COP21

Inside the rise and fall of NRG’s green strategy

Power Player

Inside the rise and fall of NRG’s green strategy

GreenBiz photocollage

Last week, for a variety of reasons, I was trying to stay offline when suddenly my phone lit up with too many messages to ignore. Journalists, environmentalists, former colleagues, all contacting me on the same topic: my former company, NRG Energy, had announced plans to divest its renewables business.

Most of the conversations went like this:

Questioner: "What do you think about it?"

My answer: "I'm very happy; ecstatic even."

Now-incredulous questioner: "Come on, you must be upset. Doesn't this decision represent the final unwinding of your clean energy strategy?"

Me: "No, I am not upset. I am a major shareholder. I am totally supportive."

Still-unconvinced questioner: "Even though it means they have no way of meeting the 90 percent carbon reduction goal that you had committed the company to achieve by 2050"?

Me: "Well, since I considered NRG's 'commitment' to that carbon goal to be shambolic even before yesterday's announcement, I mourned its inevitable non-attainment a long time ago. I am over it."

So let me explain myself, because NRG's attempt to transform itself from brown to green — how it started, where it went off the rails and, now, how it is ending — is important. And just because I am happy about this latest development as an NRG shareholder doesn't mean that I am not distressed about what it means to the climate change movement. NRG is a big polluter. Were NRG a country, it would place in the top 50 of sovereign nations in terms of anthropogenic greenhouse gas (GHG) emissions.

First, a brief synopsis of the NRG saga for those who haven't been following along. NRG is a coal-based domestic power-generation company that grew over the past 15 years to become the second-largest power generator in the United States. Coming out of the 2009 recession, seeing no future growth and enormous economic and environmental risk in its aging coal fleet, NRG tilted hard into solar and various other zero-carbon and carbon-negative business initiatives.

In 2014, NRG publicly committed to 50 percent carbon reduction by 2030 and 90 percent by 2050, still the only U.S. fossil fuel-based energy company ever to have made such carbon-reduction commitments.

Mixed success

Early success in these new clean energy businesses was mixed, as it often is. The company's clean energy initiatives were slow to bear fruit financially. As a result, NRG's capital allocation strategy — reinvesting coal profits into clean energy businesses — fell into disfavor with NRG's traditional investor base. The result was a sharp decline and underperformance of NRG's share price against peers in 2014 and 2015.

Fearing above all the advent of an activist investor, the NRG board ousted the CEO who spearheaded the brown-to-green strategy (that's me) at year-end 2015 and installed a "new" management team that was essentially the previous management team minus me and a couple other executives who left of their own volition. After a lengthy strategic review, the "new" team reached essentially the same strategic conclusion that the previous management had — which is that renewables are the future — and, as such, essentially re-embraced the previous brown-to-green strategy (including the long-term carbon-reduction goals).

Notwithstanding their efforts at regime change, at year-end 2016, the NRG board got the activist shareholder(s) they long had feared. The board quickly capitulated, deposing their long-standing chairman and vice chairman, and putting the new shareholders in charge of a new strategic review committee. It is the revamped board's decisions arriving out of that review, announced last week, that caused my phone to light up.

The company said it was putting up for sale the remaining elements of NRG's clean energy business (which I will call "NRG Renew" here for simplicity sake).

So why am I so supportive of the proposed renewables divestment as an NRG shareholder — and depressed about it as a climate advocate?

On the positive side, the market reacted to the announcement by pushing up NRG stock a remarkable 35 percent in the first two days of trading, post-announcement — NRG's largest share price move ever. Since I have remained a major shareholder of NRG in anticipation that this day would come, this price bump makes me happy.

Secondly, I am very pleased for the people within NRG Renew who get the chance to strut their stuff shorn of the burden of the NRG mothership. Their renewables asset base is big enough that the spinoff company can stand on its own two feet; attract its own sources of capital and do the innovative clean energy portfolio deals that the leadership wanted to do and should have been doing all along. Craig Cornelius (senior vice president of the renewables organization) and the management team at NRG Renew have done a fabulous job over the past two years at keeping the team together and focused on the business at hand.

They should be proud of the multibillion-dollar valuation estimate being thrown around last week by analysts as to what their part of the business might be worth.

So, good for me on a personal financial level, but at the macro level of corporate climate advocacy, the NRG saga is one staggeringly large leap — backwards.

Three sobering lessons

Here are the three major (sobering) lessons for the corporate green movement that I derive from this climate morality tale:

First, CEOs — all CEOs — keep a close eye on their share price. It is the key to their self-preservation, their personal compensation and their latitude to act, strategically and tactically. The fact that, after this week's renewables divestment announcement, NRG's stock price shot up will not go unnoticed among energy CEOs.

This is a catalyst-driven stock market and renewables divestment appears to be quite a potent catalyst. Conversely, if this is not a warning signal to any climate-conscious CEOs of conventional energy companies that may be lurking out there to suppress those green impulses, then I don't know what is. Wall Street really does hate renewables, at least in the hands of fossil-fuel companies.

