Is NRG Ready to Feel Southern Company's Pain?

NRG Energy is getting its carbon capture experiment under way, proving that Southern Company isn't the only one brave enough to test the energy industry's limits.

Reuben Gregg Brewer
Reuben Gregg Brewer
Jul 28, 2014 at 5:39PM
Energy, Materials, and Utilities

NRG Energy has some outside-the-box views of the energy industry. Now it's following along with stodgy, old-school Southern Company on the carbon capture front, though. Maybe this carbon capture thing is a real possibility after all.

To the left of normal
NRG Energy CEO David Crane has used inflammatory language to describe the future of the U.S. power industry. He's described what amounts to a death spiral as new technologies change the industry. That's what this CEO of a key merchant power company sees on the horizon because of distributed power, however.

That's why NRG Energy is partnering with Dean Kamen, of Segway fame, on a natural gas electric generator that could pair up with rooftop solar for when the sun isn't shining. It would let consumers completely sever ties with their electric utilities, and leasing such gear would give NRG Energy an annuity-like revenue stream.

That said, NRG Energy is smart enough to realize that not all customers can cut the cord. That's why it just started work on a carbon capture retrofit at one of its coal plants. It's important to note that this is different from what Southern Company is doing, since Southern is building a coal plant with carbon capture from the ground up.

Big trouble or big opportunity
If Southern Company's results are any indication, NRG Energy and its shareholders could be in for a rough ride trying to deploy this largely untested technology. In 2013, Southern Company dinged shareholders for $0.83 a share for Kemper cost overruns. Add in the $0.27 a share charge in the first quarter and shareholders have $1.10 a share worth of reasons to dislike carbon capture technology.

(Source: XTUV0010, via Wikimedia Commons)

Worse, the longer it takes to get Kemper up and running, the more likely it is that Southern Company shareholders will find more dollars-and-cents reasons to dislike the utility's bold attempt to move the industry forward. The thing is, being a first mover is never easy. Technology rarely works out the way it was originally planned even if it is highly successful in the end.

That said, if Kemper is a flop then Southern Company shareholders have reason to be angry. Southern Company owns a piece of the technology it's installing, however, so if it works out then the company could find it has a huge opportunity to license its carbon capture technology to others. The outcome is still up in the air, however, and more cost overruns wouldn't be a surprise.

Get ready for a wild ride
Southern's experience to date suggests that NRG Energy shareholders should get ready for some turbulence. NRG Energy is getting money from the government to help with this retrofit, which limits the upfront cost, but if there are delays and setbacks then the merchant power player will likely have to turn to shareholders for the extra money like Southern has.

(Source: Union Pacific Railroad Co., via Wikimedia Commons)

That would be a bigger problem for NRG Energy than it has been for Southern Company. Southern Company is largely a regulated utility, so it has a pretty steady income stream from customers. NRG Energy is largely a merchant power company, selling electricity at the going rate in competitive markets. It's lost money in six of the last 10 quarters, including the last two consecutive quarters.

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For the most part, the best way for a merchant power company to remain competitive at the moment is to keep costs in check because of low electricity prices. Spending on a carbon capture retrofit that no regulations currently require isn't the best way for NRG Energy to do that.

"We want to continue to provide safe, affordable, and reliable power to our customers, but without risking the health of the planet as a result of our activities," is how Crane explained the project. For a forward-thinking company expecting industrywide changes, it's easy to see why it believes that carbon capture is a worthwhile investment.

However, as with Southern Company, NRG Energy is likely to feel some near-term pain as it looks to the future. That might be easier to take if Southern Company had a completed Kemper online, but it doesn't.