Q&A with NRG's David Crane: the full version

david_crane_2009 NRG Energy CEO David Crane, during the CERAWeek conference in Houston in Feb. 2009. (Steve Campbell/Houston Chronicle)

Last week I sat down with NRG Energy CEO David Crane after the company’s two-day analyst meeting here in Houston. We ran an abbreviated version of the Q&A in Sunday’s Chronicle but we needed to edit it down greatly for space. So here’s a lengthier version which includes more of Crane’s thougths on electric cars, including his own Tesla.
Q: At your analyst meeting in Houston [last week] all your talk about renewable energy made you sound more a regulated California utility than an independent power producer. Why such a dramatic change?
A: To me there’s no doubt that in terms of investor perception there are benefit to us of a significantly greener portfolio, or decarbonizing our portfolio. To paraphrase Bob Lutz at GM, who said he wants to take environmental issues out of the car buying equation, I feel the same way about investing in us. Whether investors know it or not there’s a drag on our stock that comes with the fact that a good amount of our revenues come from traditional coal plants. That’s the 20th century and we need to be developing a portfolio for the 21st century, which is not ‘no coal’ but it’s certainly a difference balance that it is now.
Q: Why is this now a liability to investors, having this strong, cheap baseload coal capacity?
A: On the political front, this idea of renewable portfolio standards [requiring a certain percentage of energy generation come from renewable sources] has been popular in both red state and blue states. There’s no more obvious example than Texas. But certainly the election of the Obama administration in a time of financial crisis just accelerates the trend. Because they start talking about a federal renewable portfolio standard, which could increase the amount of renewable energy output in the country by two or three times.
The stimulus for certain types of technology is the only source of money out there. And the executive branch specifically said there will be $80 billion in loan guarantees through the Department of Energy, the vast majority of which is going to low- or no-carbon. There’s no money in there for traditional coal plants. The EPA is also being more assertive in its plans to regulate CO2, so that has focused the mind that that’s the way we’re going.
Q: Do you approach your work differently now that NRG includes Reliant, which has individuals as customers and not just large companies?
A: The presence of Reliant in Houston, the fact of the brand name recognition that’s here, that it’s in monthly contact with 1.6 million customers in Texas is very very important and adds an extra dimension to our company. A lot of ‘green’ solutions are focused at the consumer. Some things you can do at the power plant are eliminating the smoke stack or making it cleaner, but so much it is aimed at the consumer. Among what I call ‘distributed green solutions’ that we’re starting to embrace here are the smart meters that are being rolled out in Texas. And with the electric cars, we suddenly went from never talking about it to splashing it all over the news. Those two things are very interesting to us.
The thing that’s more difficult for us to do in the Texas market though, even with retail, is to figure how to play the conservation and efficiency game. In regulated markets people like Duke Energy can go to their PUC and say ‘Pay me for not generating electricity.’ Texas is an energy only market. How can you go to [Texas Public Utility Commission Chairman] Barry Smitherman and say ‘I’d like to be paid for not making power.” That nut we haven’t cracked yet. But there’s a lot to do in smart meters and electric vehicles. As I would say in this area we’re acting in enlightened self interest to pursue profitable distributed green solutions.
Q: Between the Exelon battle at the beginning of the year and the rush of renewables at the end, it seems like you’ve had a particularly frenetic year. Are you exhausted?
A: I’ve got five kids at home, the oldest of whom is 15. I don’t go home on the weekend and relax. The relaxation is that the things I’m uptight about on weekends are completely different from the things I’m uptight about during the week. I would say the same thing about Exelon the first half of the year versus these new opportunities in the second half of the year. My life is crazy 7-times-24, but everyone’s life is crazy.
Exelon was all about playing defense, and I’m inherently not like that. I did it because I felt like they were trying to steal the company, but I never went home with any joy or excitement saying ‘boy I had a good week, played good defense.’ But this new stuff is exciting. I go home on weekends or to cocktail parties and I start talking to people about electric cars and I become one of those boring people who talks about work. I mean this is really exciting stuff; this is transformational for all of us. So I’m tired but excited.
Q: Where do you see NRG now in the mergers and acquisition market?
A: For NRG to a be a seller of itself and to get good money for it, the Europeans would have to be interested in buying, and they’re not interested in us right now. The Europeans just won’t buy something with the carbon footprint that we have. So that’s one of the side benefits for this push into renewables. Several of the Europeans love nuclear, it’s not just renewables. But the carbon thing scares them, so changing the perception of the Europeans about the carbon intensity of our business would be a prerequisite of getting a good auction going. That’s not going to happen overnight.
It is a pretty attractive market to be a buyer. There are people who have to sell now, not quite like last winter, but money is quite tight, and the number of people that have the liquidity that we have is rare. But what we’ve been focused on since the Exelon bid collapsed is what you’ve seen today, renewables, electric cars. Because renewables, for an area that’s been so favored politically, has been flat on its back in the last year because it was financially overextended going into the Wall Street collapse. So, our main focus has been what you see today, the focus on renewables and the electric care space. You’re more likely to hear announcements in that space in the next few months than anything more traditional.
Q: It’s clear Congress won’t get a climate change bill finalized this year. Are you worried about the Environmental Protection Agency stepping in where Congress has failed with CO2 regulations?
A: Like everyone, we think the idea of the EPA regulating carbon is the worst possible outcome. Our tactical hopes for EPA regulations is it brings everyone to the table to create a moderate bill that is fair to everyone and can be effective in decarbonizing society over a reasonable time frame, giving us a long runway to compliance.
