It was supposed to be an easy transition for NRG Energy (NYSE:NRG) from utility giant to renewable energy powerhouse. The company had billions in cash flow coming in from fossil fuel plants that could then be turned around and invested in wind, solar, electric charging stations, and energy storage. Simple enough, right?
The problem for NRG Energy and former CEO David Crane is that utility investors and renewable energy investors are like oil and water. They simply don't mix, and neither one quite understands the other. So, less than two years after launching a brand-new Home Solar business and putting a huge focus on clean energy, the company is shutting down parts of its solar business and looking into strategic alternatives after Elliott Management and Bluescape Energy Partners were given seats on the board of directors. Don't be fooled: NRG Energy is heading for a breakup because dirty and clean energy just can't live together.
The death of NRG Home
At one time, NRG Home was supposed to give SolarCity a "run for their money." Seriously, NRG thought it could build a solar installation arm that rivaled the biggest players in the country. It acquired Roof Diagnostics to gain a decent market share and added solar products company Goal Zero as another way to attract customers.
The theory was good on the surface. A big utility name puts its financial muscle behind residential solar, which will give the product validation and the company's operations stability. Only that's not what the industry needed.
Instead of customers flocking to a utility trying to distrupt itself, they stuck with companies trying to disrupt the world. SolarCity, Vivint Solar, Sunrun, and SunPower remained more attractive options for customers than NRG Home. And in the past 18 months, the market has been shifting away from large national installers to local and regional installers that have lower costs and can be more nimble in the market. True, the company's retail arm is still around -- with 3 million retail customers to boot -- but the reality has fallen far short of the dream.
We've seen something similar with NRG's EV charging network. It's a good solution from the wrong player in the market. So, instead of NRG's flexible charging network being a marvel of the EV community, Tesla (NASDAQ:TSLA) is the charging network that's become the standard everyone else has to live up to.
The clash of the old world and the new
It isn't that NRG's management got their vision of the future wrong. It's that NRG wasn't necessarily the company to execute on that vision. Its customers were confused by the transition to solar, and in many states NRG Home was trying to enter, they had no prior knowledge of NRG. And investors in a utility like NRG were looking for cash flow, not billions of dollars of investment in a business that may take years to show real signs of progress.
With the activist investors involved, NRG Energy is likely to split into a green business and a fossil fuel business. The green business has already been separated and is either shutting down or being sold. NRG Home is being wound down and a majority stake in EVgo has been sold. It's possible the NRG Yield (NYSE:NYLD) stake will be sold as well in an effort to monetize assets and return the cash to shareholders.
Whether there's a spinoff or just a sale of assets, it looks like the old energy world is beating the new at NRG Energy.
A transition gone wrong
It's harder than it seems for fossil fuel companies or utilities to make a transition to new, cleaner forms of energy. The investment structure and incentives for the two are just too different to coexist. Fossil fuels and utilities are all about cash flows and finding ways to make money off the status quo.
Renewable energy, particularly energy production on rooftops, is about breaking the energy status quo and replacing it with more individual independence. And breaking the traditional energy business doesn't always come with predictable cash flows or installations each quarter.
The two strategies are simply at odds with each other, and NRG Energy abandoning most of its renewable business is a casualty of the realities of the energy industry today. Old and new forms of energy just don't mix under one roof and NRG Energy found that out the hard way.