In a changing world, the survivors are often those who can jettison the familiar in favor of entirely new strategies. It's harder to do than you think, requiring a willingness to abandon things you've long held dear. "Kill your darlings," editors tell writers about sentences we're convinced are perfect, but don't really work. In industry, you may have to kill an entire paradigm.
David Crane, CEO of NRG Energy (NYSE:NRG), is the rare brand of leader who can do just that. At the recent Bloomberg New Energy Finance (BNEF) Summit, he laid out his vision for his company and the future of the energy sector.
Power to the people
NRG is the largest power provider to U.S. utilities, and it's one of the largest equity owners of solar power. The existing energy system in the U.S. is based on centralized command and control, and Crane wants to shift that autonomy into people's homes. He sees a future in which there are more forms of generation at the house. Remarkably, this represents a cannibalization of NRG's legacy business model, which relies heavily on centralized utilities.
Putting his money where his mouth is, Crane recently led NRG into a partnership with Nest, a company that provides home energy-consumption solutions with an emphasis on elegant design. Crane sees a natural interplay between Nest's technology and rooftop solar, into which NRG is increasingly expanding. The company has begun installing rooftop solar panels on homes and businesses through its NRG Residential Solar Solutions unit.
The move could constitute a real threat to incumbents like SolarCity (NASDAQ:SCTY.DL). Still, SolarCity may be down but it's not out. Goldman Sachs is providing the company with $500 million in lease-finance capital to install about 110 megawatts (MW) of solar energy systems on residential and commercial rooftops with little or no up-front cost.
Meanwhile, NRG is working in partnership with other solar companies. NRG and SunPower (NASDAQ:SPWR) are developing the 250-MW California Valley Solar Ranch together. Once the project is completed – which is projected for December 2013 – the companies will operate and maintain it jointly for two years, after which NRG will take sole responsibility. Just last month, First Solar (NASDAQ:FSLR) completed the 66-MW Alpine Solar Generating Facility it built for NRG. First Solar is also building Agua Caliente – the world's largest solar plant at 250 MW – for NRG and Warren Buffett's MidAmerican Solar.
Despite these megaprojects, Crane ultimately sees no future for high-voltage transmission lines. "It's idiotic to put panels in the desert and transmit electricity to cities." Noting that there are 130 million wooden utility poles across the U.S., Crane wryly observed, "The 21st century economy should not be based on wooden poles." Crane envisions a distributed solar future, whether it's through rooftop or parking lot installations, observing that solar photovoltaic (PV) technology downsizes well.
The end of utilities?
Crane sees change coming for our energy economy as a whole. He notes that technologies like electric vehicles and solar generation are positive catalysts, while hurricane Sandy was a negative catalyst. "If we keep having extreme weather events and the inadequacy of the system keeps revealing itself, people may not want to keep reinvesting in something that's 100 years old the day it's built."
Crane believes that solar and wind are about to separate; wind needs high-voltage transmission lines and solar does not. He thinks solar and natural gas belong together – "They just don't know it yet." He observed that while natural gas prices have plunged recently, consumers have reaped almost no benefit because the savings have been captured by middlemen. "Americans have spent $150 billion on natural gas and it's not going into our pockets. Someone has taken $150 billion from the American public and they want it back."
Crane reckons that the natural gas industry will figure out that they can disintermediate utilities and deliver directly to the consumer, basically cutting out the middleman. NRG is preparing for that, with plans to supply customers with both solar PV and natural-gas-fired generation packages. Natural gas would provide a stabilizing balance to solar's unreliable availability, such that customers would only need grid connections as a backup.
After the conference, I asked Crane why retail investors should care about this stuff.
If you're a long-term investor, you have to think in terms of societal trends and where they're headed. Sustainability is one of those trends, and it's as much a business driver as anything else. The generation of people who started college around 1995 views social justice and environmental issues as fundamental considerations, and they're all in their mid-thirties now. If you're investing in your future, and your children's future, then you have to include this in your analysis.
Now that's the kind of vision I want to see from a CEO.