With the nuclear disaster in Japan and uncertainties in the Arab world, all eyes turn to the energy providers and the question of what are the safe energy solutions of the future?
NRG Energy, a Fortune 500 company, is a leading retail and wholesale power generation company that claims to have doubled its size to more than 26,000 megawatts (enough to power 20 million homes) since President and CEO David Crane took office in December 2003.
The 51-year-old takes climate change very seriously and predicts the share of renewables at NRG will grow from 2 percent today to up to 20 percent during the next 10 years, making it the fastest growing business at NRG. But a realist at heart, Crane says, renewables will never become the backbone of US energy consumption. This is why he insists on a balanced portfolio, in which different fuel types - nuclear, coal, natural gas and wind and solar – are all represented in a fairly balanced way.
Nevertheless, he is outspoken on the need to advance climate legislation and to support clean energy resources and technologies that are critical to our transition to a low carbon society.
Born in Cleveland, Ohio, the father of five children holds a Bachelor of Arts degree from Princeton University and a Juris Doctor degree from Harvard Law School. Previously Crane worked for Lehman Brothers and ABB Energy Ventures. Under Crane’s leadership, the power company received the Platts Industry Leadership and Energy Company of the Year awards in 2007 and EnergyBiz magazine named Crane “CEO of the Year” in 2010, while Earth2Tech listed Crane among 2010’s Top 10 GreenTech Influencers. Ernst & Young gave him a special recognition for his contributions to changing the debate on climate change and the environment.
Crane recently spoke to Institutional Investor writer Franziska Scheven to discuss how he sees the prospects of the company and its industry and the future of nuclear power in the wake of major energy security issues.
Can you tell me what impact the earthquake and tsunami that slammed into the North East of Japan last month will have on nuclear power?
The short answer is I think it's too early to tell. I mean, certainly the President of the United States and the Secretary of Energy and the Republican leadership and Congress have all reaffirmed their support for new nuclear power plants in the United States, but I think we need to wait until the crisis is over in Japan and see what the regulatory reaction is here in the US before we determine whether or how many more nuclear power plants will be built.
Our South Texas plant was caught at a very difficult time in that we were moving full steam towards beginning construction in a little bit more than a year, and so, we're doing very detailed design work. The announcement we made this week was that we were going to continue with the NRC license process and with the DOE loan guarantee process, but we were going to stop doing detailed design work until we determine whether the NRC was likely to order changes to the design. We simply didn't want to waste money on something that might have to be redone.
The South Texas project is not in a seismic area, it's not on the coast and it's not a Mark 1 design like Fukushima, it's not clear to us that there should be any design change at all. But since we do support the idea of a regulatory review by the NRC, we want to wait until we have an outcome of that regulatory review before we do a lot more design work.
Are you looking to talk to additional investors for that project?
First, we want to see what Tokyo Electric's attitude is because obviously we don't want to start selling their interests before they say that they don't want it. Plus, it's not exactly a great time to be talking to people about investing in a nuclear plant in the middle of a nuclear crisis. So we are not talking to anyone right now, but we could be talking to people in the near future.
And can nuclear plants be made safe, in your opinion?
I think the nuclear plants in the United States absolutely are safe. I think that the protections that we have in this country for plants, the design margin ... just to give you an example, obviously our plant in Texas, it's in a zero seismic area, so earthquakes are not the issue [but] our plants have to be concerned with hurricanes. A very strong hurricane in the Gulf of Mexico has about 125 mile per hour winds. Our plant is designed to withstand 360 mile per hour winds.
And certainly, one of the issues that we face with our nuclear plant is whether or not the United States effectively turns its back on new nuclear power like it did essentially for the 30 years after 1979, after Three Mile Island. And what I would simply tell you is that the United States can make whatever decision it wants about new nuclear power, but it's clear that China and India and other developed countries are going to go ahead and build new nuclear plants. And from my point of view, focused exclusively on nuclear safety, the world is a safer place nuclear-wise with the United States in the lead building new nuclear plants and setting the safety standards, rather than allowing developing countries to take that leadership role. So I don't agree with people who say nuclear plants are too unsafe, the United States shouldn't build them.
Nuclear plants in the seismic areas near San Francisco, for instance, is that comparable to Japan?
