Bret Kugelmass
So we are here today with Doug Kimmelman, founder of Energy Capital Partners. Doug, welcome to Energy Impact.

Doug Kimmelman
Well, thanks for having me very much.

Bret Kugelmass
Yeah, no, super excited to talk to you. I mean, listen, I know you've got that background at Stanford and then Wharton for business school, Goldman forever. But tell us, when did you first become interested in energy overall?

Doug Kimmelman
I got lucky, I was 22 years old and I got a summer internship at Goldman Sachs in between my business school years, and all they had available for the summer was municipal bonds and utilities. I didn't, I didn't know the difference. But I made a wise choice. I just picked utilities. And as I like to tell a lot of those up and coming in their career, pick something, dig in really deep, become passionate about it, know everything about it, become indispensable. So I stayed in the same, same sector for the past 38 years. And the sector got a little interesting of late. So we'll talk about that.

Bret Kugelmass
Yeah, but now, utilities and municipal bonds, actually, you know, can have some amount of overlap, right? Because, you know, do they need to issue bonds to build energy infrastructure, or do those two things just live in totally different camps?

Doug Kimmelman
Very good. No, they don't. So there are something like 3000 electric utilities in the United States, if you can believe that. And about a third of them are municipality owned, or public power entities, and they are able to issue tax exempt bonds, because they are tax exempt entities. So you have that aspect of it. And then certain activities that utilities are involved with, especially things around pollution control, they are eligible to issue tax exempt bonds. So I don't know, maybe 10% of the debt of the utility would be tax exempt. It used to be a lot more when they were building a lot more things not so much now. But funny, you brought that up, I did have to learn about municipal markets. But I do tend to find all of the deregulation, the energy transition, the push towards clean energy, electrification, all those trends are pretty fascinating. I'm sure we'll talk about the society focus on that, society is not that focused on municipal bonds.

Bret Kugelmass
Yeah, I mean, listen, it does seem like the energy sector has gotten pretty exciting. But tell us, when you first got into it, where were you focused in utilities? I mean, is this on-

Doug Kimmelman
So I started 1983. And interestingly, 1983 utilities are building nuclear plants and they're building coal plants. And we grew to a peak where about 70% of our power in the United States came from coal and nuclear. And that's only a short, kind of 10 years ago, we were at that mark. We've now transitioned to more natural gas for our generation and renewables. But back then, I was covering investor owned utilities, publicly traded utilities, as an investment banker, and helping them with financing, helping them with strategic decisions, helping them think through how to create shareholder value, but so much of the work was in issuing stocks and bonds so they could pay for this massive infrastructure build. And it's funny, we've come full circle, as I said, 38 years later, it looks like we need another massive infrastructure build out in this country. So maybe I'll be doing a little bit of that again,

Bret Kugelmass
And not so surprising. I mean, infrastructure tends to last about 40 years, right? I mean, coincidence.

Doug Kimmelman
Yeah. I just didn't think I'd be around for two cycles of it, but I guess.

Bret Kugelmass
Okay, and so where did your career go from that from there, what types of-

Bret Kugelmass
Well, I stuck with it. I was with Goldman Sachs for 22 years, but I immersed myself in the utility industry, actually, pipelining utilities and got involved in that aspect of infrastructure as well. But the industry went through a transition. Around the world, deregulation was taking hold in the late 80s and 90s, led a lot by things that Margaret Thatcher was doing in the UK. And we followed that model to some degree. So, in the United States, you saw airlines deregulating, insurance company banks deregulating, and it was the time for the electric utility industry, because that's a big expenditure of the consumer. How do we create competition to bring prices down for consumers?

Bret Kugelmass
Now I understand how deregulation might be like a big thing in a country that's mostly socialist and everything that's government owned. But in America, things weren't really government owned, were they? How did things get deregulated here?

Doug Kimmelman
No, but the push for deregulation was consumer focused. Where does the consumer spend their money? You know, your electric bill is a big part of disposable income. And should it be monopoly controlled? And are you getting the lowest price with monopoly control? And clearly, you know, the utility industry, you're not gonna have two wires into your house, was a monopoly business. So the focus on where can we cut costs? Where can we create competition? And if you look at electric utility, they've got three basic asset classes. They have the power generation, the big central station power plants, which comprise about 50% of their assets, maybe 35% of their assets are the local distribution networks, the wire to your home, and then 15% are the long line transmission lines that carry power from those power plants to the city gates. Well, it was the power generation side that was thought to be the easiest one to create competition, why should the utility be buying from themselves? Why shouldn't they be forced to buy from the market?

Bret Kugelmass
And how come that wasn't always the case? How come that wasn't the case 30 years prior to that?

Doug Kimmelman
Well, we only really, let's just say, we electrified the nation, you know, starting in the 20s, and the 30s, and the 40s, when we kind of had an industrial build out. And, you know, reliability was the key and need for large capital dollars. And to split this up into little entities back then didn't didn't make a lot of sense. You know, you think about it, you know, Thomas Edison wasn't that long ago, the electrification of this country, believe it or not, you know, only really 100 years old, or so. So it was an evolution. And so deregulation was the first big trend where utilities were forced to divest power plants. I think Goldman Sachs, you know, we were able to shift our mindset to get our heads around, well, wait a second, electricity is going to be a freely traded commodity, just like natural gas was when it was deregulated. But electricity is different than any other commodity because the physical nature of it, you can't store it. So you're going to have a lot of volatility. And you're going to need a lot of expertise to manage this risk. And so that's when we formed a very large electricity risk management business to manage this burgeoning commodity, more dollars changing hands every day on electricity than oil and gas combined. So that was step one of how we reacted to deregulation. Step two, which we'll talk about, was then buying the power plants, and we became a principal, we bought up a fair share of the power plants in New York City, for example. Public, I don't think really realized that Goldman Sachs was their electricity provider, back then in the late 90s. But that's really where I got my start on the physical side of the business.

