Will NRG Energy Profit From Distributed Energy?

The promise of microgrids and distributed energy systems has attracted investments from utilities and power generators for years. The potential to boost efficiency, reduce emissions, smooth out peak loads on the grid, and more fully integrate renewable-energy sources could save money for utilities and their customers. Now, the first large-scale, real-world technology offerings are hitting the market.

Earlier this month, NRG Energy (NRG +4.73%) announced for the first time the existence of a secretive data-analytics service, called SpaceTag. It will be used in three projects spanning 60 megawatts of Southern California Edison's coveted Orange County and Los Angeles grid, including previously announced partnerships with high-profile energy storage start-up Ice Energy and technology powerhouse Lockheed Martin.

If successful, SpaceTag could play a critical role in the company's plans to return to the days of leaner and faster growth, but many questions remain for the nascent technology platform. Will NRG Energy be able to profit from the opportunity in distributed energy? 

Image source: Getty Images.

Tag, you're it

SpaceTag was developed in-house specifically for work with Southern California Edison, but it has evolved since then. It "determines the compatibility of different buildings across a target region for distributed energy products by harvesting, synthesizing, and analyzing data for business locations," which makes it easier for the company to acquire new customers. In fact, the new platform allows NRG Energy to provide building-level recommendations for industrial and retail customers, or utilities for specific parts of their grids. 

While other companies have set out to conquer mountains of data generated by utilities and their customers, NRG Energy has a huge leg up on the competition because, well, it has years of data spread across various retail markets throughout the country. That makes it easier to find the signal in the noise, and also to provide custom solutions tailored to each customer's need. Moreover, the company can tap into its 47,000-MW generation portfolio to offer the full gamut of products and services, rather than acting solely as a data consultant. Few start-ups can readily compete with that.

It will be put to the test immediately with Southern California Edison in three projects:

• NRG Ice Bear Program: The company and Ice Energy will seek to reduce peak demand by 25 MW using Ice Bears, which can be used with commercial air conditioning units up to 20 tons. The device freezes water overnight, when grid demand is lowest, and then uses the ice blocks to provide cool air for buildings the next day without stressing Southern California Edison's distribution channels or running up the customer's energy bill. Sometimes, simple is best.
• NRG Lockheed Martin Energy Efficiency Program: The project is similar to the first one, minus the Ice Bears. It takes aim at energy-intensive practices to help commercial and industrial customers reduce energy consumption, emissions, and costs while increasing grid reliability during peak hours for Southern California Edison.
• Demand response: NRG Energy will provide demand response solutions to energy hogs if they agree to reduce power consumption during peak hours -- and pay them to do so.

Clearly, the company has huge expectations for the ability of its new SpaceTag platform to grow its business and expand these three projects. The grid in Southern California will, hopefully, serve as a sandbox to learn and develop best practices and ultimately deploy the tool throughout its nationwide network. But investors may be wondering how this fits into the company's existing business and whether it can make an immediate impact.

Patience required?

When NRG Energy announced full-year 2016 financial results recently, it reshuffled business units to make a clearer distinction between its generation and retail segments. To better reflect the new direction of the company, all customer-facing businesses will now be accounted for in the retail segment. That includes the business-solutions unit, which does it all according to the latest annual filing. Specifically, it "focuses on providing distributed products and services as businesses seek greater reliability, cleaner power, or other benefits that they cannot obtain from the grid." It continues: "These solutions include system power, distributed generation, solar and wind products, carbon management and specialty services, backup generation, storage and distributed solar, demand response, and energy efficiency."

The unit's exact contributions aren't spelled out in SEC filings, but comparing revenue totals for segments before and after the reshuffling shows just how important it is to the company:  

Data source: SEC filings.

The difference between retail revenue figures is the contribution from business solutions. That works out to $1.37 billion in annual sales, or 11% of the company's total revenue.

In other words, the unit is no slouch -- and NRG Energy has a major opportunity to continue growing the business in the long-term with SpaceTag. Similarly, this tells investors that the new data analytics platform will be integrated into a substantial part of the company's overall operations, rather than growing from scratch. Investors can hope that results in a positive feedback loop that expedites growth and helps NRG Energy meet both its near- and long-term goals.

What does it mean for investors?

There's a huge opportunity in distributed energy systems, specifically in identifying the precise problems and providing tailored solutions. Value can be created throughout the value chain, from utilities increasing grid reliability to commercial and industrial customers reducing their energy consumption. It could reduce emissions at a systems level and have profound trickle-down benefits for residential customers, too.

The expansive reach and network of NRG Energy provides some serious advantages over competitors, which may only have snippets of data to work with and lack a generation portfolio to call upon to bundle the best solutions to customers. Long story short: successful implementation of the SpaceTag platform in Southern California could provide a glimpse of what's to come for investors.