NRG Doubles Down on Distributed Generation
What’s a good way to get someone’s attention? If you’re David Crane, president and CEO of NRG Energy, you threaten to upend an entire industry. In recent weeks, Crane has done just that, outlining a vision for the future where consumers disconnect from their electric utility—with NRG’s help.
NRG would offer individual customers a package that includes both solar photovoltaics (PV) and natural gas-fired generation, allowing them to autonomously create their own electricity without the need for the rest of the grid. As Crane put it during the MIT Energy Conference last month: “The individual homeowner should be able to tie a machine to their natural gas line and tie that with solar on the roof and suddenly they can say to the transmission-distribution company, ‘Disconnect that line.’” And to add another option to their menu of utility-free offerings, just last week NRG announced plans to soon release a “solar pergola” with battery backup. If Crane’s vision—of customers literally pulling the plug with their traditional utility—comes to fruition it could mean the end of the electric utility industry as we know it.
But here’s the irony: in a lot of ways, NRG is the electric utility industry. Though not a traditional vertically integrated utility, NRG is an S&P 300 company and the largest independent power producer in the U.S. (it owns nearly 47 GW of generating capacity). Meanwhile, its subsidiaries operate as both utility-facing electricity wholesalers and customer-facing electricity providers in deregulated markets. Needless to say, NRG’s roots run deep in the existing electricity industry. With Crane’s new model, NRG is essentially making a daring end-run around its bread and butter business to engage consumers directly. What could possibly possess NRG to begin taking customers off the grid, launching a veritable coup d’etat against not only electric utilities, but against its own business models?
A number of factors may have influenced the move: concerns about grid resiliency in the wake of superstorms such as Hurricane Sandy; plummeting PV costs that make solar an increasingly attractive option as both a source of zero-carbon energy and a way to help generation portfolios meet renewables standards; concerns about nuclear—formerly a cornerstone of NRG’s energy future—in the wake of Fukushima; and the proliferation of third-party solar companies offering customers a way to, at least partially, side-step their utility (if you can’t beat ‘em, join ‘em, right?).
Even viewed in the light of such influences, NRG’s maneuvering of late is bold to say the least. NRG is no startup. It’s a big corporation with a lot of weight to throw around. And if these new business models start to gain serious traction, the repercussions will reverberate throughout the entire electricity industry.
Enter the Utility Death Spiral
To be clear, NRG has flourished under David Crane’s leadership, its stock price nearly doubling in the past year alone. So why would Crane rock the boat, as he just has? The plan that Crane has put forward seemingly contradicts NRG’s current formula for success, and it threatens to alienate others in the industry, to boot. This is a serious challenge to the status quo.
One theory would be that Crane sees the writing on the wall: distributed renewables are forcing centralized fossil-fueled generation to go the way of the dinosaur, opening the door for customers to manage and meet their electricity needs with increased independence. Granted, at today’s pace it’s going to be a while before the electricity industry is no longer dependent on coal and nuclear, but Crane seems to be positioning NRG to get in front of the curve by establishing itself as the go-to provider of islandable micropower. Sun Tzu said: “though we have heard of stupid haste in war, cleverness has never been associated with long delays.” Crane would seem to have taken this to heart.
Should the electric utility industry be worried? At a time when utilities’ business customer satisfaction is already falling, the answer is an unequivocal ‘Yes.’ If NRG steps in and takes people off the grid, there are suddenly fewer customers remaining to pay for the infrastructure needed to make the system work (the same infrastructure that’s needed to bring renewables like Wyoming’s wind power to major load centers across the country). As a result, a utility would have to distribute these fixed costs over fewer customers, raising prices for individual customers and driving even more people to think about switching over to NRG and other options that may emerge. This phenomenon results in a positive feedback loop termed “the utility death spiral.” Investor-owned utilities are taking notice, as this death spiral could result in a cycle that continues shifting customers away from the utility until there’s nobody left.
NRG’s plan hinges on a belief that if a utility can’t prove that it offers more value to its customers, those customers will leave—kicking off the aforementioned death spiral. It’s for this reason that Crane believes that utilities think “distributed solar is a mortal threat to their business.” But does this have to be the case?
Alternative Business Models
I applaud the audacity of the business model that Crane has put forward for NRG, and I think that he is doing us all a great service by doubling down on distributed generation in his high-stakes game of poker with our nation’s electric utilities. Still, there are some significant lingering questions about his strategy.
1) While Crane seems acutely aware of the long-term challenges faced by a business-as-usual electric utility industry, his proposal simultaneously ignores the potential future risk that NRG would lock its customers into by tying them to natural gas. Natural gas may appear cheap, sexy, and easy today, but it has a long history of price volatility. New England provides a perfect example of how a homogenous fuel mix, pipeline constraints, and unexpected demand spikes can cause natural gas prices to skyrocket. Does committing to natural gas (and, in some cases, to batteries) really make the most sense?
2) From a societal perspective, the most significant flaw in NRG’s plan is the overbuild that it invites. Recall that NRG wants us each to have our own personal power plant—a system big enough to handle our individual peak loads. Making every customer stand alone might be a good idea for someone selling customers the necessary generation equipment, but it means a massive overbuild of assets, while throwing away the benefits of diversity on both the supply and demand side, which are crucial to achieving high renewable electricity futures. We’d lose the collective efficiencies that we unlock by connecting to our neighbors and community, where complementary peak loads can blend together into a flatter, more manageable shape. Such efficiencies would mean that to meet the same total demand, we need less—less natural gas capacity, smaller solar arrays, and fewer batteries. Neither today’s grid nor NRG’s proposal fully capture the potential value of diversity—millions of islanded customers and an ancient, “dumb” grid both have disadvantages. However, somewhere in between these two extremes there is a ‘Goldilocks option’ that capitalizes on the benefits of each, achieving an optimal blend of efficiency, resiliency, and sustainability; an option in which the grid still figures prominently, used in part to maximize the benefits of diverse renewable sources of energy.
Innovate or Perish
Clearly, there are plenty of alternatives to both the traditional electricity system and to NRG’s proposed business model. This is a time of exciting and sometimes uncertain innovation in the electricity sector. When we see incumbents like NRG subverting their own business model, we should all sit up and take notice. The stakes are high. Expect more innovation, and enjoy the footrace—the last one to innovate will be extinct.
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