A Modern Day Gold Rush for a US Utility Company

On the Saturday after Hurricane Sandy had ravaged the New Jersey coast line, David Crane, the CEO of NRG, Inc. a New Jersey based Fortune 300 utility company, sat in his candle lit office waiting for a group of Japanese businessmen to arrive. On the agenda was the proposed construction of a replacement nuclear plant in Fukushima. As they entered his office, Crane noted their expression of disbelief and expected to hear more stories about the storm’s extensive damage. Instead his Japanese guests expressed how stunned they were to see transmission lines elevated on wooden poles throughout the State of New Jersey. What had caught their attention was the startling reality that the electrical infrastructure in America was truly obsolete.

Crane avoided expanding on the root causes of America’s infrastructure malaise for fear of losing their business. He chose not to tell them how complacent the US utility industry had become over the years nor how US consumers often take their reliable electricity service for granted. However, after Sandy, nothing would be the same. The status quo for both CEO and consumer would change forever creating an unprecedented opportunity for disruptive innovation.

MIT Energy Conference
At a recent two-day energy conference held at MIT, Crane in his unabashed, straight forward style, bluntly declared in front of a packed auditorium that America’s command and control utility business model was at the end of its useful life. The centralized grids used to service cities and towns would one day be replaced by independent mini-grids fueled by an assortment of readily available renewable energy sources such as wind and solar. Some in the audience acknowledged that it would only be a matter of time before technological breakthroughs would enable neighborhoods to produce their own power.

One such example of a potentially disruptive technology was presented at the conference by Abengoa Solar USA, a Spanish-based manufacturer of Concentrated Solar Power (CSP) plants. Just like the name suggests, these plants use mirrors to concentrate multiple sunlight beams toward a tower filled with a special fluid that is capable of reaching temperatures near 500℃ or 5 times hotter than the energy needed to boil water. During the day, some of the fluid’s heat energy generates power from steam turbines, while the remainder is stored for later use, (i.e. night hours or cloudy days). Between its extended energy storage capabilities and its ongoing innovative design enhancements, the Spanish company’s CSP plants are expected to compete with natural gas and coal on a price basis by 2020. …not bad for an electrical power source that requires a modest upfront capital cost (that has already dropped by 60% so far) and a near-zero operating cost extended over a 30 to 40 year lifespan!

As CSP and other similar renewable technologies continue to evolve, behemoth utility companies like NRG are preparing for a different future, one with less coal and more natural gas. At first glance, the transition has improved their public image from the 30% reduction in CO2 emissions. However, a closer look tells a different story. Utility companies converted to natural gas because they are betting that the soon-to-be, wide use of electric vehicles or EVs will breathe new life into the utility industry’s otherwise dying existence.

Just as air conditioners accounted for nearly 25% of power consumption decades ago, EVs are expected to have an even greater effect. First, large utilities like NRG will service fuel stations the same way oil companies have tended to their branded gas stations. However, unlike gasoline that can be stored for later use, electricity must be consumed at the same time it is produced. This difference will pose various peak demand challenges such as managing unpredictable recharging schedules from a disparate consumer base who at any given moment could plug-in for a boost.

Charging stations will offer a far different experience than what consumers are used to. For example, a trip to a Walmart might include self-operated charging stations located in a parking area where drivers can plug-in their vehicles before shopping. For customers in a hurry, charging stations may resemble a large dealership where leased EVs would be swapped or batteries exchanged for a freshly charged set. Perhaps a Zipcar-like self-serve business model with fully-charged EVs parked throughout a city could integrate an online reservation process with a smart phone App to offer a keyless activation experience.

Pricing models will probably resemble that of cell phones where a flat rate monthly subscription for say $89 would allow unlimited charges or exchanges at member stations. However, the success of these subscription models will depend on the size of the subscriber base. In California, for example, where local government support is strong, the number of EV owners participating in a fixed monthly rate pilot has only attracted 400 EV owners, well below the break even levels of 5,000 EVs needed to support a meaningful network of charging stations.

As the economy picks up, Crane and others believe that an increase in charging options along with green energy tax breaks will give consumers more reasons to tryout an EV. For NRG and other utility companies who are also EV advocates, the race to supply charging stations has only just begun. To get a jump on their competition, NRG’s board recently approved a $100 million investment to build out recharging stations in California where the adoption of EVs currently shows the greatest promise.

How significant is the size of NRG’s investment?  A glance at their income statement shows that a $100 million investment represents about three times what the company allocated for traditional R&D expenses in 2012. In fact, since 2010, NRG’s R&D budget has declined by nearly 20% annually (from $55m in 2010 to $36m in 2012). Was it the unsettling experience with hurricane Sandy or the lack of government energy policies that pushed Crane to the brink of innovation and reinvention? Either way, Crane has done what so many American pioneers did during the historic mid-1800‘s Gold Rush. Like them, he set his sights westward to California’s EV ‘gold’ in search of a better life for NRG.

© 2013 Tom Kadala
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