The Problem with Measuring the Future in Minutes: The NRG Story

(3BL Media/Justmeans) - A recent story in the New York Times drew attention to some of the challenges to be faced in making big societal changes, such as overhauling a nation’s entire energy system that had run, relatively undisturbed for close to a hundred years.

It told the tale of the less-than-seamless transformation by NRG Energy, framing it as a cautionary tale with echoes of Icarus, who got a little too close to the sun, only to plunge to his demise with the melting of his waxen wings. The company was a traditional electric utility, a big one, producing massive amounts of power, from traditional sources including, coal, natural gas and nuclear. In 2014, they were the fourth largest emitters of carbon dioxide among the nation’s power companies.

This was a difficult time, with shifting tectonics undermining any sense of stability. The ugly head of climate change had been reared long enough and high enough that it had become impossible for all but fools to deny. Investment money for cleaner sources of power began to flow, sending solar and wind costs plummeting. Fossil fuel giants, seeking to fend off the perceived renewable threat, conducted a successful counter-attack in the form of fracking. They succeeded beyond their wildest dreams. The US become the world largest oil and gas producer, literally overnight.

What followed was the equivalent of several ocean-going supertankers finding themselves on a collision course, with not enough time to turn around. David Crane was CEO of NRG from 2003 until suddenly he wasn’t at the end of last year. Crane had seen what climate change was going to mean to his industry.  Then he proceeded to do all the right things, or at least what would be considered the right things in a rational world. He made substantial long term investments in renewable power sources such as wind and solar. In doing so, he became recognized as a leader in the growing CSR movement, and a hero to many on the green side of things. But as Crane says in a blog at Greenbiz entitled, “If I was right, why was I fired?” He was trying to transform the company from brown-to-green, but investors didn’t like it.

Actually, no one had a problem with his strategy. Everyone knows that is where the future will be, with renewables. The problem, as Morgan Housel points out in Motley Fool, was the fact that the “shift meant taking focus away from areas of the business that generate predictable profits.”

You see, the thing about investors, is that they might not care if you decide to drive your car from New York, to Albany, if there’s a good reason to do so. But they get really upset if you get catch a red light because that means you’ll get there a minute or two later. In  Crane's case, the red light was a sizable loss in the 4th quarter.

The reason I’m writing about this is to ensure that no one walks away thinking that renewables are a bad idea, remembering Solyndra and all that. This is a very dynamic market and there are many people working hard to come up with newer, better, cheaper options to provide clean energy. That is capitalism at its best. But to bet on one particular company and one particular moment in time is foolishness.  In a rapidly changing scenario, there will be winners and losers. And even the winners won’t be winners all the time. But if investors insist on pulling their money out at the first sign of weakness, that makes it hard for companies to maintain long term, and perhaps even planet-saving strategies. That’s the impetus behind patient capital. It is a concept that is crucial for a transition to a more sustainable economy. Investments are necessary and they often take time to yield returns. What we have instead though, is high-frequency computerized trading, where shares are held, literally for a matter of seconds.

In the future, a smart grid will instantaneously funnel power to where the demand is, selecting the cleanest available option at every turn, much like computerized trading is rapidly moving dollars today. NRG has invested in those technologies, both the clean sources and the smart distribution, and I have little doubt that those investments will pay off in the long run.

 

Image credit: Roy Luck: Flickr Creative Commons