Power Producers and Clean Energy p.II – 8/16/16

NRG Energy has seen difficult times: falling profitability during the energy glut, technical difficulties at its solar plants, poor results for residential solar and a electric vehicle charging network projects, and the replacement of a CEO that pushed ambitious clean power projects. Given how many energy companies have disappeared in the last five years, NRG’s troubles are not so unusual and are useful for explaining how tricky energy has gotten.

One part of the story is the boom in the United States natural gas production. The fracking of shale deposits revealed gas deposits of unbelievable size that could be accessed relatively cheaply and quickly, pulling down the price of all electricity. In turn, all of NRG’s projects from coal to renewables were less profitable. Investors lost faith in the company, NRG’s stock plummeted. Coal assets were hit especially hard as shown by devastating last half-decade for coal mining companies illustrated below, made only less profitable by new regulations on pollution that disproportionately affected coal power plants.

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But most energy companies have suffered in some way or another during the glut. NRG’s more interesting troubles come from its attempts to branch out into clean power that, unfortunately, coincided with the glut that hamstrung conventional revenue sources.

All power producers and utilities will eventually be required to make more electricity while emitting fewer greenhouse gases; they face a hard fact in that. However, NRG tried to change faster than most in the last decade under David Crane who began running the company in 2003 and began acting on environmental concerns in 2006. He called environmental protection a “moral imperative” as he made large investments in wind, solar, and electric-car charging stations, and promised massive carbon emissions cuts exceeding those pledged in the Paris Climate Talks of 2015.

Yet, now Mr. Crane is no longer leading NRG. After NRG stock plummeted 63%, he was let go in December of 2015. Investors tired of earnings calls dedicated to clean-power projects that seemed more like a distraction from the energy glut crisis than a path to the future and the NRG board named the COO, Mr. Gutierrez, as the new leader.

Strangely enough, Mr. Gutierrez is committed to a similar path as Mr. Crane. He led an NRG task force that recommended that the company adopt ambitious targets for emissions reduction and has recently recommitted to those goals. Though bending to investors on some projects that haven’t panned out yet, he seems ready to continue to tackle climate change as a serious threat to the company’s business model. Still managing carbon assets while also preparing for a time when solar and wind assets will dominate balance sheets, he has seen NRG shares rise 40% during his tenure.

Mr. Gutierrez has already backed away from residential solar and electric-vehicle charging projects, but NRG still provides solar installations to big companies and continues to spend hundreds of millions to acquire more solar and wind assets. Today, NRG generates about 9% of its electricity from renewable assets, or nine times what it generated from them when Obama first took office. Across the industry, a majority of power plants being built today use renewables, not fossil fuels.

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One day NRG will produce a majority of its power from renewables. Investors and board members will come around to accepting that fact the cheaper solar and wind power become. For now, Mr. Gutierrez has the unenviable position of satisfying today’s investors while planning for a greener future, readying more sustainable assets while burning more profitable fossil fuels. One day NRG will be the clean power company Mr. Crane wanted it to be, until then Mr. Gutierrez has his work cut out for him.

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