The CEO of NRG Energy Inc. used an earnings call this week to suggest U.S. EPA’s plan to cut carbon dioxide emissions from power plants shows the wisdom of his company’s green strategy.
It wasn’t too surprising, as David Crane and NRG have been frequent advocates for change in the power sector even while offering critiques of EPA’s initial Clean Power Plan.
But not long after Crane touted his company’s combination of clean energy and conventional generation, questions began to emerge on Tuesday’s conference call about NRG’s business model.
The company’s stock is down substantially this year, and the idea of somehow breaking up NRG has been simmering among observers. The independent power producer has significant generation capacity tied to fuels such as natural gas and coal, even as it ventures into new wind and solar projects.
"The industrial logic to me favors the path that NRG’s on, but we are a public company," Crane said on the call, adding that NRG hears a refrain about its complexity. "Value maximization for shareholders is what being a public company is about."
Evercore ISI, in a report this week, said investors are right to question NRG’s capital decisions as generation and retail supply operations create free cash flow that is sent to investments in renewable energy such as solar and wind that may not have adequate returns.
"NRG will be increasingly forced to consider separating its ‘green’ business from its legacy business if they don’t turn around financial performance and/or convince investors in the soundness of their capital allocation," Evercore said. "One way or another we do continue to see value in NRG shares, but our enthusiasm is being tested."
Crane said NRG is working to make the various parts of its portfolio stronger. Everything is on the table in terms of future options, according to the CEO, who indicated the company’s outlook could be examined further in 2016.
He said pure-play solar companies sometimes are in favor and sometimes they aren’t as much, so the question remains how receptive NRG would be to a green company.
"The key is to get ourselves in a position where we have the option to do something like that in fairly short order and then see how it goes," said Crane, whose company has principal executive offices in Princeton, N.J.
In the end, NRG’s stock plunged 10 percent Tuesday, according to Yahoo Finance data. Shares ended little changed at the close of regular trading yesterday, meaning the stock price was down about 26 percent for the year to date.
"There was an expectation that the company might do something more dramatically to highlight the value of its green power business that wasn’t forthcoming," said Paul Patterson, an analyst with Glenrock Associates LLC, in an interview.
Patterson added that NRG, despite its renewable energy initiatives, "is still very much a company that derives a substantial amount of its economic value" from traditional power plants, which have been under some economic pressure because of power prices.
Crane hasn’t backed away from his vision, and he said timing matters.
"We and the rest of the industry continue to bear the responsibility for keeping the lights on in the short to medium term, which in turn depends for the foreseeable future on the sustained excellence we have demonstrated in the reliable operations and maintenance of our conventional fleet," he said on the conference call.
To prepare for the future, Crane said three capabilities need to be strengthened: retail, which provides a relationship with end users amid a shift toward energy choice; renewables such as solar; and a vehicle such as NRG Yield that provides "a competitive cost of capital to deploy for contracted assets."
Crane said NRG wants shareholders to realize value from what the company is building, and he reiterated a capital allocation plan that includes significant spending on conventional generation (EnergyWire, May 11).
Reaction to carbon plan
As for the Clean Power Plan, NRG raised some concerns last year, including on the issue of reliability. NRG issued a written statement this week about the final rule to say "it appears the EPA was quite responsive to concerns" raised by it and others.
"We appreciate that, and particularly their increased emphasis on replacing conventional generation with more renewables," the company said.
NRG said it will be states more than EPA that determine how to achieve needed emissions cuts "in ways that will help companies like ours invest in clean energy" and offering consumers better energy choices.
EPA is seeking to cut emissions from power plants 32 percent by 2030 compared with 2005 levels, with varying targets for states. NRG said it needed to review the carbon rule more fully, but it offered support for the idea of emissions reductions, adding that it has its own major goal as a company.
Houston-based Calpine Corp., another independent power producer, has offered support this week for the Clean Power Plan in a statement.
Thad Hill, CEO of Calpine, said it "represents a commitment to continuing the transition from carbon-intensive generation to efficient, low-carbon generation." The company said its natural gas-fired plants are positioned to help with reduced emissions and the integration of renewables.
Dynegy Inc., a Houston-based company with U.S. plants fueled largely by natural gas and coal, indicated that it’s studying and evaluating the final carbon rule.
Earlier this year, Dynegy CEO Robert Flexon said there’s a role for coal in the generation mix, adding that the Clean Power Plan needed to recognize that. Flexon also suggested a national energy policy would be more effective on carbon than a state-by-state approach, which he said could pick winners and losers.
Crane continued this week to express confidence in his company’s capabilities, which he said have been built over time.
He said some "competitors have taken steps in our direction, and certainly more will have to follow if they wish to be relevant deeper into the 21st century."
NRG, Crane said, is "more equipped than anyone to not only address the changes in the industry but to make them our competitive advantage."