The owner of Texas’ second-largest power plant operator and largest retail electric provider is lowering its earnings projections for the year due to this past summer’s multiple power crisis.
Measures that NRG Energy said it will take to avoid such problems in the future are likely to lead to high power prices for consumers.
On Monday NRG lowered its 2011 EBITDA (earnings before interest, taxes, depreciation and amortization) by 7 percent, or $140 million, to the $1.775 to $1.85 billion range. That’s down from a range of $1.9 to $2 billion.
The decline in earnings was due to spikes in wholesale power prices that occurred when record-breaking power demand was combined with large numbers of unplanned power plant outages in August.
Wholesale prices that normally hover around the $20 to $40 per megawatt hour range shot up to the maximum allowable price of $3,001 per megawatt-hour for several hours on several days during August.
NRG lost money during those situations in two ways.
First, all of its approximately 11,000 megawatts of Texas power generation capacity was committed to customers. When several of NRG’s gas units went offline due to unplanned maintenance issues, the company had to buy power at those top prices from other power generators to meet those commitments. That accounted for about $55 million in the drop in earnings, according to analysis by Tudor Pickering & Holt analysts.
Second, NRG’s retail electric companies, Reliant Energy and Green Mountain Energy, also had to buy more power at the peak prices to meet their customer’s higher-than-expected electric demand as Texas experienced its hottest summer on record. That accounted for about $85 million in the earnings decrease.
In a conference call with analysts on Monday, NRG CEO David Crane said the company “stumbled significantly” in August and would take measures to avoid the same problem in the future. That includes hedging its retail power needs even more than it already does and in the future not having all of its natural gas power generation capacity committed during the peak summer months.
Those moves will cost money, of course, and will ultimately be passed on to consumers in the form of higher electric rates. NRG officials declined to specify how much it would impact rates, but UBS analysts said in a research note it was likely to be “relatively small.”
Several times this past summer state grid operators issued conservation warnings and called on pre-determined industrial customers to shut down equipment to avoid system-wide problems.
Crane said the company is reviewing the maintenance plans at each of its plants given the number of unplanned outages this summer, but he did not expect that maintenance costs would change significantly moving forward.
A repeat of such problems could be even more costly in the future: Texas power grid operators are going to increase the maximum price for power on the wholesale market from $3,001 per megawatt hour to $6,000.
NRG operates more than 11,000 megawatts of power generating capacity in Texas, including a stake in the South Texas Project nuclear plant.
NRG also owns Reliant Energy, the largest electric retailer by amount of electricity purchased by customers, as well as renewable energy retailer Green Mountain Energy.
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