Wholesale power producers in the U.S. are having a hard time figuring out what their best path forward is in today's hypercompetitive environment. NRG Energy (NYSE:NRG) is executing a major strategic change and may sell off some of its most valuable assets in order to reduce debt and, hopefully, generate positive cash flow from older fossil fuel assets. Calpine (NYSE: CPN) saw so few options forward that it decided to sell itself to the highest bidder. Across the energy industry, wholesale power plants are finding it hard to survive and companies that rely on wholesale markets to make money are in dire straits.
The changes in wholesale power have thrown the entire industry for a loop. Coal power plants that once generated consistent returns are now left for dead and there doesn't seem to be an easy way for wholesale power generators to make money going forward without completely changing their business model, something every company may have to do in the future.
Why wholesale power is in trouble
It's worth going back and looking at why wholesale power companies are in this situation in the first place. One issue is that wind and solar electricity production has grown one-third and 100%, respectively, over the past three years. And over the past decade solar energy has grown from nothing to over 1% of U.S. electricity generation. This is important because wind, solar, and nuclear energy are usually first in line to supply energy to the grid. This pushes down demand for all natural gas and coal supply.
The bigger problem for coal plants is that they're being undercut by low-cost natural gas prices. And at the end of the day natural gas is coal's main competitors and the reason hundreds of coal plants have been shut down, including at least 14 planned shutdowns this year. Aging coal power plants are colliding with cheap natural gas plants to create a supply glut that hurts power plants using both fossil fuel sources. There's no way around it: Wholesale power producers are feeling the pinch and they don't have a lot of options.
There are only a few paths forward
The options for utilities and power producers that own assets that sell into the wholesale electricity market are limited. We've seen Duke Energy (NYSE:DUK) buy Piedmont Natural Gas to diversify its business into natural gas delivery. Exelon Corporation (NASDAQ:EXC) also acquired Pepco Holdings to add a regulated utility to its business. So, companies are seeing this pressure on wholesale power markets coming and deciding to diversify or buy regulated assets as a way to stabilize earnings.
Another path is to buy renewable energy assets that have contracted cash flows for decades. Buying these less risky assets is a way to de-risk what has become a risky wholesale business. AES (NYSE:AES) has been building and acquiring renewable energy assets and recently bought sPower to become one of the nation's largest solar developers. NRG Energy was one of the original companies to try this dual fossil fuel-renewable energy strategy and is now abandoning it. But others will try to use renewables as a way to survive.
The other path forward is just to sell to the highest bidder. That's what Calpine decided to do rather than acquire a business that diversify or move into renewables. But it's clear that companies like Calpine weren't going to be able to stand on their own as a public company unless there are major changes to wholesale power markets, which I don't see coming anytime soon.