In a shrinking power load market nationally under the shadow of climate change policy responses and economic recession, NRG Energy Inc. CEO David Crane urged the electricity industry and financial analysts following it not to “overreact” to the prospect of what some would characterize as draconian measures set to come out of the Obama administration’s newly activated U.S. Environmental Protection Agency (EPA). Some segments of the coal industry may even thrive in the future, Crane said during an earnings conference call Tuesday.
The current mindset directed at EPA is akin to how electric industry leaders were viewing the prospect of carbon legislation out of Congress a year earlier, he said. More than worrying about future EPA actions, Crane said he is more interested in the fact that intense competition between coal and natural gas is about to happen again.
In the meantime, Princeton, NJ-based NRG has fully integrated its Texas wholesale and retail (Reliant) operations so they should be viewed as one entity, Crane said. He claimed that in a year’s time since buying the retail energy business from Reliant’s parent company, NRG has built a “sustainable” business with lower wholesale risk and now resurgent commercial/industrial customer bases, Crane said.
In January last year, Crane said, the Reliant retail trade book required $2 billion of collateral and 400 Bcf equivalent of gas. “We said we could do better than this, and we did with our plan, which was and is to hedge the retail portfolio in the market when prices were low, and hedge the retail portfolio from internal resources when prices are high, thus reducing the collateral burden by 70%.”
But it was the federal EPA and the pall he sees it potentially spreading in the power industry that dominated part of Crane’s remarks to financial analysts.
“After eight years of hibernation, we have a suddenly resurgent EPA, and while we haven’t seen anything particularly concrete or final yet, the power industry and its investors are deeply concerned with what the [federal agency] may do to existing coal-fired generation,” said Crane, noting that in his view he is not concerned so much with what EPA seems set to do.
“Our point of view is that right now we are at a point of maximum uncertainty and everyone is fearing the worst. Our strongly held view is that the reality of the EPA action when it comes will not be nearly as bad as it currently seems to some. The EPA will not be inactive, but it will be pragmatic. Given this, the electric industry and its investors and both are in a position exactly analogous to where we were a year ago regarding carbon legislation.”
Back then, as there is now, there is tremendous fear of the unknown and what the impact of stringent carbon legislation might bring to coal-fired generators, said Crane, urging as he did a few years ago, “Don’t overreact.” As with Congress a year earlier, he said he doesn’t expect EPA “to act in a precipitous fashion against coal-fired generation.”
As far as NRG is concerned, with its many aging and coal-fired power generation units, Crane thinks the company is comparatively well placed because the generation units “tend to be bigger, younger and have a lot of back-end air emission controls. Few of our units rely on once-through cooling, and none of them dispose of their coal residue into ash ponds.”
NRG’s worst case — if it had to run new back-end controls at each of its coal-fired units — would require an additional environmental capital structure of $925 million, Crane said.
He said the nation is poised to have another debate unfold like there was in the late 1990s regarding coal and natural gas. This led to a glut of combined-cycle natural gas power plants, Crane said. That’s about to happen again, a decade later, according to Crane, who expects more coal plant retirements to unfold in some parts of the country.
Expecting upsides and competitive market conditions, Crane said this means a good deal for investors, too. “Back in m id 2008 when natural gas was approaching $15/MMBtu, all coal plants were highly profitable and desirable. In these new natural gas and environmental markets, all coal-fired plants are not inherently created equal. We believe if you look at the coal assets of NRG from both environmental and economic perspectives, you will agree that we are extremely well positioned.”
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