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Japanese technology conglomerate Hitachi will withdraw from Mitsubishi Hitachi Power Systems (MHPS), a joint venture it established in 2014 with another power equipment giant, Mitsubishi Heavy Industries (MHI), over a dispute stemming from construction of two massive defect-ridden coal plants in South Africa.
Under a Dec. 18-announced settlement reached by MHI and Hitachi, Hitachi will pay MHI 200 billion yen ($ 1.8 billion) in March, and transfer its 35% stake in MHPS to MHI, which currently holds the remaining 65%. Hitachi will also request the Japanese Commercial Arbitration Association, the entity tasked with deciding the dispute, to immediately stop the progress of arbitration, while MHI will do the same after it receives Hitachi’s payment and shares.
The extent to which the changes will impact MHPS’s operations are unclear. Hitachi suggested it will withdraw completely from management from MHPS, though it will continue to work with MHI on maintenance services of existing thermal power plants.
The two Japanese giants created the flagship power plant and equipment venture company to combine their thermal power generation businesses in February 2014, with an eye toward gaining more clout in a rapidly changing global power market. MHPS has since grown into a massive company with nearly 19,000 employees, and today is a brand-name builder of gas, steam, integrated coal gasification combined cycle (IGCC), and geothermal plants, and a solid contender in the gas turbine, steam turbine, boiler, environmental controls, generators, control systems, and fuel cell markets.
MHPS told POWER that it cannot yet comment on details about the shakeup outside of a press release jointly released by MHI and Hitachi. In the release, MHI President and CEO Seiji Izumisawa said MHI will “now work towards the completion of the projects, along with strengthening the management of MHPS and transforming our power business to ensure sustainable growth.”
Meanwhile, as POWER reported last year, Hitachi has embarked on a cautious approach in the power sector and is centering efforts on explosive demand in digitalization solutions. It is focused especially on grid modernization, through its $ 11 billion acquisition of ABB’s power grids business last year, which is likely to close in the first half of 2020. The company will keep its focus on “social innovation businesses” to improve public “safety, security, and comfort,” Higashihara said Wednesday.
In documents to shareholders, Hitachi also said it will book expenses of 378 billion yen ($ 3.4 billion) related to the settlement for the fiscal year ending March 31. The company also said it lowered its annual net profit forecast to 170 billion yen ($ 1.6 billion) from 360 billion yen ($ 3.3 billion) as a result of the settlement and other factors.
Contentious Dispute
While details are still forthcoming, the settlement appears to stem from a contentious dispute concerning who should bear losses stemming from boiler installation delays at two 4.8-GW greenfield coal plants—Medupi and Kusile—in South Africa.
South African state-owned utility Eskom approved the projects in 2007 as part of a fast-track program to avert a looming power crisis, anticipating they would be completed in 2015. Hitachi won contracts valued at $ 5.2 billion ($ 6.2 billion in 2018 dollars) to supply the 12 supercritical boilers for Medupi and Kusile between 2007 and 2008, and it later transferred the contracts to MHPS, when the joint venture was set up in February 2014. MHPS delivered the first boiler to Medupi in August 2015, and the first boiler to Kusile in September 2017.
In September 2015, however, the U.S. Securities and Exchange Commission fined Hitachi $ 19 million, alleging that the Tokyo-based conglomerate violated the Foreign Corrupt Practices Act (FCPA) when it inaccurately recorded improper payments to South Africa’s ruling political party African National Congress in connection with the contracts to build the two multibillion-dollar coal plants.
So far, only four of six planned 800-MW units (Units 3, 4, 5, and 6) at Medupi have been synchronized, and Unit 2 is slated to come online this December, though Eskom has pushed out the full plant’s completion date out to 2021. At Kusile, only Unit 1 has been grid connected, and Eskom anticipates the full plant won’t be operational until 2023.
Eskom says the delays are in part because operational units at both plants are plagued by “major design and construction defects,” and “operational and maintenance inefficiencies,” which are direly affecting plant performance. These issues have required redesigns of several components in the new units, and, crucially, modifications to their boilers. Other ongoing projects include a redesign on pulse jet fabric filter plants; modifications of coal mills; repairs of dust handing plants, ash silos, and conditioning plants; and solutions to remedy defects in the control and instrumentation systems.
Deepening Crisis
The country has been scrambling to get the full projects online as its power crisis deepens. On Dec. 9, in a move that ignited fears of economic collapse in the already financially flailing nation, Eskom pushed up load shedding two notches to stage 6—meaning it shed 6 GW of load—after power supplies to incline conveyers feeding coal to silos at Medupi failed. Eskom Chief Operating Officer Jan Oberholzer told media this week that the event was hopefully a once-off scenario created by a perfect storm of conditions. Oberholzer had in September said progress had been made on “multiple enhancements” to the Medupi milling plant, and boiler modifications had been tested at Medupi Unit 6, adding a “decision on final solution” was “in process.”
Experts have meanwhile suggested that the boiler designs may not have been the best fit for South Africa’s “inferior” coal, which typically has an ash content in excess of 38%, in addition to low reactivity. Alex Ham, a former chief engineer at Eskom’s power station design division, for example, suggested in an open letter published by BizNews in May 2019 that some of the issues that the new Eskom plants face may be because the boiler internal volume and dimensions are undersized for the slow-burning coals, and the flue gas velocities are too high, causing excessive erosion of the burners, as well as the furnace tubing. “The change during the early contract stage from the tube mills originally specified, to vertical mills, was a major error. The change was proposed by the boiler contractor with a price reduction, which Eskom accepted. The pulverised coal fineness required cannot be achieved, and the mill wear will be excessive,” he wrote.
In their joint statement on Wednesday, while MHI and Hitachi noted they reached the “amicable” settlement “through sincere and conscientious discussions between both companies,” the dispute concerning Medupi and Kusile was contentious. MHI’s Izumisawa noted a “significant gap” existing in the way the partners viewed the situation, while Hitachi’s Higashihara described the issue as “long-standing.”
However, the settlement was ultimately “achieved by sincere discussion for the benefit of all stakeholders including our customers and shareholders,” Higashihara added. “I would like to express my deepest appreciation to everyone concerned in both companies,” he said.
—Sonal Patel is a POWER senior associate editor (@sonalcpatel, @POWERmagazine)
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