A year ago, CEO David Crane was leading NRG Energy through an ambitious transformation from a fossil-fuel powerhouse to the first major consumer-centric clean energy company. Today, that initiative sits at a dead end.
Crane’s vision started to crumble as NRG’s stock tanked last year. In September, in an effort to tighten the company’s balance sheet, Crane announced the company would move all of its emerging businesses into a “GreenCo” with a strict spending cap of $125 million in 2016. NRG’s stock proceeded to fall further, ultimately reaching a 10-year low. Weeks later, Crane was fired.
Steve McBee, CEO of NRG Home -- which houses NRG’s home solar, electric vehicle, and retail electricity businesses -- left shortly after.
Once the foundation of a novel next-generation energy company, analysts believe NRG’s green businesses are on the chopping block. But rather than be deterred by NRG’s experience, McBee says he’s as bullish as ever on the advent of a distributed, clean energy future.
“I think history will show that NRG got a lot right. I think history will show that NRG changed the contours of the market. And I think [NRG’s experience] will end up being a really important and powerful stepping stone to the market ultimately being reinvented,” McBee said in a recent interview. “You could do a whole lot worse than that.”
Where NRG miscalculated
NRG succeeded in areas where companies that try to reinvent themselves often fail, he said. NRG had committed leadership up to and including the CEO. It had a big balance sheet and was willing to put real capital behind its new venture. NRG went all in, investing in a suite of grid-edge companies that were designed to shift the energy business, not to simply be a hedge. NRG also led the public discourse.
“Where NRG miscalculated was not understanding the imperative of being 100 percent aligned with your owners, and perhaps not recognizing more quickly conventional energy investors are not going to be the investors that end up creating transformational energy 2.0 companies,” said McBee. “Those investors live in a different ecosystem.”
Those investors are exclusively value-oriented, they want to see dividends and not hyper growth, he said. NRG grew its residential solar business to become a Tier 1 player in a matter of months, but that wasn’t enough to satisfy investors focused on the division’s cash burn.
Reluctance among institutional investors to embrace the shift from brown to green, centralized to decentralized energy sends a worrying signal for the health of the planet, Crane wrote in a recent op-ed for GreenBiz.
“This lack of investor appetite for internal transformation is a dangerous inhibitor to corporate change -- change which, in NRG's case, was both essential to its long-term viability and highly desirable from a societal perspective,” he wrote.
At the same time, as a major fossil-fuel owner, NRG struggled to win over clean energy investors. The stunning decline in global energy prices amid all of this did not help either.
'Going to get built one way or another'
But just because it wasn’t the right time for NRG doesn’t mean there won’t be an energy 2.0 company, according to McBee.
“We built [NRG Home] with a deep conviction that this business is going to get built one way or another in the next five years, and it’s going to be great for consumers, great for the environment, and it’s going to make the investors that were smart enough to get into that business a ton of money,” he said. McBee’s conviction hasn’t wavered.
He believes it’s inevitable that the energy sector will be affected by the same consumer and technology trends that are sweeping through every major segment of the economy, from telecommunication to health care to transportation.
For McBee, a true energy 2.0 company has to offer sustainable resources and distributed energy services, organized 100 percent around the consumer -- not the meter. The company also has to have top-notch predictive analytics and offer innovative, upfront financing for both commercial and residential customers.
“In addition to all of that, you have to have investors aligned around the kind of business that you’re trying to build, which is a disruptive, high-growth business that’s focused on accumulating a large share of the market and positioning itself as that first 2.0 energy provider,” said McBee. “Those are not investors that typically invest in the energy space.”
The same goes for personnel, he said. The creators of Uber didn’t come from the transportation sector, and the founders of Airbnb didn’t come from the hospitality industry. It’s unlikely that whoever launches a leading energy 2.0 company will have a traditional energy background, he said.
McBee acknowledged that the energy industry is fundamentally unique. At the end of the day, providers have to move electrons around safely with a high degree of reliability. There’s also a lot of sunk cost in the grid’s physical infrastructure and a high level of regulatory oversight. But in McBee’s view, even the energy industry can’t escape the effects of overarching consumer and technology trends.
If not NRG, then who?
So the next question is, if not NRG, what kind of entity is capable of creating a new energy business model?
Not the utilities, said McBee. They’re by far the best-positioned players in the market, but they’re the least willing and seriously lacking when it comes to providing premium customer service. Corporate players like GE are making progress, but they’re moving incrementally. Google is well positioned to upend the energy sector, and will no doubt play an important role in redefining energy services, but energy isn’t the internet giant’s core competency. Solar andstoragecompanies are putting pressure on utilities, but so far no solar or storage startup has found a way to seamlessly and affordably sell a suite of energy services.
And so perhaps this major new player doesn’t even exist yet.
In the meantime, before getting all the way to a 2.0 company, McBee sees a big opportunity in predictive analytics and energy management, for both commercial and residential customers. He sees companies like GE’s Predix and Chicago-based Uptake playing a leading role in this area, which will ultimately form the foundation of a new energy platform.
Money is not the barrier in any of this, McBee added.
“When I look at the risk factor and the hurdle factor of bringing a [next-generation energy business] to market, I would put money way down the list of things to be concerned about,” he said.
A 'powerful moment' for an energy 2.0 company
Private equity investors are particularly eager to use their funds. The issue there isn’t a lack of capital; rather, it’s having too much of it. Private equity firms need to invest in something with scale, which is why relatively few deals have closed in the new energy space, said McBee. So the tough part isn’t finding money; it’s pulling together assets with enough scale to attract private equity dollars.
“I think the private equity community is far along in seeing the opportunity in the 2.0 energy space. A lot of those investors have been in and around a lot of the really disruptive companies that have been built in the last 10 years in mobile, in transport, retail and music, etc. I think they see the market being on the edge of that disruption, and a number of large funds I’ve talked to have capital set aside to invest in something like that,” McBee said.
“But again, it’s got to be a platform, it’s got to have scale, it’s got to have services, it’s got to have analytics, it’s got to have the ability to do upfront financing. There aren’t thousands of those companies just sitting around looking for investment,” he added. “But that company can be pulled together.”
Besides available capital and consumer and technology trends, there are strong policy signals driving a 2.0 energy company, including the extension of federal renewable energy tax credits, momentum around the Clean Power Plan, and the Paris climate deal. What’s more, there are a lot of very attractively-priced assets in some level of distress sitting in the market today, said McBee.
“This creates a very powerful moment for a 2.0 company to come to market right now,” he said. “And I believe somebody will do that.”
Will that somebody be Steve McBee?
“Well, we’ll see about that,” he said.