Once a giant pure-play independent power producer, NRG Energy has cultivated a legacy of pioneering business models to withstand waves of change in the power sector. Its latest strategic shift pivots from megawatts generated to customers served.
A mere decade ago, NRG Energy, which described itself as a “competitive power and energy company,” held a massive 48-GW generating fleet with assets dispersed throughout the U.S. By the end of 2022, the company had accomplished a remarkable corporate overhaul, ridding itself of nearly two-thirds of that capacity and regenerating itself as a “consumer services company built on dynamic retail brands.” But while significant, that transformation has represented only one stage of the company’s elaborate metamorphosis.
NRG Energy’s foundation is embedded in Northern States Power Co. (NSP), a Minneapolis-based publicly-held energy firm that also spawned regulated utility giant Xcel Energy. According to the Minnesota Historical Society, NSP’s roots were first sown by entrepreneur Henry Marison Byllesby. Byllesby—who in 1881 as a 22-year-old engineering school dropout joined Thomas Edison as a draftsman for a power plant in New York—went on to cultivate solid experience in the then-burgeoning power industry with stints at Westinghouse, Portland General Electric Co. In 1902, Byllesby established an engineering and operating firm in Chicago with renowned financier and utility consolidator Samuel Insull.
While Byllesby in 1909 began the Washington County Light and Power Co., Byllesby and Insull in 1909 established utility holding companies NSP and Standard Gas and Electric in 1910. By the time Byllesby and Insull parted ways in 1912, NSP had snapped up several companies, including its flagship holding, Minneapolis General Electric. In the decades that followed, NSP rapidly expanded. Despite setbacks posed by the Public Utility Holding Company Act of 1935, the company had become one of the top 10 utilities by the mid-1950s.
A Non-regulated Opportunity
As a horizon for deregulation began to emerge in the late 1980s, NSP tasked David Peterson to start a new business that could acquire, build, own, and operate non-regulated power and energy segments. Peterson—a 25-year company veteran who had climbed the ranks starting in power plants and rising to running corporate fuel supply—in 1989 began leading NRG Energy as a wholly owned NSP subsidiary.
Powered initially by a series of cogeneration power plants in California, NRG Energy was formally incorporated as a Delaware corporation in 1992. By 1993, the company had branched out internationally, acquiring interests in plants in Latin America, Germany, the Czech Republic, and Australia. Within a decade, the company’s power capacity surged to 11 GW, padded by major fossil power acquisitions like Dunkirk and Huntley in upstate New York and combustion turbines in California.
However, in an effort to gain more business clout as restructuring gained steam, NSP merged with New Century Energies, a Colorado-based mid-sized public utility holding company. While the merged companies rebranded to create Xcel Energy, NRG, then already a hefty generator with a 15-GW fleet, was spun off as an independent entity. Xcel, however, still owned a 74% interest in the nascent NRG after it completed a public offering, and NRG largely functioned as an Xcel subsidiary.
At the time, NRG, still headquartered in Minneapolis, was bent on an aggressive expansion, highly optimistic that the U.S. power generation sector would evolve away from regulation based on cost-of-service pricing to an independent power generation market based on competitive market pricing. Within a year, the company had extended its full or partial ownership to 76 generation projects—a combined 24 GW, including 5 GW located outside the U.S.
But much of the expansion, including the construction of new projects, required intensive capital, and the majority was fulfilled with third-party debt. In 2002, as an economic downturn froze the market, NRG’s financial burden became significantly heavier. Struggling to pay off a $9.4 billion debt it had accumulated on its balance sheet through “aggressive purchases,” the company and 25 subsidiaries in May 2003 voluntarily filed for Chapter 11 bankruptcy protection and began a comprehensive restructuring. While the bankruptcy forced NRG to sell off assets—including most of its foreign fleet—and halt construction of nearly 4 GW of new projects, it eliminated Xcel’s equity ownership and allowed the company to relaunch as an independent public company.
