fukumori said.

Power-Plant Operator

In 2004, Mitsui and International Power Plc., a London-based utility, paid about $2 billion for 4,666 megawatts of assets, with the Japanese trader taking a 30 percent stake in the venture. Mitsui’s first involvement as a “fully fledged” power plant operator, not just an investor, came last year with the purchase of five gas-fired power units in Mexico, he said.

Mitsui took a 40 percent stake in the Mexican project, with Tokyo Gas Co. buying 30 percent, Chubu Electric Power Co. taking 20 percent and Tohoku Electric Power Co. buying 10 percent. The investment was partly motivated by the ease of maintaining gas-fired power assets relative to coal, Fukumori said.

The Mexico purchase also cautioned Mitsui against moving away from being an investor and becoming a traditional utility. Becoming a lead operator meant putting power-plant assets and project-finance loans on Mitsui’s balance sheet, as well as dealing with technical and local staff problems, Fukumori said.

“We’ll be looking to increase our participation as a lead operating company selectively,” Fukumori said.

Renewables Focus

Mitsui has stakes in power plants with total capacity of 23,000 megawatts and it generally takes a 25 percent stake in a project, he said. Among Mitsui’s 31 power investments, nine are fueled by wind, sunlight, or biomass, with hydro-electricity accounting for two more. Hydro-power accounts for 10 percent of Mitsui’s total capacity, compared with 3 percent from solar, wind and biomass.

Renewables will play a greater role in Mitsui’s power business, with wind projects being cheaper to build than solar plants, Fukumori said. The global solar energy business tends to rely more on government subsidies, introducing additional risks, he said.

“With time, the cost of wind will be no different from that of regular thermal plants and solar power will follow, and that’s why we’d like to focus on them,” Fukumori said. Mitsui is adding a 15-megawatt solar thermal plant in Spain and a 405-megawatt coal-fired unit in Indonesia, according to a company presentation.

Mitsui’s machinery and projects unit, which includes sales of power equipment, electricity, trains and water management, increased net income by more than 50 percent in the last fiscal year ended March 31 and accounted for 8.7 percent of the company’s overall 307 billion yen ($4 billion) in profit.

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