Carlyle’s risk increases from its gas-fired power plants
October 31, 2023
Carlyle-owned power plants declare bankruptcy, increased risk in gas fired energy generation
Major private equity firm The Carlyle Group is facing increased risks from its large portfolio of gas-fired power plants. Carlyle’s Lincoln Power, based out of Illinois, filed for bankruptcy for its two power plants in March 2023 after fines from the regional grid operator, PJM, totalling $39 million and concerns over liquidity and cash flow. Another Carlyle-owned gas-fired energy company, Nautilus, with plants in Maryland and New Jersey, was also fined, forcing the private equity firm to inject over $88 million into the company to cover fines.[1] Carlyle is one of the US’s largest holders of gas-fired energy generation, controlling 161 megawatts of energy production with 91 percent coming from fossil fuels.[2] This capacity of energy production rivals that of Berkshire Hathaway Energy and Tennessee Valley Authority.[3]
Analysts at the Institute for Energy Economics and Financial Analysis recently reported that private equity owners of power generation facilities across the midwest and northeast face increased risk given new market dynamics. While capacity prices paid to plant operators were high in the 2010s, analysts at IEEFA found that, “those prices have collapsed, squeezing existing and new developers alike.”[4]
In its bankruptcy filing, Lincoln Power said it had been “experiencing a liquidity crunch caused by the fact that clearing prices from recent capacity auctions held by PJM have decreased significantly and are currently operating at ten-year lows,” IEEFA reported.[5] Given the increased uncertainty in the regional power generation market, Carlyle has a responsibility to update investors on the risks associated with the regional power generation market and its plan to reduce exposure to fossil fuels.
One of Wall Street’s flagship credit rating agencies, Moody’s, downgraded the credit rating for Carlyle owned energy firm Nautilus from B1 to B3 in April 2023 citing fines from Winter Storm Elliot and low capacity market prices. In its report Moody’s cites “project’s recent liquidity and cash flow struggles following a series of weak PJM auction results plus $39 million in capacity performance penalty expenses from Winter Storm Elliott.”[6]
Environmental Justice Risks
Not only does Carlyle’s investment in gas-fired energy generation pose financial risks for institutional investors, it also adversely affects communities of color and low-income communities who face the brunt of emissions related impacts. Researchers found that Carlyle produced an estimated 14 million metric tons of CO2e from power generation in 2021 which is the equivalent to the amount of carbon sequestered by over 16 million acres of US forests in one year.[7] Approximately 84 percent of the 19 power plants in the study are located in areas with a higher percentage of communities of color and low income communities than that state’s average and 9 out of the 19 facilities have been cited with EPA violations.[8]
Future Outlook Dim
The PJM Capacity market, where many of Carlyle’s gas-fired power plants are located, is looking to change its structure to account for increased severe weather events in the winter and to incentivize the development of solar and wind energy generation, putting PE-owned fossil fuel energy generators at risk.[9] The PJM regional power generation market is considering changing its pricing structure of capacity payments to account for changes in the frequency of extreme weather events and other factors. Paired with the overall collapse in capacity prices, the changing market climate is expected to reduce the cash flow for gas-fired electricity generators, making these ventures less profitable. According to IEEFA, “PJM capacity prices (are) no longer a bonanza.”[10] Additionally PJM is considering incentivizing projects generating electricity through solar or wind with higher capacity prices, putting fossil fuel generators at a further disadvantage.[11]
There is substantial risk in Carlyle’s gas powered energy generation investments as demonstrated through recent bankruptcy filings and ratings downgrades. Institutional investors should ask Carlyle about plans to reduce its exposure to risky fossil fuel investments that also endanger the lives of communities of color and low income communities across the United States.
[1]Institute for Energy Economics and Financial Analysis, “Private Equity in PJM: Growing Financial Risks,” August 22, 2023, https://ieefa.org/resources/private-equity-pjm-growing-financial-risks.https://ieefa.org/resources/private-equity-pjm-growing-financial-risksInstitute for Energy Economics and Financial Analysis. P. 12 According to IEEFA’s analysis these fines were affected by the PJM Settlement; “Lincoln Power Files for Bankruptcy after $38.9M PJM Charge for Failing to Run during Winter Storm Elliott,” Utility Dive, accessed October 18, 2023, https://www.utilitydive.com/news/lincoln-power-nautilus-power-ferc-pjm-penalties-elliott-complaint/646615/.
[2]Alyssa Giachino et al., “The Carlyle Group’s Hidden Climate Impact: Exposing a Decade of Fossil Fuel Investment” (Private Equity Stakeholder Project, Americans for Financial Reform, Global Energy Monitor, April 2023), https://6000718.fs1.hubspotusercontent-na1.net/hubfs/6000718/PE%20Climate%20Risks/PECR_Report_Carlyles-Hidden-Climate-Impact_April2023.pdf. p 16
[3]Alyssa Giachino et al., “The Carlyle Group’s Hidden Climate Impact: Exposing a Decade of Fossil Fuel Investment” (Private Equity Stakeholder Project, Americans for Financial Reform, Global Energy Monitor, April 2023), https://6000718.fs1.hubspotusercontent-na1.net/hubfs/6000718/PE%20Climate%20Risks/PECR_Report_Carlyles-Hidden-Climate-Impact_April2023.pdf. p 16 and p 14
[4]Institute for Energy Economics and Financial Analysis, “Private Equity in PJM.” p 5
[5]Institute for Energy Economics and Financial Analysis. p 12
[6]“Moody’s Revises Nautilus Power, LLC’s Outlook to Stable from Negative; Assigns B3 to Superpriority Extended Credit Facilities | Rating Action | Moody’s,” accessed September 28, 2023, https://www.moodys.com/research/Moodys-revises-Nautilus-Power-LLCs-outlook-to-stable-from-negative-Rating-Action–PR_475625.
[7]Giachino et al., “The Carlyle Group’s Hidden Climate Impact: Exposing a Decade of Fossil Fuel Investment.” p. 16; OAR US EPA, “Greenhouse Gas Equivalencies Calculator,” Data and Tools, August 28, 2015, https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator.
[8]Giachino et al., “The Carlyle Group’s Hidden Climate Impact: Exposing a Decade of Fossil Fuel Investment.” p 17-18.
[9]Institute for Energy Economics and Financial Analysis, “Private Equity in PJM.”
