Ian Clark is founder and managing director of Dichotomy Capital and Dichotomy Power. Clark first founded Dichotomy Capital in 2012 to use “deep fundamental research focused on the power markets to guide investments in public and private investment vehicles.” Dichotomy Power, founded in 2019, is a hydroelectric company focused on the northeastern U.S. that owns, operates and maintains hydroelectric facilities.
Clark said Dichotomy Capital provides a value-based manager focused exclusively on the power sector that uses intensive research and a contrarian mindset to find undervalued securities, special situations, timely shorts and attractive private investments. He uses the company’s “thorough understanding and rigorous analysis of the power sector” to capitalize on opportunities and deliver superior risk-related returns to investors.
In this exclusive interview, Clark helps make the connection between capital investment and hydropower, discusses future plans in hydro and shares opportunities and challenges for the U.S. hydroelectric industry.
Q: Please give our readers a general overview of Dichotomy Power, including your hydroelectric portfolio.
Clark: Dichotomy Power is a northeast U.S.-focused owner/operator of hydroelectric facilities. Currently, we have 20 MW under ownership or awaiting Federal Energy Regulatory Commission (FERC) license transfer approval. Dichotomy also owns an energy broker that provides revenue management services, such as power purchase agreements, group net metering, renewable energy credit (REC) sales, etc.
Q: You founded Dichotomy Capital in 2012 and Dichotomy Power in 2019. Please give us some insight into how and why you went from power market investment to individual plant ownership.
Clark: I enjoy owning and building businesses. My investment style has always been very hands-on, and Dichotomy Capital engaged regularly with management teams in the power sector. In 2015, I saw opportunities to buy some hydroelectric facilities and it merged a few of my passions. Ultimately, we want to invest like business owners on a long-term horizon, so buying the operation of facilities was a natural extension of that philosophy. I’ve found the two businesses to be highly complementary and both businesses have benefited from the other.
Q: Dichotomy Power focuses on hydro plant ownership. What made this subset of the power generation market so attractive to you?
Clark: I grew up in New England and hydroelectric facilities were everywhere. My father was self-employed as an electrician, and every so often he’d work on a few small hydros nearby and take me with him. Running conduit through penstocks is probably more enjoyable to reminisce about than the actual job, but I’ve known about the hydroelectric space since I was a kid. I find the challenges and opportunities to be truly attractive qualities. There’s no other space like hydro that combines mechanical, electrical, regulatory and financial knowledge. If the world seeks to decarbonize, then hydro will continue to play a role for the next hundred (or more) years thanks to the predictability, grid services and centralized location. It’s a great resource that is undervalued by the grid.
Q: Right now the company owns and operates 10 small hydroelectric plants. Do you see that portfolio growing?
Clark: We do a better job of updating our facilities than our website. We currently own/operate 16 hydro projects, with another five waiting for FERC license approval. We are actively growing and have aspirations to be multiples larger than our current portfolio in a few years. Our capital partners have been highly supportive of our growth aspirations, and they have provided us with the means to expand, both from a technical and financial perspective. I’d be disappointed if in three years we aren’t two or three times bigger than we are today.
Q: A couple of your hydro facilities are in the process of being relicensed with FERC. How is this process going?
Clark: Overall, we are happy with our progress on the relicensing front. I am lucky to have a great group of folks on the team helping out with relicensing, and their efforts have shown good results. Our Campton facility will be finishing up relicensing in the next few months, and we think that will be a good outcome for all stakeholders. The Dichotomy team looks to proactively address license issues by engaging with regulatory agencies in a data-driven process. By confronting potential issues with data, we hope to get around emotional responses that can sometimes pop up from stakeholders (or licensees). Generally, this has led to a process that enables solutions, rather than a process that compounds problems. Given Dichotomy’s focus on smaller facilities, quickly finding solutions at a cost-effective point is a necessity.
Q: I understand you also are rehabilitating some of your aging facilities. What is involved in that work, and is this a more challenging approach with a smaller project?
Clark: Our maintenance team has rehabbed a couple of facilities and I am incredibly proud of what they have done. Many of our rehabs have incorporated REC grants, public utility commission/utility approval, interconnection overhaul, FERC/state correspondence and no shortage of engineering know-how. The team at Dichotomy has acted just like that — a team. Everyone is involved when we take on a large project, regardless of the facility size. Coordinating teams, budgets and goals is paramount to our success, and the Dichotomy team has nailed it. Given that our facilities are smaller, we don’t have the kilowatt-hours to spread out fixed costs, so sticking to a budget is critical. While that is a challenge, the team has risen to that challenge each and every time. They should all be very proud of their accomplishments.
Q: What are the strongest opportunities and challenges you see for hydropower over the next five years?
Clark: In one word I can answer both: Regulatory. Hydro sits in an interesting spot compared to other renewable resources. Given that we operate on a shared resource, the regulatory requirements are very high compared to our friends in solar and wind. >>On the flip side, I don’t get as worked up about a 25 bp move in interest rates as they do. The challenge over the next five years is going to be the increasing regulatory requirements (relicensing, financial assurance, etc.), but that is the opportunity for well-capitalized and safety-conscious firms, like Dichotomy.
Q: You spoke during the utility executive roundtable session at HYDROVISION International 2022. Can you tell us about a couple of hot topics you covered?
Clark: I had a lot of fun on that panel. If I’m invited back, I intend to beef up on my hydro puns and perhaps even prepare some slides. We covered a range of topics including relicensing, COVID challenges and how to properly value hydro in the power stack. Based on the conversation with the other panelists, it was clear that these topics impact the entire fleet and are not confined to a single size or type of hydroelectric facility. I hope the audience had as much fun as we did and gained some knowledge.