1. NRG Energy has owned a 44% share of the 2.6-GW South Texas Project Electric Generating Station (STP) nuclear power plant located in Bay City, Texas, since 2006, along with municipal utilities CPS Energy (40%) and Austin Energy (16%). Under a definitive agreement announced in June 2023, NRG will sell its stake in STP to Constellation Energy. Courtesy: NRG
Establishing a Significant Competitive Energy Foothold
By 2006, buoyed by market forces, NRG had resumed its expansion spree. Its most significant acquisition during that period was of Texas Genco, whose generating assets in the Electric Reliability Council of Texas (ERCOT) comprised 10.4 GW, many of which NRG retains today as its core generating base in Texas. These include major baseload coal and nuclear plants, and intermediate, cyclic, and natural gas assets, such as the mammoth 2.5-GW coal-fired W.A. Parish plant, the 1.6-GW coal-fired Limestone plant, the 1.4-GW Cedar Bayou natural gas plant, and an undivided 44% interest in two nuclear generation units at the 2.6-GW South Texas Project Electric Generating Station (STP, Figure 1).
In 2009, while still chiefly a competitive power generator with a 24-GW fleet, the company acquired Reliant Energy, a substantial retail franchise in Texas. It also began to concertedly consider investments in technologies that emitted no greenhouse gases (GHG), including Bluewater Wind, a pioneering offshore wind development envisioned as a 200-MW project (though it abandoned the project two years later, unable to secure co-investors). And a year later, it acquired Green Mountain Energy, a retailer styled on providing “cleaner energy and carbon offset products.”
By 2012, NRG had begun describing itself as an “integrated wholesale generation and retail electricity company,” but it added a new suite of investments in a bid to expand its “alternative energy” holdings, which were composed of new carbon-mitigating technologies such as solar PV, distributed solar, solar thermal, and carbon capture. At the time, with significant prescience, the company forecast that the energy industry would embrace “a long-term societal trend towards sustainability” and that an information technology–driven revolution would bolster personal choice in the consumer economy.
Still, 2012 proved to be a pivotal year in which NRG vastly expanded its fossil fleet through a $1.7 billion merger with GenOn. The merger added a 21-GW wholesale fleet based in PJM Interconnection, ISO-New England, and the New York Independent System Operator (NYISO) to NRG’s portfolio. The combined company made NRG—now outfitted with a massive 46-GW asset base—the largest competitive power company in the U.S., and it shifted its largest sources of capacity revenue to capacity auctions in the East. “This combination ushers in a new era of scale, scope, and market and fuel diversification in the competitive power industry,” NRG’s then-CEO, David Crane, said at the time.
Despite a series of disruptions, including new stringent federal environmental rules, NRG, led by Crane, continued its enlargement. In a manifesto penned in 2014, Crane envisioned NRG could function like an Amazon, Apple, Facebook, and Google of electricity, playing a transformative role in connecting customers with energy-generating potential and empowering them to make their own electricity consumption choices. Crane further broadened NRG’s investments with visionary flair into offshore wind, rooftop solar, electric vehicle charging, and home automation. However, the company also continued its thermal fleet expansion. In 2014, pivotally, it acquired Midwest Generation from Edison Mission Energy, adding a substantial 8-GW fleet of mostly fossil capacity, including Joliet, Waukegan, and Will County, giant coal plants in Illinois.
By 2015, NRG’s fleet had crested to 52 GW, and its business had expanded beyond plant operations. NRG now fostered a business entity that provided engineering, procurement, and construction, and other energy services. And, along with a “Home” consumer-facing business, which included its retail brands, it had established NRG Yield to own, operate, and acquire diversified contracted renewable and conventional generation and thermal infrastructure assets.
2. NRG Energy and partner JX Nippon operated Petra Nova, a $1 billion carbon capture and sequestration (CCS) project in Thompsons, Texas, over a three-year demonstration period starting in December 2016. The project, POWER’s 2017 Plant of the Year, captured 92.4% of carbon dioxide from flue gas slipstream at the adjacent coal-fired unit W.A. Parish unit. Economic conditions rooted in the collapse of oil and power prices at the outset of the COVID pandemic prompted the partners to place Petra Nova in reserve shutdown in May 2020. While NRG sold its share in the pioneering project to JX Nippon in September 2022, the Japanese firm recently notified the Electric Reliability Council of Texas it plans to return the unit to year-round service starting on June 28, 2023. Courtesy: NRG Energy
Navigating Market Volatility
However, the rapid growth failed acceptance on Wall Street, and worse, it saddled the company with increased complexity, particularly as wholesale market conditions began to distort, shaken by an influx of state and federal intervention to establish incentives for renewables and nuclear. Anticipating new troubles, NRG at the end of 2015 installed a new CEO, Mauricio Gutierrez. Cognizant of the unprecedented disruptions, Gutierrez, who was NRG’s former chief operating officer, was widely quoted for declaring that the independent power producer model “is now obsolete and unable to create value in the long term.”