Bret Kugelmass
And how does that work? I mean, I think if Goldman Sachs as, you know, purely financial, purely math, purely numbers, when you say, own a power plant, what do they do? I mean, are they sending guys in suits, literally to the site? Or is it all just behind the scenes like I own 10% of this and 15% of that?

Doug Kimmelman
No you don't want to get those Hermes ties dirty. So, not them to the facility. So Goldman Sachs, as it grows as an institution, evolved decades over decades, from, you know, selling stocks and bonds, and they built a merchant bank, where they were investing their own capital, but investing their clients' capital in alternative investments, private investments. And so Goldman Sachs became a principal investor first on behalf of their clients in private equity. And Goldman Sachs Capital Partners, private equity funds, I think was the 98 and 2000 fund, invested in the power plants that I was out buying on behalf of the funds. And that was a good thing for their clients to diversify and earn higher returns. Goldman Sachs went public in 1999. And at that point, the firm wanted to diversify its revenue streams, its earnings. And we decided to move this business into the GIR commodities division, onto the balance sheet of Goldman Sachs and then use the balance sheet of Goldman to create a diversified source of earnings, a more stable source of earnings that we felt that the stock market would more appreciate, rather than just, you know, selling stocks and bonds, so it was really a new business arm for the firm. And we operated these plants, we controlled them, but we hired great operating teams. We'll get to ECP, we now have something like 15,000 plus people in operations that are experts that manage these things. We have oversight, obviously, we set the strategic direction, we manage the board, but we bring in experts on the day to day side. And really the focus, reliability, number one, right, say reliability, reliability; environmental compliance, you have to learn that because if you don't do that, you're out of business; and safety, you got to keep the workers safe. Those are really the three principles, which maybe we'll get into. They had to learn to be an accepted good operator, otherwise, you're out of business.

Bret Kugelmass
Yeah. And so how does it work? If I'm, you know, if I'm a client of Goldman Sachs, do I get to say, Hey, you know, once a month, I just want to take a look at what your potential investments are and I'll invest in this natural gas plan or this solar plant? Or is it that you put money into a fund, and you just trust Goldman Sachs, then to spread it out across the assets as they see fit? And then you get a financial statement every now and then.

Doug Kimmelman
Yeah, so private equity, which was how I got started, that's what I do now. But at Goldman Sachs, not unlike any other private equity fund, they raise a blind pool fund, and investors commit capital over a five year period generally. And the investor says, Okay, I'm going to commit a million dollars to this fund. And then Goldman Sachs, the managers of that fund, decide when they call that capital from investors, the investors don't have an ability to veto or say, No, I don't like that investment. Upfront, there are investment parameters of the types of things that the fund is going to-

Bret Kugelmass
What might be some of those investment parameters? And I'm going to ask that back in the day, and then I'm also gonna ask that today.

Doug Kimmelman
Yeah, it's changed because back in the day, most funds were generalist funds. Now, many funds, if not, most funds have a specialty, you go to your healthcare, private equity manager, your technology, private equity manager, in our case, the, you know, environmentally ESG, renewable focused manager, but back then it was it was a generalist. So really, there weren't that many parameters, there were maybe parameters around concentration, you can't put more than 10 to 20% of the fund. In any one deal. Perhaps there was geographic limitations. We don't want you know, all of the funds, say in emerging market countries. And so those type of things were pretty loose parameters for the manager to do their best. And if the manager did not earn good jobs, good returns in the fund, they're not going to raise another fund. And that really was the litmus test, is good returns or you're out of business.

Bret Kugelmass
Yep. And you had a little slip there when you said good jobs. But I almost wonder is that part of that? Is that something that is like part of the brand that people care about when you make an investment, that it also creates, like jobs in America or anything like that?

Doug Kimmelman
I think I think there are a number of things misunderstood about private equity. Private equity is one of the biggest employers in the United States. I will say when you when you go into store and you go into a business, and you say, Wow, this is really well run, and it's really well designed. And, the team here, the employees seem to be really well trained. I will tell you nine times out of 10, that's a private equity owned business, because they know how to run businesses, they know how to motivate, compensate, train employees. So, one of the biggest employee bases, you know, certainly in the country, and then we forget who is private equity. You know, we think it's Steve Schwarzman or David Rubenstein, no, private equity is investing for the most part on behalf of retirees in this country, retired teachers, retired government workers

Bret Kugelmass
Because pension funds will be the limited partners in private equity funds.

Doug Kimmelman
You've got it. While the private equity manager is going to put up some of his own capital, so he's aligned and has skin in the game, the investor, you know, 98% of the money, comes from large institutions, which are dominated by by pension funds. Yes, there are sovereign wealth funds. Yes, there are endowments and foundations and family offices and wealthy institutions, wealthy individuals, but you're dominated by the likes of CalSTRS and CalPERS. And New York State Teachers and entities like that.

Bret Kugelmass
How does that work in other countries that aren't so much like pension fund in terms of like supporting workers into their later years? And it's more of like, governments do it directly? Do they not have the same ecosystem of investment?

