The energy world's 50 shades of brown
In reaction to last week's essay about the end of King Coal, there was a slight burst of activity in the Twittersphere questioning whether my legacy at NRG was properly characterized as a noble attempt to go "beyond coal" or as the opposite, a misguided strategy centered around "doubling down on coal."
Both are correct because, in my opinion, in order for America's coal fleet to be rationalized and decarbonized, ownership of coal-fired generation in the United States first needs to be consolidated into many fewer pairs of hands. Indeed, it is critically important in "whose hands" ownership of the American coal fleet resides as its end game begins. As those hands are now not mine, Twittersphere commentary on my legacy is besides the point.
What is highly relevant is what my successor at NRG does with its vast portfolio of conventional generation.
This is a question I have thought a lot about the past couple months. I have a great deal riding on the outcome. Economically, I almost certainly remain NRG's largest individual shareholder, holding more stock in the company than the entire board of directors (save one) and the entire executive management team, combined.
Environmentally, as a climate advocate and as a father of five, the question is important to me — as it should be to you — because NRG's roughly 100 million tons per year of greenhouse gas emissions would put it at or near the top quartile, in terms of anthropomorphic GHG emissions, of the 195 nation-states that signed on to the COP21 Agreement in Paris in December.
It also is a timely question because, having not articulated publicly a change in strategy at the time I was fired on the eve of the Paris talks, or any time since, NRG's upcoming earnings call Feb. 29 is the logical venue for the new CEO to set his own direction for the company both economically and environmentally. He is a very smart individual, with a deep understanding of the dynamics of the power industry, but as I try to put myself in his shoes, I am reminded of a passage from George Friedman's thought-provoking book, "The Next 100 Years," in which the author noted practical constraints that play on both political and business leaders:
Geopolitics and economics both assume that the players are rational, at least in terms of knowing their own short term self interest. As rational actors, reality presents them with limited choices. ... Nations (and businesses) generate leaders who would not have become leaders if they were irrational. Climbing to the top ... is not something that fools often do. Leaders understand their menu of next moves and execute them, if not flawlessly, then at least pretty well, An occasional master will come along with a stunningly unexpected and successful move, but for most part the act of governance is simply executing the necessary and logical next step (emphasis added). ...
"Simply executing the necessary and logical next step" is a problem because the breadth, extent and urgency of the climate situation depends on the world changing its approach to energy production and consumption within one generation, which means a revolutionary, not evolutionary, pace of change. Our prospects for success dramatically would be enhanced if at least some incumbent energy companies would become "Nixon goes to China"–like change agents, rather than entrenched defenders of the status quo. This change agent certainly does not need to be NRG, but as it had progressed some distance down this path over the past several years, let's examine the practical range of motion open to its new CEO by starting with the facts.
Renewables 3,500 times greater than coal in 2015 — the numbers don't lie. NRG management can read as well as the rest of us. Game over. The future of power in the United States is — in addition to natural gas (in which NRG does NOT have the competitive advantages of Calpine, its immediate competitor) — renewables, an area in which NRG currently is well positioned.
But does that mean that NRG's new CEO is free to reaffirm the renewables-driven "go green" strategy of the previous regime, a regime in which he, after all, was a major player?
No, he cannot. A green strategy is not a practical option for him, for multiple reasons.
There is the issue of market expectations. Into the strategic void created by NRG's silence as to its own future direction since the regime change a couple months ago, jumped the armchair analysts who follow the company, offering their own public commentary on NRG's future strategy. Uniformly, they have interpreted NRG's replacement of its green CEO with its conventional COO as a conclusive indicator of a "B2B" strategic redirection — which, in this case means equally "back to basics" and "back to brown."
Compounding the market expectation question is the potential "BEF" — Board Embarrassment Factor: If the conventional guy follows the same green strategy as the green guy, then why did the board change CEOs in the first place? It makes no sense as a matter of business logic and all boards have a desperate desire to be perceived as rational decision makers. New CEOs do well not to embarrass their board of directors, most of whom in the case of NRG have been ensconced on the board for more than a decade.
This is not just an NRG issue. Jim Rogers in in his final year as Duke's CEO invited me to meet with his board. I came away from that interaction full of wonderment that Rogers got any change done at all, dealing with directors so deeply entrenched in the status quo.
Questions of capacity and credibility
Finally there are the twin questions of capacity and credibility.
Can NRG, at this point, persuade customers who want to "go green" of its long-term commitment to clean energy? Will the company's 2014 commitment to cut its carbon emissions by 90 percent by 2050 be reaffirmed? And will the company allocate additional capital to grow its clean energy businesses? Renewables consume a lot of up-front investment capital and with some $19 billion of consolidated debt on its balance sheet, NRG's first priority vis-a-vis its equity holders needs to be debunking the perception that the company is massively overleveraged.
This almost certainly will require NRG's taking steps to reduce recourse debt and deconsolidate NRG Yield, once its golden child and now the $8 billion debt albatross weighing down its balance sheet. But when NRG sets NRG Yield free, NRG's ability to arrange cost-effective financing of future renewable projects will be further diminished.
So if green is out at NRG, then the color of its new strategy will fall somewhere within the range of 50 shades of brown.
But just because NRG's future is brown doesn't mean that it is not important, from an environmental perspective, how things turn out there. NRG still can make a lasting contribution in the fight against climate change. NRG, like Southern Company and other big fossil fuel companies, has unrivaled expertise in combusting fossil fuels at enormous scale. Government labs, academic research, computer simulated models — all good — but my money is on the men and women who operate these plants for their daily livelihood to figure out how best to get the carbon out of fossil fuels either before, during or after combustion.
We just need to find a way to combine the rank-and-file practical expertise that resides within the big fossil companies with the carbon entrepreneurs such as NetPower that are demonstrating technologies that combust fossil fuels without carbon.
In my mind, as much as I love renewables and particularly solar, it is a plain fact that victory against climate change will not be ours because we converted the world to 100 percent renewables in one generation. Our victory will come when we learn, during that same period of time, how to combust fossil fuels without emitting carbon into the atmosphere.
More specifically, this means retrofitting thousands of coal plants in China and India with post-combustion carbon-capture technology and learning, in the United States, how to use our rich bounty of natural gas in a non-carbon-emitting way. In this, fossil companies such as NRG, Duke and Southern have a pivotal role to play, leading the way.
There is glory in being the lightest shade of brown.