LS Power’s Deep Pockets, Risk Appetite Could Shake Up Renewables Development

Privately held LS Power doesn’t often publicize what it’s up to.
But the firm, which has built or bought 42�gigawatts of generation
capacity across the country, signaled recently that it’s making a
concerted push into renewable generation.

The greenfield developer and asset owner planted its first
multi-billion dollar stake in the energy space by building combined
cycle gas power plants in the 1990s. Its current 14 GW gas fleet
includes well placed assets like New York City’s Ravenswood
Generating Station, but the company also owns pumped hydro storage,
and even some coal.

This summer, LS Power finished the
largest lithium-ion battery in the world
—the Gateway project
in San Diego County. It has also worked with wind and solar—it
just sold a set of solar parks developed in the early part of the
decade to Capital Dynamics. But those resources had been a small
piece of the portfolio.

Now, CEO Paul Segal is hiring staff for a large-scale renewables
development push. Central to his thesis is that the conventional
approach to renewable project finance needs a shakeup to meet
society’s decarbonization needs.

“We will need to jump beyond the current financing model to
get to where we need to go,†Segal said in an interview. “We
think that there’s a place for us in getting control of great
renewable generation locations and perhaps financing them and
risk-managing them in a different way than what has been required
of renewable developers over the course of the last 15
years.â€

If project risk was easy to dispose of, everyone would do it.
It’s not yet clear if LS Power has cracked a code that earlier
renewables leaders have failed to discern. But LS Power has shown
an ability to take risks that peers do not, and win. That history
makes this commitment worth taking seriously.

New Look

To understand what LS Power wants to shake up, one must start
with how the solar industry operates today.

“Most developers now are getting financing and building
projects and selling them upon completion to investment groups that
have a lower cost of capital and are better suited to owning these
projects long-term,†said Colin Smith, solar analyst at Wood
Mackenzie.

These deals typically require a long-term offtake agreement,
which guarantees a certain amount of revenue for the new project
owner. Deals often factor in a certain amount of merchant tail, or
expectations for how the plant will make money once the contract
period ends.

LS Power wants to combine both roles. It will play the
entrepreneurial early stage developer, using in-house talent to
sniff out market potential and lock down land rights. But its
balance sheet allows LS Power to provide its own financing, freeing
it from needing to please financing partners and their lawyers.

“We don’t need to consistently monetize these assets to pay
our team,†Segal said. “We can own them for an extended period
of time.â€

That frees it from needing a decades-long commitment from a
utility customer in order for a project to be judged worthy. LS
Power will develop its own view on how project value will evolve
over time.

This also allows the company to chase competitive markets. While
developers desire long-term revenue certainty, customers seek
flexibility and cheap prices.

“I don’t know many market participants in deregulated states
that are in the market for procuring their power 15 years at a
time,†Segal said.

Even utilities would prefer shorter-term deals if they were
cheap enough, Smith noted. Developers have to overcome the sense
that deals are only going to get better with time; nobody wants to
be stuck with an old contract that ends up far above market
prices.

“In a commodified market, how do you get things shorter,
cheaper and better, all at the same time?†Smith asked. “You
have to get creative.â€

Corporate DNA

That attitude traces back to the company’s founding in 1990.
Founder and Chairman Mike Segal grew his initial projects into a $3
billion dollar fleet of gas plants, and used the proceeds to
finance new development from then on.

Segal once
described his strategy
as seeking out projects with “high
barriers to entry.”

“The reason to like those deals is there is limited
competition for them, and they usually offer the best rewards,â€
he said at an event in 2016.

Of course, at this stage in the renewables development cycle,
it’s too late to become a first mover. But there’s still room to
try new things.

“When you look at the amount of renewables required to get to
some of the objectives that have been laid out, it’s still very
early,†Paul Segal noted.

The company’s experience in the energy storage market shows
how it can pull this off.

Utility-scale battery development has advanced in the last
decade, but LS Power only joined the ranks of battery operators in
2018. That was with Vista, a battery that quietly joined the
California grid unsecured by any apparent utility capacity
contract. It functioned as a sort of corporate pilot project,
despite clocking in at 40 megawatts, the biggest U.S. battery by
that measure at the time.

“We anticipated a need,†Segal said. “We were looking at a
financing structure that didn’t necessarily require somebody to
show up and say, ‘We need your product for 75 percent of its
useful life.’â€

After that, the developer moved on to Gateway, which became the
largest battery in the world when it began operations this summer.
That one lacked
utility contracts
until a few months before construction
wrapped up. By then, California regulators had crunched the numbers
and realized the state was headed for a severe capacity crunch, and
needed several gigawatts of new plants in a year or two. It was a
good time to have several hundred megawatts ready to go.

This long gray building houses the most powerful lithium-ion
battery in the world, a project which showcases LS Power’s
unconventional appetite for risk. (Photo courtesy of LS Power)

The rest of the fleet

The LS Power fleet encompasses far more than those two
batteries, and the energy transition will affect the economics for
the other assets.

LS Power owns the Sandy Creek coal plant in Texas. But that one
is likely to stick around, Segal said, because it was finished in
2013 with high efficiency technology and stringent environmental
controls.

Gas plants are positioned to make sense for some time, but the
influx of renewables will push value away from baseload generation
and toward flexibility, which will benefit low fixed-cost peaking
generation.

LS Power has picked up legacy pumped hydro storage projects from
utilities. It splits ownership of the Bath County facility with
Dominion Energy, and recently acquired New Jersey’s Yards Creek
facility.

Pumped hydro facilities provide a far greater amount of
energy storage capacity than do batteries, and perform better for
long-duration storage. Bath can deliver 10 hours at maximum output,
well beyond the typical battery. But Segal concedes that pulling
off that kind of civil engineering feat these days is
impractical.

“I just don’t know that the economics of building a massive
pumped hydro storage project today will compete well against a
battery storage project that runs off of lithium-ion technology,â€
he said.

That approach contrasts with NextEra Energy Resources, the
renewables mega-developer that is trying to build a new pumped
hydro plant in Southern California. Failing to find willing
customers, the company resorted to a controversial legislative push
to
force utilities to buy power
from its facility. That effort
failed, underscoring the difficulty of this capital intensive
resource in today’s electricity markets.

LS Power also builds transmission lines, a crucial piece of
infrastructure for
moving clean energy to market
. But almost all U.S. transmission
buildout is controlled by regulated utilities, which typically pass
on cost overruns to their customers, Segal said. LS Power advocates
for competitive transmission, where it aims to save customers money
by doing a better job than utilities.

“Our traditional approach around competitive transmission has
been to manage the cost risk, so if we have an overrun, it’s our
problem, not the customer’s problem,†Segal said.

The solar projects recently sold to Capital Dynamics came from
an earlier era, developed a decade ago. LS Power decided it had
tapped out of optimizing them as an owner-operator, and decided to
send them off to a new owner.

But seeing the solar technology’s sustained performance over
all those years generated confidence for investing much more in
that resource.

“It’s easier than having something that’s spinning really
fast and incredibly hot,†Segal said.

Source: FS – GreenTech Media
LS Power’s Deep Pockets, Risk Appetite Could Shake Up
Renewables Development