Doug Kimmelman
Look, I would say, countries that maybe have a little more of a socialistic bent, and let's think of Europe and let's think of Canada, they might in fact, have larger pension systems. And they too, are big investors in private equity. There are other places like Japan, where certainly they support their workers, but Japan has just been late to investing in private equity. And they've got an issue because when interest rates are 1%, or even negative, where are you going to get the returns to meet the pension benefit? And this is some would call it a ticking time bomb in the United States, because there's many states that have continued to guarantee defined benefits and increased benefits for the pension holders, other retired workers in an interest rate environment of one or 2%, it's really hard to earn the necessary return to meet those those obligations. And those obligations, in some cases, rising greater than the rate of inflation. So the alternative for a state is to maybe raise taxes to put more money into the pension to solidify it, that's not very popular. Another option would be to cut benefits to those pensioners, that's certainly not popular. So the choice that they land on is take more investment risk, investment or capital into potentially higher returning securities. And so alternative, things like hedge funds, private equity, real estate, private investments have been dramatically on the rise, driven by that one fact and a need for higher returns. And so far private equity has delivered.

Bret Kugelmass
And what are what are the target private equity returns?

Doug Kimmelman
Probably on a net basis after fees, low teens, you know, 12%.

Bret Kugelmass
That's better than 1%, that's a lot better than 1%,

Doug Kimmelman
It's better than 1%. And generally, in a pension fund, you have an actuarial rate of return that you're expected to achieve. It's somewhere in the neighborhood of 7%. These days, so finding asset classes that are north of 7% are hard, especially we have a stock market, that's an all time high, we have interest rates, perhaps starting to rise, that means bond prices going down. So you're kind of forced to some degree into higher returning alternative assets.

Bret Kugelmass
And, okay, I'm gonna ask you one more macro question on this. So let's say the trend is towards putting more capital towards these higher, let's say higher risk, but higher return instruments or, you know, through vehicles like private equity funds. And what happens, though, if the market can't support that many good investments? Like Like, what if there's more private equity funds out there than there are really good things to put money into?

Doug Kimmelman
Yeah, well look, with risk return, right, there's a there's a trade off, it's kind of a straight line, with higher return a higher expected return, higher potential return comes higher risk, and higher standard deviation of returns, meaning not every fund is going to get you that that 12%. Now, you may have venture funds at the at the high end of risk return, where some you get totally wiped out and sometimes you make five times your you know, your money. So fortunately, for private equity, there is a lot of liquidity in the system, from the Federal Reserve, from stimulus, from about to be infrastructure bill, it looks like, and when there's liquidity in the system, right, that creates opportunities. We've had a growing economy. We've just talked about certain sectors of the economy where new businesses are cropping up, where there's new opportunity for growth, we're going to talk a bit about clean energy, we could talk, you know, there's technology, there's healthcare, we could go through a number of industries, either going through transition, going through new products, going through growth trends, that there have been opportunities. So private equity, you know, to some degree, has been a big player in this growth, a big player in restructuring industries that maybe weren't that efficient. And so the returns have been there. So, so far, so good. I will say for the last 15 years, skeptics have been saying, there's too much money, there's not enough deals, there's too much money, there's not enough deals, and they've been proven wrong.

Bret Kugelmass
Yeah, and I can see why too. I mean, I've walked into some pretty terribly run businesses before. And you can just see, oh, my God, if you just applied the best practices management, the best process restructuring, applying new technology like this could business can be doing so much better. And what you're saying is private equity is the instrument by which you can take some sort of financial control, and invest in a company, make it more efficient, higher returns andreturn that money back.

Doug Kimmelman
And we're motivated, not just to keep our firm running, but myself and everyone else like me that manages a private equity firm. I've put in virtually all of my net worth into my funds. So trust me, I am highly motivated to make sure there's a return.

Bret Kugelmass
That should be a requirement.

Doug Kimmelman
Well, I think most investors, you know, see that and do require the general partners do that. But I want my firm to continue thriving, I want to raise the next fund, I need to have good returns. So we are granularly focused on each one of our businesses, on how its managed and beyond just putting the best CEO in charge, which is a critical ingredient, but governance, right how we're monitoring that company, not just on profitability, but on all the things I just talked about: reliability, safety, how the employees are, you know, are treated, you want to make it a great place to work. Because if you have a great culture, a great environment, and if we can provide the capital, and we can put a structure around this business, and we can motivate everyone and reward them, if they do succeed, there seems to be a right way and a wrong way to manage a business and you said it well, if you go into store, you can kind of tell what's being run well, and you can even tell if employees are happy employees are not happy. You know,

Bret Kugelmass
And so tell me, what was that transition like, you know, going from Goldman Sachs to found your own firm? What prompted it? And how did it come together?

Doug Kimmelman
Yeah, well, you know, as I left it, you know, we had that trend of deregulation at Goldman, we had a very large asset footprint on the balance sheet of Goldman Sachs. And if we go back, and this is in the, I don't know, 2002, 2003, if you look at the income statement of Goldman Sachs, you'll see this line item right near the top called electricity sold. And, you know, the rating agencies looked at Goldman Sachs at double A rated institution at the time, but something like 90% leverage. And you would say, how could you have such a high credit rating when you have so much debt? And the argument was, don't worry, all of our assets are highly liquid marketable securities, if there's ever a crisis in the world, Goldman Sachs can just sell them down very quickly, the rating agencies said, Well, what about these illiquid power plants? You can't just sell them down quickly. And so Goldman was concerned about the credit rating, and that led me to spinning out and saying, you know, I'm going to find capital elsewhere. I chuckle I look back. The power plants weren't the illiquid things. The mortgage securities were.

Bret Kugelmass
In hindsight, yeah.