It's certainly more comparable than our project is. What I would say is that the nuclear plants in the United States that bear similarities to Fukushima are going to have more explaining to do than the nuclear plants that don't. I personally think that they will be able to demonstrate that they are safe and they can handle beyond designed events. But nonetheless, I think they have to answer the question. So plants in seismic areas or plants right on the ocean or plants that are very close to major urban centers so they have potentially evacuation issues, they need to provide some disclosure and some comfort.
A nuclear plant, the unfortunate fact is that any sort of nuclear accident is going to have a disproportionate impact on the people who live right next to the nuclear plant. So every nuclear plant in the country lives basically on the trust and the confidence of the local people, and that's really the foundation for the whole thing.
I was down in Bay City, Texas, on Monday, talking with the community leaders about all the safety features we had at our plant. And so, I think that communication has to happen, and it has to happen with the plants in the active seismic areas. But I'm not at all saying that it's a preordained conclusion that those plants need to be shut down early. They just need to be asked the question.
If plans to push ahead with nuclear power fold in the US, what are the alternatives to nuclear power?
From my perspective, increasingly the power generation business is splitting into two types of power plants. You have baseload plants that run around the clock, or can run around the clock, with a high degree of reliability, and then there's what we call intermittent capacity like wind and solar. Wind and solar are not a substitute for nuclear power. Coal and natural gas plants are a substitute. My concern is that nuclear of course is a zero air emission, zero greenhouse gas emission, zero sulfur, zero NOx. Both coal and natural gas obviously emit a fair number of pollutants, coal obviously more than natural gas.
I'm not anti-gas. We are building gas plants. I don't think that gas can be everything, and I don't think gas should substitute for nuclear power. Right now, in this country, 50 percent of the power is supplied by coal, 28 percent by natural gas and 20 by nuclear. We had assumed in the years ahead that the percentage for gas and the percentage for nuclear would both increase, and the percentage for coal would decrease, and so, we support the idea of more gas plants. We just don't think it should be 100 percent more gas plants.
So if you're asking me is there a substitute for nuclear power, I would tell you that there is no substitute in terms of zero air emission baseload power for nuclear. Nuclear is the only game in town.
What role does geothermal energy play?
Geothermal, economic geothermal energy really only exists in a few spots in the United States. Right now, it's only being done commercially in California. So where there is geothermal energy, I think we should tap into it, but it's not economic or practical for the greater part of the United States right now.
What will happen to gas prices going forward with what happened?
If the government doesn't do anything else, like a clean energy standard, then because of the very low price of natural gas right now and the relative ease with which you can build a natural gas plant, if the government does nothing, our industry will build only natural gas-fired plants. And what will happen, and we saw this happen roughly ten years ago, our industry did the exact same thing: we built 200,000 megawatts of natural gas-fired plants, and as a result, the price of natural gas went from $3 per million BTU to $15 per million BTU. And the price of electricity went up and Americans suffered.
If all we do now is build natural gas-fired plants, the same thing's going to happen in a few years' time. And so, I think that's a very bad outcome economically and environmentally. No doubt we need to build more gas plants, but if all we build is gas plants, I think that that's wrong.
Natural gas-fired power plants use an enormous amount of natural gas. And if there is a lot of new natural gas-fired power plants, demand for natural gas will outstrip supply and the price of natural gas will shoot up. The price of natural gas in most parts of the United States makes up by far the largest part of the price of electricity.
So even if you have a whole lot of natural gas plants, which means that there's a lot of electricity—there's a lot more supply of power-generation plants than demand for electricity, if the underlying price of the fuel has gone way up, the public will suffer.
Will renewable energy ever be a major contributor to wholesale power generation for energy?
A lot of times in the energy world, they say a significant contribution means more than 10 percent. Can we get renewables to the point that renewables are 10 or even 20 percent of the fuel mix in this country over the next 20, 30 years? I think we can do that, and that's a very exciting business area for us because that's the highest-growth business area within our sector. Over the next ten years, we would like to see renewables become 10 to 20 percent [of our overall fleet], mainly solar power.
But ultimately, if you have a resource that's 20 percent of the total, and it's not a reliable resource, it's not the foundation for the whole system. The foundation for the electric system, since Americans will not tolerate brownouts and blackouts, has to be coal, nuclear or natural gas. And so, we want to do them both, and we want renewables to succeed, but we have to recognize their inherent limitations.
What renewable technologies or projects are you most interested in?
