1. Your firm, which you founded in 1987, was the first to focus exclusively on the electric power industry, and you closed your fourth fund in October, raising $1.7 billion. Can you give us some detail about how EIF invests in the industry?
We provide equity capital to electric power developers to build and operate their projects. The firm started out investing in the independent power marketplace. Until the 1980s, every watt of electricity was produced by utility companies, which sold their power to customers like you and me. But then, a new law came out saying that if electric utilities could buy power from independent producers more cheaply than they could produce it themselves, utilities would have to buy that power from the independents. That produced a groundswell of new power firms, and that is the marketplace we began tapping when we founded the firm.
EIF invests about half its capital in “brownfield” projects, which are already operating, where we look to improve operations and efficiencies. The other 50 percent is invested in “greenfield” projects, where we find developers who want to build new projects from scratch.
2. Who are your investors?
During our recent fundraising, we attracted about 50 new limited partners. We have 73 limited partners in all. Overall, our investors are made up of pensions and sovereign wealth funds, which together make up about 57 percent of our total commitments. Foundations, endowments and insurance companies make up most of the rest. We had a sense that because we had good returns in prior funds that people would want to come back to us for this fund, and they did.
3. Given that electricity is more or less a commodity, how can it also be a solid long-term investment for EIF?
Power is the one commodity you can’t do without. If we look at a power project and decide to help finance it with a developer, we go through a process that might take two years to site, and throughout this time, we’re putting in equity capital to get the project up to a point where we can take it to a utility and say, ‘look, we’ve got this terrific power project. You know you’re short of capacity, so let’s sit down and negotiate a long-term contract.’ That’s the way everything gets done these days. It’s the independent power producers that approach the utilities—or are approached by the utilities—and because of these producers, you now see utilities buying a lot of their power instead of developing it.
4. Is the discovery of shale gas behind most of the industry’s changes and opportunities?
Natural gas is now the cheapest fuel around, and that’s the complete opposite of where we were a few years ago, when coal was half the price of natural gas. But gas also addresses some of the leading environmental issues people care about because it replaces coal, which releases about twice the CO2 that gas does.
There are two forces behind the opportunities in our industry. One is that existing power plants are dirty and pollute. The second is that the plants we currently have are old and cost more to operate. About 70 percent of the coal plants in the U.S. are at least 30 years and have to be retired. The opportunity for us is to help utilities build new plants to make up for all the old ones that pollute and are expensive to operate.
5. In light of the recent failure of Solyndra, a solar company the government backed, are investors like you are scared off by clean energy projects?
The answer, even before Solyndra, is “yes.” The supply we already have built up on the renewable side in some states is approaching 20 percent. On the other hand, something like Solyndra is a whistleblower to what’s not happening well in the U.S., and that is the oversight of a build-out that hasn’t yet to show itself to be a viable marketplace for the next 20 or 30 years.
(Edited for clarity)