Doug Kimmelman
In hindsight, not that hard to sell a solar power plant. So I said, How hard can it be to raise capital? Turns out, it's very hard to raise private capital. But I went off for, you know, a year and a half to raise our first fund, we were fortunate, we raised that I think, the largest first time private equity fund, at the time, it was about two and a half billion dollars, you need a lot of capital, because these are very capital intensive sectors. And a power plant costs a lot a lot of money. So that was '05, what's that, 16 years ago, we formed Energy Capital Partners.

Bret Kugelmass
Partners? Where did you find your investors? Where'd you find your limited partners?

Doug Kimmelman
Well, it started, you know, the first thing you build a team and started with me and didn't want to do this alone. So I kind of cherry picked those with the skill sets I wanted, those that had relationships, you know, with utilities and asset owners that could help find the deals, those that had a commodity background that understood commodity risk management, those that had mergers and acquisition skills of how to put deals together, project finance, folks, how do you put the debt financing on these folks with regulatory legal compliance, so, built what I thought to be was an optimal team. And then I went out on the road, fortunately, you know, a partner at Goldman Sachs, you're fortunate, you have a pretty good Rolodex. And so my first investor was the University of Notre Dame. And that was a very, you know, II couldn't have been more excited, and very fortunate CalSTRS, another big one in California and the pension plan. And it just started feeding on itself. Hard work, I like to say and it takes it a mindset. When you raise private equity, if you are rejected 80% of the time, most people would be kind of down in the dumps, something's wrong with my strategy, something's wrong with my firm. Rejected 80% of the time is a homerun, I view that as glass half full, more than half full, because 20% of the time I was being accepted. So I just said more meetings, more meetings, more meetings, and we'll get there.

Bret Kugelmass
You're telling me I mean, I'm an entrepreneur, I've raised venture capital and 20% of time be great.

Doug Kimmelman
Right. But a lot of people that's hard to take rejection. And I like to say, you know, if I get a no, I'm excited, because that means the person thought about it. He came up with a reason. And so tell me why no. And maybe we can talk about that. So I wrote a lot of white papers on countering the no, of maybe you're missing something here. So perseverance, hard work, pounding the pavement, literally around the globe, which I continue to do other than in this virtual world of COVID. It's changed fundraising, maybe we'll we'll get to that.

Bret Kugelmass
But tell me, you know, when you say you build a team, right, but you got to feed them, and the first deal doesn't always, you know, come through so quickly. What was that time period like when you're trying to get some money? I mean, maybe you have some capital committed and that can pay some staff. How long do you have until you have to make your first investment?

Doug Kimmelman
I paid everybody. I paid out of my own pocket for the first year-

Bret Kugelmass
Unbelievable.

Doug Kimmelman
-before $1 came in. I didn't even think twice about it. And I said, well, we're gonna do it. We're gonna raise the money. We're gonna do deals. You know, I've been doing this my whole career. I'm year 23 into my career, why would all of a sudden I not know how to do things? So I didn't view it as a risk. And maybe that's how entrepreneurs think but but I funded everything from opening two offices to hiring all of our employees, maybe the biggest expense was diligence and legal. Because when you're looking at deals, it costs money to evaluate the deal, bring in engineers to check if it works. But, you know, we pulled it off, I think our first acquisition was a predominantly large hydro system, and, you know, back then maybe it wasn't called renewables. It's called renewables now, but we were pretty excited. Unfortunately, we had a reputation that while our firm, you know, ECP, was a new name, people weren't a new name, and we had credibility from having owned facilities and being part of the fiber of the utility industry so that we were trusted with remember those big three that I said: reliability, environmental compliance and safety. We were trusted stewards of these critical infrastructure assets. So we got it done.

Bret Kugelmass
Amazing. Okay, so you do your first deal. Now you've you've built the team, you've done your first deal. Now you've proven to people now you're able to pull in more limited partners, maybe raise a couple more funds. I mean, it's got to get a lot easier after that first moment. How did things transition, you know, ever since the origination?

Doug Kimmelman
It was never, I say, It's never easy, never easy finding good deals, spotting the trends, managing the companies, financing what you're doing. And we've had really an evolution of trends. So we had, I'll say, in maybe around 2007, 2-3 years in, got whacked by a 2x4, there was this thing called fracking, horizontal drilling in shale gas that I had never heard and there was probably the biggest technological disruption in my lifetime, in the energy sector, was this new technology that made it you know, cheaper to find a massive amount of abundant oil and gas. So the price of natural gas, which is the fuel on the margin that is used to create electricity, the price of natural gas dropped by 90%. Right from from $12-13/MMBtu to around $2. And that totally disrupted which assets were economic, which assets were not economic, disrupted the flow of natural gas, disrupted the power industry greatly. And then right on top of that, we have states coming out with renewable trends, saying that we're requiring in California now 100% renewables. So it very much changed the whole mix. So this put everything in a blender, took a few years to come out of that and figure which way is up, and it's been exceedingly profitable since that that period.

Bret Kugelmass
Because, for you, I mean, it's not like you were, you know, wedded to a certain technology. So from your position, I mean, change is a good thing change is opportunity change is, you know, you apply intelligence, you spot trends before other people do, and then you get the leg up.

Doug Kimmelman
Yeah, change is good. I chuckle a little bit a the government, keeps changing the rules, changes regulations, changes tax policies, incentives, things like that. And I'm a little bit, whatever, I know, you're gonna keep changing things, and it creates disruption and opportunity. Just tell me what the rules are. And we'll figure out-

Bret Kugelmass
And is that ever a problem? Is there ever uncertainty around the rules that actually stimmies your ability to make a move into a sector?

