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 U.S., signaled recently that it's making a concerted push into renewable generation.
The greenfield developer and asset owner planted its first multibillion-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 staffing up 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.”
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 previous 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.
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 [for the] 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.”
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 said. 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.”
That attitude traces back to the company’s founding in 1990. Founder and Chairman Mike Segal grew his initial projects into a $3 billion 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,” 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.’”
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' worth 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. Both 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,” 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 build-out is controlled by regulated utilities, which typically pass cost overruns on 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 that 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.