We had a speaker at our analyst conference from the Pew Center, Eileen Clawson, who said when she talks to opponents of the climate bill in the Republican Caucus and asks them if they can’t support a bill what are they gong to do when the EPA regulates carbon, the answer is a moment of silence before people go on to the next topic. With very passing day the EPA comes closer to doing it, which could be a catalyst to a moderate outcome. From my point of view if Congress stays at an impasse and the EPA starts regulating, they’ll get sued and what we’ll have is a total impasse and no one will invest in anything. In a sense that’s not overly bad for us, because as an incumbent generator if no one is building anything new, the existing supply is more valuable. So as an incumbent that’s not a bad place to be, but it’s just so wrong for the country.
Q: The City of San Antonio seems to be pushing hard to have CPS, the municipal utility, cut or reduce its stake in the expansion of the South Texas Project nuclear plant. How hard has it been to find a buyer for the other 20 percent of the project you’ve been marketing for a few months?
A: The 20 percent stake in NRG’s interest in NINA, not CPS’ interest. That process has been ongoing for several months. To be frank it has been delayed a little bit by the lack of clarity in San Antonio. Even if it’s a 20 percent stake we control the partner wants to know if they’re buying 20 percent of our 60 percent stake [in the expansion] or 20 percent of a 100 percent ownership. It’s caused some little delays, but when you’re in partnership with people everyone has their personal stakeholders they have to deal with. As I understand it now the city and CPS will make a decision in the next six to eight weeks. We can live with that, but we don’t’ really have any choice to live with it. But we’re hoping there’s clarity in that time frame.
Q: But has there been any shortage of interested buyers?
A: There’s no shortage.
Q: Would you consider working with Exelon on the STP expansion?
A: We actually would consider working with Exelon, they actually bring a lot to the table. But in the final days of the Exelon [takeover attempt] they were out talking with investors saying they thought development of nuclear power plants was a bad idea. So I think it would be hard from them to back away from those statements. There would have to be a sea change in commodity prices. So we’d be happy to work with Exelon but I don’t think they’d be happy to work with us.
Also in terms of interest in a little bit different magnitude, there’s interest among local players in Texas. They tend to be thinking of smaller pieces, though.
Q: Local players like other municipalities or electric co-ops?
A: I can’t answer that.
Q: Are you disappointed in the stalled deal with the city of Houston to build a 10 megawatt solar plant for them?
A: I loved the structure of that deal, the idea of the solar being firmed up with a long term agreement. To me that’s the future. And even though it was 10 megawatts as much time goes into negotiating that as 100 megawatts. So it was very very disappointing we couldn’t reach an agreement. If we could pull the trigger on it we’d have it done in six months. It has good PR value for us, too. But I am so sick of whether it’s nuclear or solar, of every one saying ‘this is cheaper than this’ all based on what’s on paper. At 10 to 20 megawatts, a $40 million project where you’ve got tax credits where you can get some debt financing, lets just get a few of them in the ground, and then based on how much they really take to build and operate make an informed decision. But this project, that hurt bad. It wasn’t about EBITDA or free cash flow. It just hurt that that one is getting away from us.
Q: You bought a Tesla, the all electric sports car, last year. Is it everything they promised?
A: It’s taught me a lot about electric car ownership mentality. First of all the contribution of Tesla to the electric car future of the county is it demonstrates you need an element of fun. It’s absurdly fast. When you put your foot on the pedal the acceleration of the electric car just slams you back into your seat. The reaction you get, well, people just light up. When I drive down the streets of Princeton [New Jersey, where NRG is based] you can hear people talking on the sidewalk. ‘Is that an electric car?’ I would say 150 people have driven my Tesla because I let people try it around the office park.
People want to see this happen, but there’s the problem of ‘range anxiety.’ My car has a 240 mile range and only once I’ve driven it 40 miles away, to the Philadelphia airport, I’m watching the meter go down and I’m getting nervous and it still says I’ve got 185 miles to go. It’s taught me a lot about what you need to do to calm people in terms of range anxiety.
It also taught me whatever they tell you about charging it off your household current, forget about it. It would take three days. Tesla is a 53 kv system I think, the Nissan LEAF something like a 30 kv and the Aptera a 16 kv. But charging the Tesla on household outlets will take three days. They sent me the send the 220 kv converter you have to put in your garage and it charges just fine.
Q: So all this talk of creating a public charging infrastructure, it’s really necessary?
A: When they sell you the electric car they should present you with a miles contract equivelant to a mintues on a cell phone but we’ll be responsible for the 220 KV charger in your garage. Probably you will just borrow it, you wouldn’t have to own it. We would also sell you access to a fast charger network. It is an insurance product. It’s designed to make people comfortable if they get caught out with a low charge so they have some place to go.
Q: A year ago I don’t think I would have thought the CEO of NRG would be here talking about cars and solar power.
A: You’re right. Someone asked me recently ‘when did you start thinking about the electric car business.’ I don’t’ remember even a year gao thinking about the electric car as a business opportunity but I ordered the Tesla in early 2007. But I’m really not interested in cars at all, so I’m not sure what made me get instested back then.
Maybe I’m completely wrong that we’re on the cusp of an electric car revolution. But if we are, there will be so many billionaires to be made. The person who figures out what to do with those batteries. They’re good in electric car for 6 or 7 years an after that they’re no longer good for transportation but they’re still good batteries. And the person who figures out how to rehabilitate batteris so can reuse them.