Doug Kimmelman
Yeah, I mean, you know, it's been tricky in the renewables, just in terms of putting the appropriate rate of return. They've had tax incentives for wind and solar, that have been continually expiring. And it's really hard. And they've renewed them, and they let it go down to the wire, and then they renew them, but you have to price in uncertainty. So that's been an example of something that's been, you know, a little tricky around the around the fringes.

Bret Kugelmass
Yep. And, and so when did ESG- and let me actually rephrase it. When did environmental oriented assets become part of your guys' focus and part of our program?

Doug Kimmelman
So, we're fortunate, there's a lot of people, I like to say they're greenwashing themselves. There's a lot of new arrivals that are jumping into this and the first thing, I say the product hasn't changed. The product is called I like to call the product reliability. Some people call the product electricity, right? Nothing works in this world. If the power went off right now, you and I, right, we'd freak out. That'd be the end of this nice chat. So it makes everything work. And there's nothing more important in society, to a functioning economy. And if you have emerging countries economies around the world. First thing they'll tell you they want is reliable electricity. First and foremost, you got to understand your product, and there's a lot of folks that are coming into this that don't. The second thing, I think it was one of the first things that I said to you, to stay in business, you have to follow the rules. And environmental compliance has always been a key fiber of this industry. We don't own any coal plants now. But back in the, in the 80s, in the 90s, when 50% of our power in the United States came from coal, of course we owned them and how you operated them meant whether you stayed in business. So part of our fiber is has always been an environmental focus. And then when renewables became, we'll call it a societal trend, that we need to reduce the carbon footprint of this planet and deal with with global warming, we obviously were the most well situated folks to jump in. Bought my first hydro facilities, I think, in 1998, so been at this a very long time. So we'll get into, we're now the largest private equity owner of renewables and battery storage, which is the the next emerging trend in the in the country. Not because we understand renewables, we understand electricity, we understand environmental regulations, environmental compliance, we know how to manage these facilities, we know how to manage risk. As I said, electricity is a commodity that can't be stored, we're getting there with battery technology. But for the most part, and I don't really care if it's coming from hydro, geothermal, wind, rooftop solar, or a natural gas facility, you have that same dynamic, but many of the new people that are coming in, they've had no history in understanding electricity as a commodity, and how to manage that risk. Many saw some of that raise its ugly head in Texas.

Bret Kugelmass
And okay, now with so many assets owned across such a wide, both geography but also a portfolio of different different sectors, do you guys gain particular insights? I mean, do you even have better data, just from all of your assets spread across the country as to- I mean, do you do any data modeling where it's like, you take some of the information about how these assets produce energy, or how the grid demands energy, and then like, predict, you know, where or what will be needed moving into the future,

Doug Kimmelman
I think that's the key to our success, we've modeled, and this goes all the way back to the 90s, every region in the United States, and most of our regions are not interconnected from a transmission grid. So the dynamics in Texas, for example, are totally different than the dynamics in the Pacific Northwest that has a lot of you know, hydro power, or the South that has a lot of nuclear power. So you need to know every single plant that exists, you need to know the transmission grid, because an electron can't necessarily move from point A to point B, you need to know the maintenance schedules of knowing when power plants are going to be down for maintenance, because that may mean you know, you need to know who the customers are. Are they utilities? Are they municipalities? Are they large industrials? And how you're going to hedge, you need to know the rules in each state, you know, California putting in rules, that utilities are required to contract for storage and for renewables, and you need to understand that. So we have been modeling this, right, for the for the for the past 30 years, in a very, very granular way. And that's how we make our decisions. I think maybe we've all learned in society long ago, you know, if you're getting your information from the newspaper, or the media, maybe it ain't so accurate, though, it's having done it, it's your own models, but it's also having a network of people that you know and trust where you get your information from. So I know, I think for the most part in my sectors, who to believe and not to believe. And so you know, you're talking to boots on the ground. And you're really learning from boots on the ground, and fortunately, you have access to boots on the ground to what's really happening.

Bret Kugelmass
It's so funny say that, I mean, that was part of the founding story of of our firm here, you know, we were seeing just like two different tales. You know, we were looking at the data. And then we were also seeing what the media was saying. A lot of people- I started off my career, you know, working for Nanosolar, which was an advanced, you know, solar technology company. But, for the last, you know, 15 years, I've been seeing, you know, hype hype hype around renewables. And yes, it's growing. But I also see the data about how much other energy is needed, how much other energy is being used new assets around the world. And there's a big disconnect there. So I hear you when you say you got to rely on your own modeling and your own research and not just what you read in the news.

Doug Kimmelman
Yeah, in this Texas weather event in February, the worst performing asset was wind, something like 90s at the peak, something like 97% of the wind assets were not, were not running. And that created real havoc for the asset owners that assumed maybe they were going to run all the time, that had contracts to sell electricity at a fixed price and had to go into the market and buy very expensive electricity and couldn't cover their debts.

Bret Kugelmass
And what do we do about that as renewables increase in terms of total grid penetration? I understand batteries, but batteries can only go you know so far. So where do you think things are headed?

Doug Kimmelman
Well so far, I'll do a twist on your words so far, they can only go so far. But we have to get there. And you know, we have to get there. So I think the world society is intent on increasing our mix of renewables. Well, obviously the best renewable is something I like to say that is baseload, that runs all the time. So we own, which I think is the largest geothermal facility in the world. It's in Northern California, that's steam out of the earth.

Bret Kugelmass
And nuclear matches that bill also, they operate just like geothermal in that sense right?