Let's face it: Absolutely no positive indicators suggest that conventional energy company CEOs should hazard the perilous journey from brown to green on their own. For the climate movement, it reinforces the essential truth of the criticality of corporate procurement: the energy industry will decarbonize only if and when big energy buyers give producers a deadline and tell them, thereafter, they no longer will buy power from any company that combusts fossil fuels.

The second sobering lesson is for all the people who think they can influence good corporate carbon behavior through the institutional investors who own publicly traded corporations. There was no institutional investor support for NRG's attempt to go green and now, obviously, a huge reward for them abandoning the effort.

So, for all the happy talk coming out of the senior ranks of the major pension funds, sovereign wealth funds and university endowments about investing their money in a climate positive way, they continue to entrust the great majority of their vast investment resources into the hands of money managers who are, at best, climate-indifferent. Either the pensions and sovereigns place their money with funds dedicated to carbon light investments, or they need to embed climate considerations into fund managers' annual incentive compensation calculation.

Corporate greenwashing?

Third, the denouement of the NRG green story raises the sensitive issue of corporate greenwashing and when the climate movement will start to call it out.

If we are going to make meaningful progress on carbon emissions, chronic emitters cannot be given a free pass simply because they have announced long-term reduction goals. If we are to maintain the integrity of the collective corporate effort, the climate movement needs to demand visible and meaningful progress from companies that have embraced long-term carbon reduction goals.

When NRG announced in 2014 its goal of 90 percent carbon reduction by 2050, it was the result of 18 months' work spearheaded by NRG's sustainability team, culminating in the later stages in several presentations to NRG's board of directors. The NRG board, to its credit, endorsed the carbon goal only after pressing NRG management to provide a convincing roadmap to achieving 90 percent carbon reduction in a manner that still enabled the company to grow. The carbon roadmap ultimately provided to the board depended on contraction of the aging coal fleet and clean energy growth resting on four pillars:

  • NRG Renew (large-scale wind and solar);
  • NRG Home Solar (rooftop solar);
  • NRG eVgo (electric vehicle charging network); and
  • Petra Nova (carbon capture and use)

So, what's the current status? NRG sold eVgo to private equity last year and unwound NRG Home Solar earlier this year. The first Petra Nova project recently was taken to completion but, as far as I can tell, no further attempt is being made to expand that business beyond the one project. The only thing that was left, until last week, was NRG Renew.

And now that business is being sold.

Yet, in tweets the day of the announcement and in an internal town hall meeting, NRG reaffirmed the company's commitment to the 90 percent goal. And a quick hit on NRG's corporate website shows a bunch of images highlighting solar and other clean energy solutions that, at this point, reflect the company's pre-2016 forward-to-green plan far more than they accurately reflect the company's new back-to-conventional future.

So, I think it is time for the climate movement to call upon NRG either to delineate how, under its new plan, it gets to 90 percent carbon reduction or, failing that, to formally renounce its carbon goals and stop portraying itself on its corporate website as a "going green" company before it becomes condemned for being hypocritical and misleading.

A positive development in the corporate world over the early years of this millennium has been the influx of purpose-driven companies: companies dedicated to doing good while doing well. So many, so fast, it became inevitable that the time would come when a purpose-driven company moved away from its purpose.

How are we to respond? What are the employees to do?

I feel empathy for employees who truly believed in the purpose and came to work every day intensely motivated by a desire to achieve it. We had lots of those type of people at NRG when I was there, and many still work there. For most of these employees, there is no dishonor in working for a conventional power company of the type that NRG is reverting to; they just need to develop a new source of motivation.

But for that part of the company, which acts as the point of the spear on achieving that purpose, those folks need to reflect upon what they stand for. To be blunt, they need to do a little soul-searching. When they stand up and reaffirm carbon goals that their company has no means to achieve — and no one outside their immediate circle believes — all they accomplish is harm to themselves as professionals.

If they persist, they risk becoming Ivanka-ed: Complicit.

For NRG management, they will spend the next 12 to 18 months implementing the announced plan, including the sale of NRG Renew. If they fully succeed, and I am confident they will, the company's asset mix should look remarkably like it did 10 years previously, in 2009, before we launched the push into clean energy. Based on the math, there should be additional short- to medium-term share price appreciation, and, let's face it, public company CEOs have to live in a short- to medium-term world. Long-term prospects, however, are a different story.

I don't know many companies that have succeeded by turning the clock back to what they looked like 10 years previously.

As a shareholder, I will reap the financial benefit of their new short-to-medium plan, and that is good for me. But deep inside, I suspect it will gnaw at me; knowing that the Earth will be in just a bit more perilous state than it otherwise would have been, had NRG stayed the course.

And that's really unfortunate for all of us.