A major concern rested on GenOn, which had been financially crippled by falling wholesale power prices and capacity prices spurred primarily by the glut of cheap gas. GenOn only stayed profitable because it sold assets to rebalance its portfolio, which entailed retiring uneconomic coal plants and converting them to gas where economical. After GenOn’s debtholders filed a suit against NRG in December 2016, alleging breaches of fiduciary duty, NRG in a stunning move in May 2017 relinquished GenOn’s 15.4-GW fleet—nearly a third of its fleet—to its creditors.
Seeking to cast off nearly $13 billion in debt and shave exposure to environmental and cyclical commodity price risks, NRG in the following years began a series of generating asset divestments, starting with interests in NRG Yield (a 3.4-GW portfolio that later morphed into Clearway Energy) and its 3.6-GW South Central portfolio. By 2019, its asset sales resulted in $3 billion in cash proceeds, the removal of $8 billion in consolidated debt, and a simplified corporate structure. Notable recent asset sales include its 44% (1.2-GW) equity interest in STP—its sole nuclear asset—to Constellation Energy for a $1.75 billion purchase price.
During the same period, however, the company’s transformation has led it further into the retail space. In 2018, it bought North Carolina–based XOOM Energy for $210 million, and in 2019, it bought Stream Energy, a “direct selling” retailer that operates in Texas, Pennsylvania, and other Eastern markets for $300 million. Then, in 2021, it acquired Direct Energy for $3.6 billion. Earlier this year, it closed on the $2.8 billion purchase of Vivint Home, a “smart-home” platform that it claims will be integral to its current business model.
Cultivating a Concerted Focus on Retail
Profoundly less commodity-based and more customer-focused, NRG today considers itself “one of the largest competitive energy retailers in the U.S.” The core of its business, it says, “is the sale of electricity and natural gas to residential, commercial and industrial [C&I], and wholesale customers.”
NRG segments its operations with a geographical focus: Texas, the East, and the West. In its Texas segment—serving ERCOT—the company’s generation supply is “fully integrated” with its retail load, allowing the company to supply a portion of its retail customers with its Texas asset base. This approach “reduces the need to sell electricity to and buy electricity from other institutions and intermediaries, resulting in stable earnings and cash flows, lower transaction costs, and less credit exposure,” the company explains. “The integrated model also results in a reduction in actual and contingent collateral through offsetting transactions, thereby reducing transactions with third parties.”
3. NRG Energy’s electricity supply by fuel type at the end of 2022. The company’s owned generation capacity (Figure A) served about one-third of the 155 TWh of its sold power in 2022. The remaining two-thirds were served by third-party market purchases of power for resale. Figure B represents NRG generation capacity plus current and future renewable electricity capacity from power purchase agreements (PPAs). At the end of 2022, NRG had signed agreements for about 2.4 GW of renewable power capacity, and about 45% were operational. Courtesy: NRG Energy
The integrated model comprises three main functions. “Customer Operations” is geared toward serving its customer base. “Market Operations,” meanwhile, works to cost-efficiently supply energy to its customers, as well as to “maximize the value of the company’s assets after satisfying load requirements.” It does this through two commercial groups: power, which is responsible for “end-use” power supply (including plant optimization and fuel supply), and natural gas, which is tasked with costing, logistics, and supply for all of NRG’s customers, including C&I and wholesale. The Direct Energy acquisition “significantly increased the Company’s capabilities and scale across the natural gas value chain,” NRG notes. Finally, NRG’s third business segment, Plant Operations, is dedicated to its wholesale generation portfolio, which included 16 GW of generation capacity at 23 plants as of December 2022 (Figure 3).
NRG’s asset sales and retirements announced over 2023 are slated to diminish its overall fleet even more to about 13.6 GW. The sale of NRG’s stake in STP will cut the company’s ERCOT fleet’s capacity to 8.9 GW. And since the company retired its giant 1.4-GW gas-fired plant in Joliet, Illinois, in June 2023 (owing to results of a PJM base residual auction), only 2.9 GW remains in the East, all operating in PJM. Meanwhile, spurred by Illinois’ Climate and Equitable Jobs Act, which requires all coal and oil power units to achieve zero emissions no later than January 2030, NRG has chosen to retire all its remaining plants—a combined 1.8 GW—in the state. Still, some efforts to retire inefficient generation have been stymied by market rules. For example, after PJM identified reliability impacts from NRG’s proposed retirement of its coal-fired 410-MW Indian River 4 in Delaware, NRG entered into a reliability must-run (RMR) agreement that is expected to end in 2026.
