EnCap: 'Strange' Power Market Driven by Data Center 'Inelastic Demand'

In his 35 years in the power business, ⁠EnCap Investment⁠'s James Hughes has never seen a market as "strange" as the current one, driven by data center inelastic demand as well as industrial projects across the US. 

Hughes is a Managing Partner and head of the EnCap's energy transition business, which last May raised a $1.5 billion fund to invest in power, low-carbon fuels and carbon management. In a wide-ranging interview with Cool Vector, Hughes says hyperscaler demand for data centers has created an attractive supply-demand dynamic for his strategy. "I've never seen a large class of customer, a large set of demand, that is price inelastic," he says. 

Hughes predicts a five- to seven-year window during which he is confident "we will be able to take capital and earn a return that is a premium return on that capital."

Hughes shares his analysis of the the "Republican trifecta" in Washington and its likely impact on his strategy. While the removal of incentives for low-carbon fuels and carbon management companies may challenge those business models, Hughes says any changes to the Biden-administration Inflation Reduction Act will have little impact EnCap's opportunities in power generation. 

"If I can execute a power project, there is somebody that's going to buy that power under a long term fixed price agreement," says Hughes. "The challenge is not identifying a customer for the power. The challenge is, okay, can I find a site and get control of that site? Can I gain access to the grid?"

Formed in 1988, EnCap is one of the largest energy-focused private equity firms in the world. Hughes says his team has the experience to recognize opportunities in a rapidly changing market. "What we bring to the table is gray hair, and having done this for a very long time and having lived through several cycles," he says. 

Hughes shares is views on the prospects for renewable energy in digital infrastructure, noting the huge interest in using "clean, green" power, offset by an urgency to get projects built using whatever energy sources are available, led by oil and gas. 

He gives his take on an oft-repeated question in today's digital infrastructure and energy market: Are we in a bubble? Hughes predicts efficiencies in the next generation of GPUs, but says he doesn't see any trend that will reverse excess power demand in the coming years.

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