E.ON, one of Germany’s largest utilities, announced a radical move last week to spin off its centralized fossil-fuel assets into a separate company to focus exclusively on renewables, distributed energy and “innovative, customer-oriented solutions.”
German laws requiring power providers to purchase solar and wind have caused wholesale electricity prices to tumble, making centralized gas, nuclear and coal power plants in the country far less valuable. E.ON expects to lose $5.5 billion this year, due in large part to financial troubles with its conventional power business. Another leading German utility, RWE, lost $3.8 billion last year for the same reason.
“It will become increasingly difficult for a company with a broad portfolio to be successful and to grow in both the new and the conventional energy world," said Johannes Teyssen, E.ON's CEO and board chairman, during a press conference last week.
“A good indicator of the world we’re entering here is certainly far ahead in Europe and particularly in Germany,” he later added. And so this could be where other markets are headed.
Utilities in the United States currently enjoy low natural gas prices and face less aggressive renewable energy mandates. Nonetheless, the plummeting cost of solar and wind energy, and new technologies that allow customers to control and moderate their electricity usage is transforming the energy landscape and putting utilities on the defensive.
Are there any power companies in the U.S. embracing change in a similar way? Although not a regulated utility, the competitive power supplier NRG Energy is arguably closest.
The company retains a fossil-fuel-heavy portfolio, but it is also rapidly expanding into renewable and distributed energy.
“Conventional power generation is growing, and it has to keep up with demand growth. It also has to keep up with the attrition of older plants,” said Mauricio Gutierrez, NRG’s executive vice president and chief operating officer, in a recent interview with Greentech Media.
“But the biggest growth we see is around the renewables space. That’s where you’re really thinking about 10X type of growth,” he said. “We’re seeing it in the solar space, wind, distributed solar and other distributed technologies. So that’s where we want to focus a lot of our attention.”
NRG has taken a number of steps recently to bolster its distributed energy business.
Last month, NRG announced carbon reduction targets to reduce emissions 50 percent below current levels by 2030 and 90 percent by 2050. Distributed renewable energy will play a significant role in meeting the targets, along with a concerted shift from coal generation to natural gas and the commercialization of carbon capture and sequestration.
NRG is already the fourth-largest renewable energy company in the U.S. Last year, the company created a YieldCo, NRG Yield, to manage its renewable assets. YieldCos are publicly traded companies formed to own operating assets that produce cash flow, distributed to investors as dividends. This move arguably puts NRG on track toward a two-tiered business platform.
NRG took another step to separate out its renewable energy assets over the summer by splitting into NRG Business, NRG Renew and NRG Home. NRG Business will encompass the power producer's conventional generation portfolio. NRG Renew will manage all of its utility-scale renewable energy projects. And NRG Home will manage the retail business, including rooftop solar installation, home energy management and electric-vehicle charging.
A shift is underway
NRG’s recent acquisitions underscore a growing emphasis on distributed energy. In April, it added Roof Diagnostics Solar, the eighth-largest solar installer in the U.S., to its existing installer network. In October, NRG acquired Pure Energies, a solar customer acquisition platform, to boost its presence in the fast-growing residential arena.
“As we diversify these businesses [of conventional and renewable energy generation], we start getting closer and closer to the customer,” said Gutierrez.
That doesn’t sound too different from E.ON’s shift to “innovative, customer-oriented solutions.”
On a recent earnings call, CEO David Crane hinted at the company’s plans to become a more vertically integrated solar company in order to drive down installation and permitting costs for both residential and commercial projects. Details of NRG's new solar strategy will be unveiled at an investor day in January.
While distributed solar is the key element in moving from a centralized to a decentralized grid, it’s not the only technology NRG is investing in. It’s also very active in offering micro combined-heat-and-power systems, and it is exploring the adoption of fuel cells and batteries.
Last month, NRG won sixteen contracts from Southern California Edison for 178 megawatts of “preferred resources,” including demand management, energy efficiency and storage.
NRG has positioned itself well to be a first mover in the distributed framework structure. It has already distinguished itself from Dynegy, another of the nation’s top independent power producers.
The size and importance of NRG’s power generation business cannot be underestimated, however. “That’s what most of the operations group that I run focuses on,” said Gutierrez.
The company has a separate team “that is solely focused on growing our renewable business our distributed business, particularly distributed solar business,” he said.
The cultural differences between these two teams could create a fissure within NRG, more so than market dynamics alone. On E.ON’s earnings call, Teyssen noted there was an irreparable divide between the people running central generation and the people that are promoting the "prosumer" model.
"We’re already experiencing how difficult it is to combine these two very different cultures in a single organization,” he said. “And we have to assume that the new energy world will become even more dynamic and diverse than we can imagine today.”
Clean energy entrepreneur and consultant Jigar Shah believes this phenomenon won’t remain unique to E.ON.
“I think this is a major transition. I think every utility is basically going to have to put personnel [who are] wedded to the past in one company and their personnel [who are] wedded to the future in another company,” Shah said on last week’s Energy Gang podcast.
Of course, pushing forward with an aggressive renewable energy agenda does not mean NRG is ever going to spin off its fossil-fuel assets and create two companies.
“It feels like they are hedging against different speeds of market change in different regions, and taking a ‘we can do it all' approach, from retail utility to microgrid provider to NRG Renew,” said Steve Propper, Grid Edge director at GTM Research. “I see NRG trying it all rather than making abrupt changes.”
For more analysis of the E.ON transition, listen to The Energy Gang podcast below: