June 20–NRG Energy needed to generate more electricity for its customers in Texas, so it struck a deal five years ago to buy a natural gas power plant in Mississippi, haul the pieces to Bacliff in Galveston County and reassemble it.
But by the time the plant was ready to fire up last year, wholesale power prices had plummeted. NRG, which had bet on rising demand and prices, tried to get out of the deal, refusing to pay $109 million it had promised for the plant, according to a lawsuit brought against NRG by the plant’s owner, Rockland Capital, a private equity firm in The Woodlands.
The case settled recently under confidential terms, according to documents filed in state district court in Harris County, but Rockland’s claim opened a window on the changes that have buffeted the merchant power industry in recent years and the shifting business focus of generating companies like NRG. Low natural gas prices and increasing amounts of low-cost wind energy have depressed wholesale electricity prices in Texas, battering earning in recent years.
That set the stage for the acquisition of two of Houston’s biggest merchant power companies, Calpine by an investing group led by a New Jersey prive equity firm, and Dynegy, by the Dallas company Vistra Energy.
NRG, meanwhile, has moved ahead with divesting some $4 billion in assets, including its renewable energy holdings, and focused on its higher-margin retail electricity business. NRG is the biggest seller of electricity in Texas and owns the retail companies Reliant, Green Mountain Energy, Pennywise Power and Cirro Energy.
In the case of the Mississippi power plant, NRG balked when new transmission lines from North Texas were set to bring new supplies of electricity into the Houston market, adding more downward pressure on price. The Houston Import Project was approved by state regulators in 2015 and became operational earlier this year, despite the opposition of power generators that had benefited from transmission bottlenecks that sent wholesale prices spiking when demand soared on hot summer days.
“Why build a $100 million plant when you won’t even recover your investment?” asked Ed Hirs, energy economist at the University of Houston.
NRG declined to comment, citing the confidentiality of the agreement with Rockland. Rockland officials did not return calls seeking comment.
NRG signed the deal with Rockland in early 2013, a few months after the Texas Public Utility Commission voted to raise wholesale electricity prices by as much as 50 percent. Regulators hoped the extra profits would give power producers an incentive to build more plants to avoid rolling blackouts and provide enough power for the growing Texas economy.
Power providers kicked off a building boom, including NRG which announced in late 2014 that it had it started construction on a new $150 million natural gas-fired electric plant near Houston with enough capacity to power 72,000 homes at peak demand. The 230-acre site would run six turbines that could be started quickly during peak times of energy demand. The Bacliff project –the one owned by Rockland –was expected to be ready in early 2016.
But by that time, power prices in Texas had fallen to their lowest level in a decade and new transmission lines would be making their way to Houston. In the first quarter of 2016, the average price per megawatt was $17, according to the Electric Reliability Council of Texas, which operates the electric grid for about 90 percent of Texas. Just four years earlier when NRG signed the contract with Rockland, the average price was about $25 per megawatt.
When the plant from Mississippi was ready to go online last year, according to Rockland’s court filings, NRG was selling –not buying –power plants as it struggled to right itself after reporting losses during each of the last three years, including $2.2 billion in red ink in 2017.
In July, NRG rolled out what it called its “Transformation Plan,” which promised to eliminate $13 billion of debt, cut costs and sell as much as $4 billion in assets including 6,000 megawatts of conventional generation (A megawatt is enough to power 200 Texas homes on a hot summer day). Among the assets to be jettisoned were wind and solar projects in which former CEO David Crane had invested. Crane was forced out of the job by large shareholders unhappy about the company’s low returns.
Rockland believed that NRG’s decision to terminate the power plant deal was part of an effort to keep electricity supplies low and prices high, according to court filings, and asked Judge Larry Weiman to order NRG to turn over analyses, reports and other documents detailing the company’s financial strategy. The case settled before Weiman could rule.
NRG’s chief CEO Mauricio Gutierrez said in a news release last summer that the transformation plan was a commitment to simplify and strengthen NRG to thrive in any market cycle. Investors liked it, immediately sending the stock price up more than 25 percent in value. The stock is trading near its 52-week high of $31.96 a share.
As NRG shifts away from production, it’s pivoting to the retail side of the industry. Today, NRG earns twice as much revenue selling electricity to consumers and businesses than it does producing power from coal, natural gas, wind and nuclear generation, according to NRG’s securities filings. NRG has headquarters in Houston and Princeton, N.J.
One way NRG is expanding its retail operations is by returning to renewables. NRG has teamed up with solar power producer California-based Cypress Creek Renewables to build three solar facilities in Texas to sell to NRG’s commercial customers.
Meanwhile, the newly rebuilt six-cylinder natural gas-fired plant, which sits on property owned by NRG, is idle. NRG never took custody of the plant, said NRG spokesman David Knox.
Rockland isn’t saying what will happen next, but there’s a hint of what’s to come in one of the company’s court filings. About the only thing left, according to Rockland, is to dismantle the power plant and sell the turbines to another company.
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