Wall Street's Power Surge

Energy plant tragedy puts a light on bank, private equity push into electricity.

February 9, 2010, 3:41 PM

Feb. 11, 2010— -- Goldman Sachs has attracted a long line of critics and conspiracy theorists convinced the Wall Street bank is at the root of many an economic catastrophe.

But after a deadly power plant explosion in Middletown, Conn., involving a company called Kleen Energy, even members of the conspiracy crowd might have been surprised to learn that the natural gas-fueled plant was being built by a private equity fund and that it had been bankrolled by Goldman.

And while no one is suggesting the bank's involvement underwriting the nearly $1 billion project would have in any way compromised safety -- indeed, the exact cause of the explosion is still under investigation -- the incident does call attention to the ever-growing alignment between a shifting national energy policy and the Wall Street financiers who hope to profit from the green movement.

In terms of promoting clean energy, greed, for lack of a better word, is good, power industry members said.

"In simple terms, the clean fuel industry is dead without Wall Street funding," said Karl Miller, a former Wall Street banker, power industry executive and energy investor.

Jim Owens a spokesman for the Edison Electric Institute, a trade association representing investor owned power companies, said that's because those companies "need capital, a lot of capital."

"Electric utilities are perhaps the single most capital intensive industry there is," he said.

One of more than 80 natural gas turbine projects currently under construction in the United States, the Kleen Energy plant was just a few months away from finally generating electricity. It had survived nine years of political hurdles.

Goldman's financing, a complex debt issuance sold mainly to European banks, got done just a few months before the financial market meltdown of autumn 2008. Kleen, in fact, was to be among the biggest power plants in the Northeast and the hope was that its becoming operational would eventually reduce electric bills in Connecticut, which gets most of its power from out-of-state providers.

Coal-fired power plants are seen as Environmental Enemy No. 1, and the backlash against them opened the door for the Kleen project and others like it.

While coal fired plants still produce roughly half of all the kilowatt hours of electricity consumed in the United States, natural gas, which a decade ago accounted for just 10 percent of electricity produced, now accounts for upwards of 20 percent, according to the Edison Electric Institute. Hydro and alternative sources make up the balance.

With the backlash against carbon emissions only growing, coal-fired power plants could soon be a thing of the past.

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When private equity giant KKR acquired the Texas electric utility TXU a few years ago in one of the biggest leveraged buyouts in history, the new owners immediately tried to scuttle plans to build 10 new coal-fired plants, although since that time plans to build a few of those coal fired plants have been revived.

Kleen's developer, William Corvo, a former Middletown councilman, was able to secure lucrative contracts from Connecticut Light & Power to supply electricity for 15 years, locking in a guaranteed revenue stream, crucial for the project to get out of the starting gate.

Eventually, Energy Investors Funds, a $5 billion-in-assets private equity firm, acquired 80 percent of Kleen from Corvo (who still controls a small stake via his White Rock Holdings) and turned to Goldman to arrange an investment-grade-rated debt package. EIF, in turn, assigned the actual construction of the power plant to Connecticut-based O&G Industries, which served as the general contractor.

A slew of major private equity players, such as the Blackstone Group, as well as established energy investors, such as First Reserve, are gearing up to ride the alternative, renewable energy wave.

C.P. Eaton recently raised more than $1 billion of institutional capital -- including from pension funds, endowments and foundations -- for a renewable energy fund that will be investing in renewable energy assets in the United States and internationally.

"More and more private equity money is flowing into energy projects, especially wind power as well as solar," said Jeanine Prezioso, managing editor of Institutional Investor's Power Finance & Risk newsletter. "I don't think any one incident such as what happened in Middletown is going to stymie Wall Street's involvement in energy. There are a lot of private equity funds on the sidelines waiting to jump in."

That's because the U.S. government is providing subsidies to incentivize wind- and solar-related projects. Natural gas-fired plants, however, could represent the future of electricity, according to Miller. So while President Obama may have his sights set on scaling banks down to size, his energy agenda will rely on their core strengths -- capital formation.

"Wall Street knows that the core energy infrastructure plays will be in natural gas, expanding pipeline distribution to reach new production fields, and major electricity transmission upgrade projects for the utilities across the U.S.," Miller said. "Wall Street also knows that wind, solar and other clean tech companies and assets will make up only a very minor part of the overall capital commitments necessary to meet the U.S. energy needs."

The Energy Information Industry has recently released its long-term forecast, which stated that the United States, even by 2035, will still derive as much as 80 percent of its energy from fossil fuels.

Growth will have to come from natural gas-fired power plants, as "the current nuclear fleet of plants is aging and on their last legs, there will not be any wholesale new coal plants built, and clean coal is just not commercially feasible," Miller said.

Independent, privately funded power plants go back to 1978 and a piece of Carter-era legislation called the Public Utility Regulatory Policy Act. The rationale was the utilities claimed a power plant cost an outrageous amount to build, passed the cost on to their consumers, and kept the difference, and so, the thinking went, independent producers could keep them honest by competing on price.

Private equity funds investing in power goes back about as far as private power and deregulation, industry people explained. A lot of the reasons for an independent power sector owe to the need to keep monopoly utilities honest.

The meltdown at Three Mile Island three decades ago set nuclear power back.

Whether Wall Street's role in energy production is undermined by the Middletown tragedy remains to be seen, but if there is money to be made, it's likely that bankers and utilities will continue to collaborate.

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