Doug Kimmelman
Well, there's a controversial topic that we could spend an hour on. So nuclear is green, there's no doubt about it, there's no greenhouse gases coming out of a nuclear facility. The United States is still the world's largest producer of nuclear power, most people don't know that, they think it's France, but France has a higher percentage, but off of a smaller base. So still, about 20% of our electricity comes from nuclear, but we are shutting down the nuclear plants at a very rapid pace for a few reasons. Number one, they're old, right, 40 years, some cases, you know, approaching 50 or 60 years. To extend the life of a nuclear plant, you might have to put in a few billion dollars and just upgrade the, you know, the pipes and the like to make sure that it continues to function well. Well, if you're gonna make that big investment., interestingly, your product is electricity, what has pushed the price of electricity down? Shale gas. Fracking phenomenon has created so much abundancy of natural gas, that's the fuel on the margin that is used to create electricity. So because strangely, because of fracking, in abundant natural gas, the price of electricity is down. So if your product is electricity, are you going to make a $2 billion investment, when your return may or may not be that great, but then the bigger problem, I like to say, half of society likes you, and half of society doesn't, which is, pick the issue in today's world. We're split 50/50. And it's one of those. So you know, we had Three Mile Island and there was a movie, China Syndrome, and the mindset of much of America is this is just, you know, too dangerous, the waste the chance of an accident, Chernobyl, Fukushima. Others say, wait a second, you know, no one's been killed in a nuclear accident in the United States, the safety record is impeccable, these plants run at 95 plus percent of the time, they put out no greenhouse gases. Look at the evidence, maybe this is the answer. A lot of people think it is the answer. But the societal trend in the United States is they're shutting down, the decided trend that they're shutting down. Rest of the world, in Asia, they're building them. Though, it's fascinating, but nuclear is, you know, is a baseload form of electricity, like geothermal.

Bret Kugelmass
And then what do you think about you know, if we looked at the trends of natural gas, you know, we've used- natural gas is like the chief reason that we've been like, quote, unquote, decarbonizing, you because we're replacing your coal, which is very carbon intensive, with natural gas, let's say, which is medium carbon intensive. But when you look over the trends in Europe, I mean, they're talking about shutting down natural gas moving forward, especially like the UK, you know, by 2050, not just in the electricity sector, but every sector, they got to get rid of fossil fuels. Do you see that gonna happen in the US as well with natural gas.

Doug Kimmelman
If I had to, so our carbon footprint has been reduced. And if I had to pick, let's rank, what's caused that, one you left off is energy efficiency. So energy efficiency is, is number one, how we're building our buildings, our air conditioning systems, our appliances or electronics. So, number one is energy efficiency. Number two is coal to gas switching. Natural gas is cheaper and cleaner than coal. And so we've been shutting down coal plants and replacing them with natural gas and that has been reducing the carbon footprint dramatically. Number three, and a lot of people think it's number one, but number three are renewables and the push to renewables. So let's think about the role of natural gas relative to renewables, we can't get to where we want to be in terms of 100% renewables without two things: without natural gas as the transition fuel, because when it's not windy, and it's not sunny, we need something very quickly to turn on. Take a week to turn on a nuclear plant, it'll take a few days to turn on a coal plant, but a natural gas facility can turn on very quickly. So we need natural gas as the transition fuel. We need natural gas as the replacement for coal until we get to the next thing we need, which is storage technologies that can turn this highly intermittent wind and solar that may only run 10, 20, 30% of the time into something that is baseload. And you were right. We don't yet have the technologies that have the efficiency and the cost in battery storage to yet make renewables. You know, that that that world of nirvana that we want to see. So in the meantime, natural gas is the bridge fuel. That meantime, may be for several more decades. Battery storage is coming. There's been a lot of great evolutions, I will tell you one of the culprits, back to natural gas, with the price of natural gas dropping by 90%, because of all of this abundant shale gas, there's been great efficiencies in wind technologies and solar panels and batteries. But believe it or not, they haven't been able to keep up with the competing fuel natural gas that has dropped by 90%. So low natural gas prices actually make it a little bit tougher. But we've had a wonderful, let's just say, last 18 months, we've had some real advances in storage. We are the largest private equity owner of battery storage in the country. 3000 megawatts, which in the storage world is a lot, but there's a million megawatts of capacity in United States. So I think that's less than 1%. So we got a long way to go and penetration. But the curve has been ramping up pretty dramatically. Where electricity is expensive. California has the highest electricity prices in the world. And so there, it's economic for storage.

Bret Kugelmass
How do you think about investing in battery storage? Do you invest in a plant before it's even built? Do you invest in plants that are operating? And then you apply better management? Where do you guys come into the picture on that?

Doug Kimmelman
Well, the first is, we don't want to take technology risk. That's not our, you know, our mandate. And we are a, we call it a core plus infrastructure fund, is our flagship fund. We also like many others have a SPAC which is growth equity, where maybe we can do some earlier stage things, higher risk higher return. But in our core flagship fund, we're looking for cash flowing situation. So we do it in a number of ways. We've built one of the largest residential solar businesses, it's a public company called Sonova. Sonova installs rooftop solar systems, they get paid on a 25 year lease. Increasingly, approaching 50% of their installations, now, the consumer wants a battery. And they will sign a long term lease to pay for that battery in the home. So that that solar does not work just for eight hours a day, that maybe that solar takes them into the evening, 16 hours a day. So that is pretty straightforward. And we are buying a very large volume of batteries for that. The next, we have another company called Convergent, I call this peak shaving. We go to an industrial company that wants to reduce its electricity costs, we buy in the market, whatever the cheapest battery system is, we install it, and then we sign a contract with them. When power prices spike, certain hours of the day, certain months of the year, we have the right to take them off the grid and put them on the battery. And we share in the savings.

Bret Kugelmass
And tell me more about that, when you say you buy the batteries that are on the market, does that mean you find a factory somewhere? And then you guys manage the installation on a physical facility? Or is that another company that does all of that, and then you invest in that company?

