Comment: Carbon Morality

Source: By David Crane, President and CEO, NRG Energy, EnergyBiz • Posted: Wednesday, January 28, 2015

Nearsightedness of Incumbency

TEN YEARS AGO, when EnergyBiz was launched, the American power industry was not experiencing its finest hour. Gripped by irrational exuberance, which manifested itself principally in overpaying and overleveraging when acquiring deregulated power assets, the power industry destroyed billions of dollars of shareholder value.

Worst of all, it managed to destroy value in a way that besmirched the entire power industry’s image. The ethical stench that radiated from the carcass of Enron tainted all of us – the Enron-wannabes, the Midwest utilities that set up sexy proprietary trading platforms or the too-many-to-mention power companies that came to grief through ill-considered foreign investment. When you add in the round-trip trading scandal, the misreporting of commodity pricing data and the alleged manipulation of the California wholesale market, the power industry left an indelibly negative image in the minds of regulators and the public.

For those of us who grew up with and believed in the value proposition of the independent power producer industry, worst of all was the fact that Enron was one of us. No matter how much Enron in its final years was hyping itself as the “ultimate multi-commodity trading platform,” it had started its post-pipeline evolution as an independent power producer. Indeed, Enron was our shining light – the IPP that became the belle of the ball.

So when it was made clear to us that our little IPP patch of the industry was the root of all evil, that we weren’t the Shire in the utility industry’s Middle Earth but, in fact, a small slice of Mordor (call us Mount Doom) – that was hard to take. It was particularly hard at a place like NRG, which in 2004 was emerging from Chapter 11 bankruptcy protection into the wreckage of the power industry and, unlike Enron, NRG was innocent of any criminal malfeasance. Prior to its Chapter 11 bankruptcy reorganization, NRG had not engaged in criminal acts, it was just criminally stupid in terms of the transactions it had done and the prices it had paid.

We have come a long way in 10 years, as an industry and as a company. We prospered during the robust commodity price environment before the financial crisis and we were sufficiently prudent in our hedging and in our leveraging to survive the commodity price collapse after the Great Recession. The IPP sector has shown it can withstand the extreme price swings of energy commodities, even though we lack the “iron dome” of rate base protection enjoyed by our bigger brethren, the investor-owned utilities.

But I am concerned that trouble looms for the power industry, utilities and IPPs alike, as the ground shifts below our feet in a way that none of us anticipated 10 years ago. I fear that the fast-shifting moral landscape in which we all operate threatens to leave our industry adrift, shunned by the customers we serve and the modern society we enable. I fear that we – all of us – are entering a new era of moral hazard.

Here is my hypothesis: Big corporations increasingly are being held accountable by the frustrated public for intractable societal problems that previously were considered the exclusive domain of public policymakers. But now, realizing the hopelessness of relying on effective action from a government terminally paralyzed by partisan deadlock, the desperate public is looking to the biggest remaining high-functioning institutions to take up the slack. That’s us: corporate America.

In most cases, the societal problem has some link to the business practices of the industry being called to account – like childhood obesity and the fast food industry, fresh water consumption and the beverage industry, personal privacy and the high-tech industry, and child labor and the garment industry. But in none of these cases is the link as direct, immediate or compellingly important as it is for us, the power industry.

The societal issue we own, obviously, is climate change, the mother of all social issues. We are as an industry – for the sake only of the casual uninformed reader perusing this issue of EnergyBiz in the dentist’s waiting room – the single largest emitter domestically of CO2, as a result of our overwhelming dependence on fossil fuel-based power generation.

We should have seen it coming back in 2007, when the proud and mighty TXU was forced into the hands of private equity because it had ignited a firestorm of controversy by announcing its plans to build 11 new coal plants in the coal-friendly and deeply conservative state of Texas.

After that shot across our bow, things calmed down. The struggle over the future of coal-fired generation reverted to the old normal – industry on one side versus the EPA and professional environmentalists on the other side, with the great majority of Americans seemingly indifferent to the outcome. But in fact, the moral issue has been festering just beneath the surface.

The American power industry, which consumes over a half-billion ton of coal per year, has left coal’s public image in the hands of the coal industry. Big mistake. The coal industry’s expensive attempts to persuade the American public that the emissions from coal plants that are scrubbed but otherwise untreated for carbon emissions constitute “clean coal” have failed miserably. In fact, their ads are so misleading they cast a pall of distrust over the entire industry and, as such, are destined to go down in history as representing one of the most ill-advised and self-defeating corporate public relations campaigns ever.

Now, the public discontent is bubbling to the surface. While the professional whiners in our industry continue to rail against the EPA and its effrontery in intending to regulate CO2 emissions from stationary sources, the real risk to our industry rises elsewhere: from John Q. Public and corporate America itself. NRG has filed comments on the proposed EPA regulations critical of important aspects of the proposed rule, but we do not dispute the merits of the EPA regulating CO2 emissions from power plants.

Corporations? Are we really at risk of being shunned by our fellow corporations, many of which are dealing with their own moral hazards? Why, yes, in fact, we are. Witness the “space race” among the most influential companies of the modern era – Amazon, Apple, Facebook, Google and Microsoft – to build giant, energy-consuming data centers. Most of them are openly competing with each other to ensure that their data centers are 100 percent powered by clean energy. Some are even making the distinction between clean energy, which simply can be grid power plus renewable energy credits, and “high-quality clean energy,” which means using energy from clearly identified renewable resources enabled by the data center’s demand for it.

What should be particularly disturbing about this is that the one company of the “fabulous five” that has not embraced clean energy data centers – Amazon – was picketed at its headquarters earlier this year by protesters castigating it for its willingness to run its data centers on grid power. Think about that: Amazon is being sent the message from its own consumer constituency that the use of grid power is wrong. Plugging in to the wall is now akin to smoking at your desk. Now, that is a moral hazard.

When it comes to the public, consider the fossil-fuel divestment campaign that’s gathering momentum among university endowments. For many reasons, I’m not a supporter of this divestment campaign, and I’m not overly concerned that it will dry up the pool of equity or debt capital available to our industry, but I’m concerned about one thing: its effect on the hearts and minds of American college students.

If the millions of students matriculating into and graduating out of the American university system each year are being exposed to four years of constant agitation about morality-driven divestment from fossil-fuel companies, are those students likely to become loyal and willing customers of our industry? I don’t think so.

It’s something for the utilities to think about this year as they rev up their lobbyists and unleash their PR consultants in an effort to eliminate or retard the spread of clean distributed generation like residential solar. You may win the occasional net-metering battle here or the fixed-charge battle there. Electric utilities in Florida may continue to prevail with their canard that distributed solar is not right for the Sunshine State, but make no mistake: By winning these battles – indeed, by fighting them in the first place – you are losing where it really matters. You are losing the hearts and minds of the future generation of Americans. And, by so doing, you are hastening the day when the dominant energy partner for the end-use energy consumer will be companies with no history of fighting against the inexorable rise of the clean energy future and that embrace and enable the consumers’ right to make their own energy choices.

Certainly, we hope to be one of those companies, as do many outside companies currently looking in on our industry as one ripe for the plucking. But not too many other energy providers get it, and I don’t know why. Call it the nearsightedness of incumbency.

David Crane is the president and chief executive officer of NRG Energy.