{"id":10295,"date":"2016-11-04T00:34:02","date_gmt":"2016-11-04T04:34:02","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/can-a-brown-consolidator-lead-the-green-revolution-david-crane-and-nrg-energy\/"},"modified":"2016-11-04T00:34:02","modified_gmt":"2016-11-04T04:34:02","slug":"can-a-brown-consolidator-lead-the-green-revolution-david-crane-and-nrg-energy","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/can-a-brown-consolidator-lead-the-green-revolution-david-crane-and-nrg-energy\/","title":{"rendered":"Can a \u201cBrown\u201d Consolidator Lead the \u201cGreen\u201d Revolution? \u2014 David Crane and NRG Energy"},"content":{"rendered":"

 <\/p>\n

When I met David Crane, I wanted to talk about solar energy. He wanted to talk about storing energy. No one in the room wanted to talk about NRG Energy.<\/p>\n

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\"coal-power-plant\"<\/a><\/p>\n

NRG: An IPP with a Clouded Past<\/strong><\/p>\n

An \u201cindependent power producer\u201d (IPP) generates power and sells it to utilities or other users \u2013 but it isn\u2019t a public utility. As a trade group puts it, \u201cunlike the regulated, vertically integrated utility paradigm, competition provides price signals to promote an efficient level of investment in appropriate locations.\u201d [1] In theory, competition from IPPs could make power generation more efficient.<\/p>\n

At the turn of the century, NRG Energy was one such IPP; it actively acquired, developed, and operated domestic fossil fuel power plants (\u201cbrown\u201d energy). In time, the Company\u2019s strategy proved too aggressive and in 2003, following an energy downturn, it filed for bankruptcy.<\/p>\n

Enter David Crane.<\/p>\n

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\"david-crane\"<\/a><\/p>\n

Mandate to Change: From Ashes to \u2026 More Ashes?<\/strong><\/p>\n

After Crane took the helm, NRG\u2019s power plant portfolio had over 17 gigawatts (GW) of generating capacity. Plants were \u201cfired\u201d by a mix of coal (~30%), natural gas (~50%), and oil derivatives. [2]<\/p>\n

Investors were looking for Management (that\u2019s David Crane) to grow earnings through a mix of (1) operational cost reductions, (2) reinvesting in high return-on-equity coal and natural gas expansions, and (3) spearheading consolidation of the independent power producer industry. [3] They wanted NRG to buy even more<\/em> fossil fuel plants.<\/p>\n

Management executed.<\/p>\n

Led by acquisitions of Texas Genco ($5.8B), GenOn ($4.0B), and Edison Mission ($3.1B), NRG became the largest IPP in the U.S. with ~45 GW from coal, natural gas, and oil power plants. [4] Forbes<\/em> put it bluntly, \u201cNRG Energy is one of the nation\u2019s biggest operators of carbon-belching power plants.\u201d [5]<\/p>\n

Crane saw NRG\u2019s climate impact as an imperative for change. Across two days in November 2009, Management presented a strategy to transform \u201cto a post-hydrocarbon purveyor of sustainable energy solutions.\u201d [6] They needed to respond to climate change.<\/p>\n

Moreover, they wanted to capitalize on that response \u2013 to be a first-mover in next generation solar and nuclear. After all, wasn\u2019t this the point of IPPs? Shouldn\u2019t they be the most efficient owner-operators?<\/p>\n

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\"renew\"<\/a><\/p>\n

Renewables: A Short-Term Until Short-Termism Caught Up<\/strong><\/p>\n

The renewables strategy had a profit motive, too.<\/p>\n

The Company knew that its fossil fuel plants would have increasing environmental liabilities under various regulatory scenarios (they expected to invest nearly $1B in pollution control). [7]<\/p>\n

NRG also recognized consumers had a desire for cleaner power. Climate change was shifting behavior. This underlying desire for cleaner power resulted in new (solar) installations and more supply on the grid. With total power supply outpacing demand growth, NRG\u2019s fossil fuel business would become less attractive (in California, net demand from gas-fired plants decreases significantly from 9AM to 6PM when the sun is visible!). [8]<\/p>\n

NRG invested heavily in both renewables acquisitions (e.g., a large portfolio of wind assets outside Los Angeles) and organic initiatives (e.g., a new electric vehicle charging business).<\/p>\n

What happened? Why haven\u2019t we all heard of NRG?<\/p>\n

David Crane was fired as CEO in December 2015.<\/em><\/p>\n

Following his dismissal, the new CEO (Crane\u2019s former COO) \u2018reassured\u2019 investors that the Company\u2019s \u201ccore business would remain its coal- and natural-gas-fired power plants.\u201d [9]<\/p>\n

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\"nrg-logo\"<\/a><\/p>\n

Lessons Learned: Transformation Is More Than One Person<\/strong><\/p>\n

No. The \u201cbrown\u201d consolidator couldn\u2019t lead the \u201cgreen\u201d revolution.<\/p>\n

NRG\u2019s mix of investments made it a \u201chard\u201d company to invest in. In Crane\u2019s words, \u201cmany times, institutional investors would complain to me about the complexity and challenge of what we were trying to do. They would point out to me that if they wanted exposure to \u2018brown\u2019 (a.k.a. fossil fuels), they could buy Dynegy (DYN). If they similarly wanted \u2018green\u2019 (renewables) they could buy Solar City (SCTY), and the portfolio of SCTY and DYN was easier for them to carry than NRG.\u201d [10]<\/p>\n

Moreover, culture shock was significant. What happens to someone working at a natural gas power plant when their parent company says renewables are the future? Good question.<\/p>\n

Between investments in renewables (which had different cash flow profiles than the \u201cbrown\u201d businesses) and underperformance in the Texas coal-fired business, NRG\u2019s stock tumbled.<\/p>\n

Put together, the story of NRG and David Crane is a stark reminder that it\u2019s not enough for one business leader to decide that responding to climate change is important. Transformation requires ecosystems of leaders \u2013 investors, operators, and regulators \u2013 to understand one another. Having a CEO in the power generation industry recognize the need to respond to climate change was a start. But it wasn\u2019t enough.<\/p>\n

Crane wrote to his former employees:<\/p>\n

That the clean energy future is going to happen is, at this point, inevitable, but as we have seen with my own personal experience, timing is everything and the earth, as we know it, is running out of time. We need to act now. [11]<\/p><\/blockquote>\n

 <\/p>\n

All the same impetuses to invest in renewables in 2009 continue to exist for NRG today. The Company remains one of the largest renewable generators in the country with ~5 GW of wind and solar generation. \u00a0Its legacy \u2013 Crane\u2019s legacy \u2013 can still change. When is the right time? I\u2019d say now is a good time to start. But maybe there\u2019s something to that energy storage thing Crane wanted to talk about.<\/p>\n

What do you think?<\/p>\n

 <\/p>\n