Doug Kimmelman
Well, we have to procure the batteries, which are cheap, efficient, reliable, and available. And you know, manufacturing has been, you know, a bit of a challenge to the quantities that we need. So you may be, you know, putting an RFP out to Tesla, out to Sanyo, and there's a number of battery manufacturers in Asia, not as many in the US. And you're going to procure whatever the best deal is. And generally, they or a third party or ourselves will be involved in that installation, there's something called an inverter that has to be part of the process. And there's a lot of equipment that goes with it to connect it in effectively. But yes, we're the quarterback of putting all the pieces together.

Bret Kugelmass
And then structurally, how does this happen? Do you like set up like a special purpose vehicle to manage this whole thing where it's just straight from your big company, you just got a guy who does it?

Doug Kimmelman
So we right now own about 20 businesses, as the controlling investor in these businesses, some of them we've bought and we then come in to try to grow them make them better, some of them we've built from scratch. In each case, we have a management team that we've put together. In each case, we control the board and the strategic direction. So we're intimately involved in all of these steps, but every one of them has their own strategic plan of exactly how they how they do things.

Bret Kugelmass
And how do you find the management team? Let's say that like, you know, you at your firm, say, Hey, we want to get into this space. We see opportunities, maybe you have your own research team saying, okay, here's some industrial players, here some batteries. But then when you actually want to create an entity, how do you build a management team?

Doug Kimmelman
Well fortunately, this is my 38th year in the sector. So the Rolodex is not that bad. And there's 55 of us at ECP. And collectively, you know, I think we know who we trust and who culturally fits us, who works well with us. We also try to hold on to those management teams, CEOs, CFOs, corporate development folks that have worked with us, with a portfolio company that perhaps we have monetized and sold, but we bring them back and work with us on another portfolio company. So it's very fluid, you have to know who you trust and who you rely on and at least I come back to cultural fit that can work well with you. But we're fortunate that we've been out for so long, and I've owned so many companies, that the Rolodex is pretty good in that regard.

Bret Kugelmass
And then when you said, you don't take on any technology risk, like I've seen some interesting things coming down the pike in storage, like, have you seen those where like the crane lifts the giant concrete block, and it's going to store with potential energy, you guys wouldn't even consider getting involved in that at all, or like, who does? Venture capitalists?

Doug Kimmelman
Tidal power, right is when the tides are going to do it. So you know, our investors, the core of our investors, I call it core plus infrastructure, they want businesses that, for the most part, there's physical assets, that they are throwing off some degree of cash flow, maybe even we return a yield to them, you know, every year. And so for that type of asset, you know, it needs to have a track record, it needs to have an operating history. Also, to get the returns, you know, if you have to put in 100% equity, because no one will loan you money, because there's no track record, and we don't know how this asset is going to behave, it's hard to hit equity returns, you know, in the mid teens, high teens, if you can't have any leverage in the business. So we are dismissive of new technologies without a proven track record. And banks are going to be even more dismissive than us in terms of lending capital to these these types of assets. So we want to see, you know, some degree of operating history, some degree of perhaps contractual arrangements, where they've locked in some some cash flows before we look at it. We certainly are all for new technologies and we're all for disruption. This energy transition, this electrification trend is going to need it. The demand for electricity, we're at a breakthrough moment in society. electricity has been flat demand for electricity for the past several decades. Partially, that's because of energy efficiency. But all of a sudden, the demand for electricity is booming. We have driven by transportation, the electrification of the transportation sector, driven by big data, we haven't talked about that. But think of things like cryptocurrency mining, shockingly, is 1% of global electric grand for that, which is an enormous number. But even just how are you using high velocity data to solve some of the world's biggest problems, think of diseases and vaccines and simulation on computers. And then the third piece is just what we're doing in our homes and what we're doing in buildings, more electricity to make them cleaner, think of the home that is gonna have the solar panel, the electric car, with the battery, and the smart meter of how to control when you're using your air conditioning and the like. So we need breakthrough technologies for all that I just talked about.

Bret Kugelmass
And so I'm trying to find out, where is that cutoff point? What is the type of investment that might be using a breakthrough technology, but maybe it has a pilot facility or something, but this would be the first you know, like full scale integrating to the grid? Do you guys get involved in that? And or who does what type of firm does that?

Doug Kimmelman
You know, we didn't talk about probably the number one most talked about topic in finance happens to be SPACS and PIPES. You know, we used to have venture capital back companies, and they put up the 10, 20 million. But then there was this term that's often used called the valley of death, that these companies can't raise money to commercialize themselves, the venture capital market is not going to throw hundreds of millions of dollars that is needed for an infrastructure asset. So an infrastructure asset, to get from a laboratory to commercialility where it's been accepted by utilities and customers, where's that capital going to come from? You know, the Series B, C, D ventures just not enough money, all of a sudden this SPAC concept or you know, these these blank check companies have come forward. And the stock market, which these are publicly traded entities is saying you know what, will come in earlier stage, instead of that B round and that C round in the venture world, maybe the SPAC can come in and provide that capital. So all of a sudden, there is great promise for some of the burgeoning technologies and clean energy, whether it's an electric vehicle charging company, or it's a battery storage company, or it's the battery technology itself, that all of a sudden there's a very large pool of capital that says we'll buy you and you'll immediately be publicly traded, and we have the hundreds of millions of dollars to forge that valley of death so that you can move from the laboratory to commercialility. So this is a big deal in clean energy.

