Renewable energy sources may still generate only a small fraction of the world’s electrical power, but with the public finally waking up to the consequences of fossil fuel consumption, it’s not a bad business to be in.
It’s a very complex one, though, according to Jim Murphy, the CFO of Invenergy, North America’s largest independent generator — neither publicly held nor private equity-owned — of wind power.
The Chicago-based company has developed or is in the process of developing projects with a total production capacity at any point in time of almost 14,000 megawatts (MW) in North America, South America, and Europe.
About 40% of that capacity is powered by wind, an energy source that accounted for only 4.7% of electric power generation in the United States in 2015, according to the U.S. Energy Information Administration. Another 40% of Invenergy’s capacity is at plants fired by natural gas, which was tied with coal atop U.S. electricity-generation sources last year, with 33% each.
Natural gas isn’t a renewable form of energy, but it’s at least much cleaner than coal. The company also has projects in solar energy (another renewable, responsible for just 0.6% of U.S. electricity generation last year) and energy storage.
The use of renewable energy sources has been a topic of debate in this year’s presidential campaign, with Hillary Clinton in favor and Donald Trump opposed.
Murphy co-founded the company in 2001 along with several other energy-business executives, including the company’s CEO and majority owner, Michael Polsky. He recently spoke with CFO about finance at Invenergy and what it’s like to be the CFO of a company that’s working to make electric power generation a cleaner business.
What’s the biggest key to being the CFO at a business like Invenergy?
The thing I spend the most time on is raising capital for the projects. We’re not an investor-owned utility with a monopoly service territory; we’re an independent generator that sells the power we produce to a variety of different off-takers.
We do this in a manner that’s similar to real estate development, in that we develop a series of projects, each with its own characteristics and financing. Project finance capability and expertise is probably the most important thing to someone sitting in my chair.
What does that look like? How do you go about raising capital?
We raise capital for the ownership of our projects, including senior debt and equity. For some of our renewable projects, we have to source what’s called tax equity.
Tax equity refers to the fact that these projects generate a substantial amount of tax benefits under the Internal Revenue Code. You need to have a significant amount of taxable income to absorb those tax benefits, but we are constantly utilizing our capital for more and more development, so we don’t have a large tax base.
So we need to go to the market — primarily financial players, like banks and insurance companies, that can provide an equity partnership to us [while] we allocate the tax benefits to them. It’s a very bespoke product but similar to leasing in many ways, when leasing was a more tax-advantaged play. But it’s unique to the renewable power space.
What does that market look like?
There are a limited number of active players — realistically, maybe 20 in the U.S. market today, of which about five are doing probably 80% of the transactions. They are participating in this business just for that tax equity.
It’s really important to have great relationships with those parties and for them to trust our execution capabilities. We’ve been at this for some time and have developed many excellent projects, so we have those relationships, but it’s not a deep market.
Couldn’t you raise a lot of the capital you need by going public?
We have some institutional investors in the business, but we haven’t gone to private equity, or hedge funds, or in particular to the public market.
Development is a complicated business, and one where you need to be able to turn on a dime. That doesn’t match up well with being a public company and having to set expectations for quarterly earnings and having to report against GAAP. We’re not constrained by those things, so we’re able to be nimble and flexible in the way we develop projects.
We’re also able to really keep our eye on the ball of creating net present value for our stakeholders.
What makes the business so complex?
To be successful in development, you need a lot of things to happen simultaneously. You need to find a site for a facility, get it permitted, get it connected to the grid, and bring financing together — and you’re typically working on a short time frame where each of those factors is dependent on the others.
The team needs to really pull together to manage the schedule and bring all of that together by a particular date so that we don’t miss milestones under the various underlying agreements.
What’s the biggest risk factor you face?
The U.S. market and the world market are on a good trajectory toward changing the mix of power generation sources. We would hope that the political and social enthusiasm for that doesn’t change. If for some reason there was a desire for this progress to stop, that would be detrimental to our business. But I don’t expect that to happen.
I take it, then, that Invenergy has a clear interest in who gets elected president.
It’s pretty easy to see where the candidates are aligned on those issues.
What is the company’s overall strategy?
We are focused on two things. Number one is to create value for our stakeholders, including our founder as well as our third-party financial partners. Number two is creating a workplace environment for our team that’s exciting and stimulating.
What does that environment consist of?
I’m mainly referring to the nature of the work here at Invenergy — the ability for people to assume great responsibility quickly, the pace of execution, the apolitical culture, the flat organizational structure, and really interesting projects.
We also focus on nurturing our culture. For example, last year we moved into our new office space, which is modern, design-centric, open and collaborative, and better reflects our innovative spirit.
We have a robust social committee that coordinates out-of-work activities for employees like White Sox and Cubs games, holiday parties, and happy hours. Each month we have employee-led seminars — effectively combined with happy hours in our canteen area — where employees from different groups across the company give a 101-style overview of the work they do and how it ties back to our overall strategy.
Our Invenergy Women’s Network, which has an ever-growing membership, both male and female, provides employees with unique professional growth opportunities. And we often bring in outside guests and speakers — last year Mayor Rahm Emmanuel talked to employees about clean energy and innovation in Chicago, and EPA Administrator Gina McCarthy led a clean energy roundtable.
Your website says the name “Invenergy” is meant to evoke the idea that the company is innovative. How so?
We’ve done some very unique projects. For example, we bought a project from a developer that was in bankruptcy. The project was designed to have four natural gas turbines and four steam turbines. We were able to subdivide the facility and take half of it to another project we were developing in Canada and reinstall it there.
This wasn’t a matter just moving equipment. We also moved completed structures, kind of like disassembling buildings and re-erecting them at another location.
It was economically feasible because of our low cost of acquisition and our identification of a location in the grid where the re-use was economical. You don’t see that in our business. It was very creative and unique. We got two good projects out of one that we acquired in a bankruptcy.
Another area where we’ve been pretty successful with innovating around is battery storage. There aren’t a lot of large-scale battery storage projects in the world. We’ve been able to successfully develop a number of large battery projects, primarily in the central United States.
What does the glut of natural gas in the market mean to your business?
As we’re a gas-fired generator, to some extent it’s been beneficial to us. On the other hand, it’s not helpful to our renewables business [to have] low natural gas prices in markets where power prices are indexed or highly dependent on the price of natural gas.
But we typically aren’t looking to the market for our revenues. We typically sign long-term contracts with utilities and commercial industrial customers to sell them power over a long time frame. That insulates us from commodity volatility.
If Invenergy identifies as a clean energy player, why are you in the natural gas business?
Natural gas is what we call a bridge fuel. With the Paris accord, the Clean Power Plan, and other motivators for making our country’s mix of power generation cleaner, our country is moving away from a dirtier mix, driven primarily by a high concentration of coal-fired power plants, to more and more renewables. Over the long term we think a very high percentage of power generation will come from renewables.
But as coal plants get retired, there’s a lot of capacity to replace. They tend to be large plants, with capacities of 500 to 1,000 MW, whereas wind and solar projects are going up in 10 to 20 MW blocks. So natural gas is required to bridge the need. And while natural gas does have some emissions, it has a much lower emissions profile than coal.