We are very, very bullish on solar, particularly solar photovoltaic, that what we see in terms of the development of the technology and the advances that have been made in the past few years, and the commercialization of the advances that we see coming over the next five years, we think solar will become very competitive first with wind and then with other forms of fossil fuel-fired generation.
As an American, certainly I hope that it will be in the US, because it's actually US companies that are doing most of the technological innovation. But this is one of the reasons why we believe that the idea of the clean energy standard which the President is supporting and various Republicans and Congress are supporting is a critical idea. Because even though the cost of solar power is going to come down dramatically over the next few years, the chances are it's still going to be more expensive for at least another decade relative to the price of natural gas-fired generation.
So the government we believe needs to encourage renewables and other forms of zero air emission power generation by creating a clean energy standard which carves out a piece of the market for those zero emission forms of generation.
We have a venture capital fund within NRG, and it's looking at new energy technologies, and just what we see in terms of the innovation that's going into the conducting material itself, the silicon or the cadmium telluride, the advances that are being made in large-scale manufacturing of solar panels to bring the manufacturing unit cost down. And the focus that's being paid on the [balance of plant 15:09], the frames that you put the solar panels on. All these I think have the potential to create a significant reduction in the unit cost for solar panels.
How reliable is the world's energy and oil supplies these days?
I think the world's energy supply, the world's oil supplies, completely depend upon King Abdullah in Saudi Arabia. As long as King Abdullah is healthy and has the best interests of the United States in mind, then I think we in this country are fine. But to me, it certainly makes me nervous as an American, our country's complete dependence on the Middle East for our transportation fuel. That's why we believe that the United States government should aggressively support the transition of the transportation sector to electric vehicles.
What power assets are you most interested in pushing forward, going forward?
As we've seen over the last couple of years, bad things can happen to all forms of power generation and all forms of energy, between mining accidents and offshore oil spills and nuclear accidents. Our point of view is that the best type of power generation portfolio is to have a balanced portfolio with all of the different fuel types represented. So we would like to have nuclear and coal and natural gas and wind and solar in a fairly balanced way.
Can coal be made to burn cleanly and not wreck the environment? Do you believe in clean coal?
I believe there's such a thing as clean coal. I don't think we're there yet, and I don't define clean coal the way the coal industry defines clean coal. I think to be defined as clean coal, your coal generation needs to have a carbon footprint that's no worse than a gas-fired combined cycle plant. So I believe that there are technologies out there that are worthy of being demonstrated at scale, but it's still at the demonstration stage. As it happens, we have a clean coal project at our coal plant in Texas called Parish that's being partially funded by the Department of Energy, and it's still a couple years away from being operational, but I think if we have a few projects like that, we could be in a situation where in 10 to 15 years, we can actually say that there is such a thing as clean coal. But right now, we don't really have it.
What effect will events in the Middle East and China have on energy earnings and on you 2011 outlook?
By earnings, we tend not to focus on accounting measures of earnings in terms of earnings per share because since our trading book is mark to market, we get these book accounting fluctuations in our earnings. So we tend to focus more on cash metrics, free cash flow and EBITDA. The events in the Middle East I really think will not have much of an impact on our earnings, since there's very little oil generation in the United States. And the price of natural gas in the United States is no longer linked to world oil prices. So the events in Japan obviously could be a major setback for our nuclear plant, and again, it's too early to tell, but we've invested about $350 million of cash in the nuclear plant, and obviously, we will write it off if we have to, but we would rather try and see the project succeed.
We've given guidance for 2011, which is $1.7 billion to $1.9 billion, which is down from almost a record year that we had in 2010 with $2.5 billion. And the reason it's so much lower is again because the price of natural gas is so low, the price of electricity is so low. And when the price of electricity is low, it's tough for us as an electricity company to make the same amount of money. So it's significantly less, but it's still obviously a substantial amount of EBITDA of $1.7 billion to $1.9 billion.
What does all that mean from an investor's perspective?
From an investor's perspective, our sector has been under pressure over the last couple of years because investors recognize that the core profitability of our sector is tied to natural gas prices. And natural gas prices have been falling unrelentingly. But I think most people should recognize now that natural gas prices have bottomed out. They actually rose a little bit in part because of the nuclear crisis, on the theory that more people would be using natural gas. And as the price of natural gas starts to climb again, then I think that will be an environment in which people will want to invest in NRG, and if they look at NRG, they'll see all the exciting things that we're doing to grow the business in terms of the renewables, the electric vehicles, the clean coal projects, etc.