Bret Kugelmass
And where is this money coming from? Why so so it's a publicly traded company, I guess it means is the public markets. But why are a bunch of, you know, your Ma and Pa, you know, whatever thrown in 1000 bucks, 10,000 bucks into these SPACS that are blank that they don't know anything about the operating history of?

Doug Kimmelman
They just got a $1400 stimulus check.

Bret Kugelmass
Is that it? So I'm wondering , is it because a certain class of people are flush with cash, don't know where to put it.

Doug Kimmelman
And for more than a certain class, the entire economy. So the Federal Reserve is throwing money at the issue. And the federal government through stimulus is throwing money at the issue. So there is an enormous amount of liquidity. At the same time interest rates, you know, well, maybe the tenure has moved from 1% to 1.75%, it's still not a great, you know, investment. And so people are looking for returns with this with this cash. Yes, the retail investor has gotten more involved. Certainly the the risk on trade, especially in the in the retail investor is there. What a SPAC is, is it goes public, and it doesn't get own a company. And then the sponsor of the SPAC has two years to find a company. And if they do find a company that the shareholders agree to, then that public company morphs into this new business, right goes from a blank owning nothing to a new business. It's quicker, more streamlined than the traditional IPO process. And for companies that are in hyper growth mode and need the capital, it seems to be the perfect vehicle. So you have seen dozens and dozens of companies being acquired in the clean energy sector by SPACS. And there's a lot more money out there, and there's going to be more to come. So that's really good news for this breakthrough that we need in terms of, I talked about electrification, I talked about how we get the transportation sector electrified and the breakthrough on storage, which is probably the probably the biggest one.

Bret Kugelmass
And maybe I'm still a little confused. Why, you know, is it with a SPAC? I mean, why does it have to be a public company? If these investors wanted to put money into higher risk investments, why wasn't there always just a vehicle? Like, why not just go to you know, a bank or not bank, but like an investment banker, and say, hey, I want you to invest in these types of ways that the public?

Doug Kimmelman
That was the valley of death, right? We didn't have capital that was sitting there saying we will take this risk. So the public market, through SPACS, is now willing, this window isn't going to be open forever, is willing to take earlier stage risk in large size, they're willing to bet on a company that doesn't have any revenue, and its products not quite there. And it wasn't, you know, that wasn't available before.

Bret Kugelmass
But isn't the whole point of public markets and public markets like having rules for the government to protect your retail investor from investing in things that they don't know that much about I guess?

Doug Kimmelman
I don't think it's the government's job to decide what is.

Bret Kugelmass
And I don't either. I don't either, personally, but I guess I'm still confused as to, like, how it's allowed.

Doug Kimmelman
Well, why wouldn't it? This is capital formation, it is allowing companies to grow. If you look at the returns so far, the returns have been phenomenal in terms of companies that have been we call it de-SPAC in the clean energy sector. And so with the government's focus needs to be on disclosure, you're disclosing all of the risks, and all of the facts and all of the financials. If there is adequate disclosure, you have a credible underwriter, Goldman Sachs, Barclays, and Morgan Stanley, a Credit Suisse, whoever is putting their name on this sponsor of the SPAC, but they are credible, this sponsor of the SPAC is actually putting up at risk capital. So he is aligned, just like I discussed in private equity. So everyone's following the rules. This is not a sham, trying to sell you a company that doesn't exist. These are real companies that society actually demands because society says we want to deal with global warming, on an energy transition. And we need companies to solve this issue. And there are a lot of real companies that if they had the capital, you know, they could accelerate their growth plans and perhaps have success. So that's what we're seeing. And, you know, and the SPAC market has been a facilitator in that regard.

Bret Kugelmass
Yeah, that's pretty amazing. I love to see innovation, not just from a technology perspective, but also from a business model perspective. And it seems like that's what these SPACs are doing. And can SPACs act almost as like REITs? Can SPACs invest in a group of projects, or does it have to be in the technology vendor itself?

Doug Kimmelman
No. Well, a SPAC defines what it is they're going to invest in. We have SPACs in the world of gaming that are doing well, they invest in gaming, right. There's a lot of e-sports and things like that, that are very exciting these days, but a SPAC has a mandate, just like a private equity fund, and they buy one business, they don't go out and buy a lot of businesses. They pick a business, and then they go to the shareholders to make the case, and the shareholders have to vote. And if the sponsor doesn't get a deal done in two years, he loses the money that he put up. So there is, you know, there's a motivation to get it done. Just because a SPAC raises money doesn't mean he's going to find a deal that is suitable. And so one focuses very much on the quality of the quality of the sponsor. And probably the narrower the focus, the better. And you'll hopefully have a sponsor that knows his sector, has access to deals and access to diligence capabilities that they can evaluate, whether this company is a non-starter and will never have revenues, or it's a real company. So that's really the risk, that does the SPAC sponsor do his job and diligence and appropriately evaluate this business that they're going to be buying, that it is a real business that has a real opportunity to grow. There's risk, not everything works, and everybody's going in with their eyes wide open.

Bret Kugelmass
Doug, we could chat forever, but we have to wrap up. Last words on you, what would you like our audience to leave thinking about?

Doug Kimmelman
Just, this is a very exciting time in terms of the energy transition, the decarbonisation and the push to electrification, I'd say everyone needs to stay close to the facts around all of this. There's an awful lot of rhetoric, especially coming from the political world, right? Our product is electricity, we do need to keep the lights on. Yes, we want to get to a cleaner world. But let's get there with well keeping the lights on and keeping reliability high. So seatbelts on, you know, we're going to get there and there's going to be a lot of fascinating investments along the way. So thank you for the time, I enjoyed the chat.

Bret Kugelmass
Doug Kimmelman, thank you.