Meanwhile, in January 2023, the company sold its 420-MW Astoria power plant in Queens, New York—its only asset in NYISO—to offshore wind developer Beacon Wind Land for $215.5 million. Today, it also has only one asset in the Midcontinent Independent System Operator: the 1.2-GW gas-fired Cottonwood plant in East Texas, but that, too, is slated to cease operations when its lease expires in May 2025. NRG’s assets that operate in the California ISO (CAISO), meanwhile, include the 214-MW Ivanpah solar thermal plant and the 226-MW gas-fired Midway-Sunset plant, which CAISO recently released from an RMR. NRG, notably, still owns a 37.5% stake in the 1,613-MW coal-fired Gladstone plant in Queensland, Australia.
Proceeding With a Risk-Wary Strategy
A primary driver of NRG’s current strategy is a climate goal, first announced in 2014—when the company, led by Crane, was still a giant power generator—to reduce GHGs by 50% by 2025 from its 2014 baseline. In 2019, NRG also set an ambition to achieve net-zero emissions by 2050. In 2021, notably, the company became the first North American power company to receive validation from the Science-Based Targets Initiative as aligned with a 1.5-degree Celsius trajectory.
Yet, that presents a complex dilemma for NRG, as Jeanne-Mey Sun, NRG’s chief sustainability officer, noted. “As a competitive energy provider, NRG competes for its customers every day. As such, we must serve the needs of customers that want to buy electricity, even when it has a relatively high carbon intensity,” she said. “Moreover, there are rules governing the shutdown of power plants in the market. In addition to complying with these market rules, we have a fiduciary duty to preserve and enhance the financial performance of the company.”
For CEO Gutierrez, the solution is clearly embedded in opportunities that will endure the rapid pace of change. During an investor event held in June 2023, trends Gutierrez highlighted suggest as electrification gains pace, the residential sector will increasingly adopt smart and connected devices. “The most relevant aspect for us is the convergence between the two,” he said. “New value opportunities are emerging from electric vehicles [EVs] and rooftop solar to smart devices and portable batteries.” At the same time, “a buildup of renewable energy and grid-scale batteries, combined with increasing demand-side load management are creating headwinds for conventional power generation assets,” he said. “These trends support our evolution toward the consumer and home.”
However, he added: “I want to be clear, we will own generation, but we need to make sure it has the right attributes to help manage our customer’s power demand, and it will deliver stable margins to our consumer business.” NRG’s generation portfolio “is an integral part of our improved supply strategy,” he underscored. During the event, Gutierrez also unveiled NRG’s development of three “brownfield” projects—a combined 1.5 GW—in Texas: a 413-MW gas peaker at TH Wharton, a 436-MW gas peaker at Greens Bayou, and a 689-MW combined cycle gas turbine project at Cedar Bayou.
While Gutierrez suggested NRG already has a diverse fuel mix and merit order, and 70% of its fleet is now located in Texas, he said the company’s generating future will be highly more strategic. “As we think about the future composition of our portfolio, we want to increase the load-following capabilities of our supply and continue lowering our emissions with responsible retirements,” he said. It means, he suggested, that future developments may be limited to intermediate or peaking capacity. More significantly, any generation the company owns will provide a foundation for its customer-focused businesses. “Depending on market design improvements and economics, we could bring these products to market to help manage our retailers,” he said.
That’s one reason why NRG “was comfortable with” its decision to sell its baseload stake in STP, Gutierrez said. “We can easily replace the attributes of this asset through market purchases of power and attract good economics for our business,” he noted.
Over the longer term—2025 and beyond—NRG ultimately expects “a tighter integration” between its energy and smart home businesses, said Gutierrez. That would allow NRG to grow outside competitive power markets. “Our smart home and behind-the-meter offerings give us access to 60 million additional homes, a significant increase in our total addressable market,” which currently stands at around 7.5 million customers, he said.
The opportunity could also allow the company to participate in residential load control and aggregation. And finally, it could provide another tool to help NRG manage its own retailers. “NRG is uniquely positioned to act as a bridge between the home and the grid,” said Gutierrez. “We will be able to dispatch the home as a power unit and provide instantaneous flexible capacity to the electric grid.”