CalPERS ♥’s Vinod Khosla

Vinod Khosla has a penchant for capital-intensive biofuel and ethanol companies, and now he has an A-list limited partner to help finance that predilection: The $244 billion California Public Employees’ Retirement System, which is in advanced talks to commit up to $640 million to Khosla Ventures, according to two sources.

The move will make CalPERS the only Khosla Ventures LP other than Khosla himself, who has been investing from his own pocket since forming the firm back in 2005.

No doubt the money comes at a good time for Khosla. The Republican superstar venture capitalist is a billionaire, but he’s already spent a boatload of his own money on cellulosic ethanol production technology. For example, Range Fuels of Broomfield, Colorado, which is building a big, fat commercial ethanol plant in Georgia, has soaked up $163 million in capital so far, much of which has come from Khosla.

He’s also an investor in the earlier-stage ethanol plant company, Coskata, which has raised around $30 million so far (including from Globespan Technology Partners and a few others); Cilion, which is building six ethanol plants and has raised more than $200 million; and Mascoma, another cellulosic ethanol company. Mascoma — looking to build a commercial-scale biorefinery in Michigan that uses wood as a feedstock — is supersecretive about how much it has collected from investors so far, but last month it closed on a $61 million round from seven investors, including Khosla, pushing the capital it has raised well past $100 million.

The bet on Khosla is highly concentrated, even for CalPERS. It’s not hugely surprising, though. CalPERS prides itself with working with the best investors in their respective fields and it has a long relationship with Khosla, who first visited CalPERS’ board with his pitch about six weeks ago. More, CalPERS has been sussing out private equity opportunities in clean energy production and distribution since around 2006, under the leadership of chief investment officer Russell Read. (Read, as many readers know, leaves the pension on June 30. But people close to CalPERS say his departure won’t have a material impact on its investment decisions).