How a $3.6B deal complicates one energy giant’s net-zero goal

NRG Energy Inc. is betting that a $3.6 billion purchase of Direct Energy will bolster its electricity-focused business, but it also may cause a more than fortyfold increase in retail natural gas sales at a company that has pledged to reach net-zero emissions by 2050.

That’s because NRG is poised to gain Direct Energy’s retail customers for gas and energy-related services as well as power. The merged companies’ combined retail gas sales would have been about 964 billion cubic feet in 2019 instead of just 23 bcf at NRG alone, according to a fact sheet on the deal announced Friday. Commercial and industrial gas sales at Direct Energy, which operates in all 50 states and parts of Canada, accounted for most of that increase.

“A transaction of this size is material from a sustainability reporting perspective and NRG plans to work with the leading sustainability reporting groups and standards to evaluate the impact of these new businesses,” the company told E&E News in a statement. “NRG will provide an update on company sustainability commitments, potential impacts, and goal-setting as information becomes available.”

The Direct Energy deal comes as leaders throughout the power sector look for ways to address climate change while also seeking favorable investments as they navigate the coronavirus pandemic and an economic downturn. Last year, NRG updated and accelerated its emissions goals — to a 50% greenhouse gas emissions reduction by 2025 from a 2014 baseline and net zero by 2050. Data has previously indicated NRG was 83% of the way to the 2025 goal, including adjustments for asset sales.

During a Friday conference call with analysts, NRG CEO Mauricio Gutierrez said the company intends “to continue to be on a path” of carbon reduction and net-zero emissions by 2050.

He noted that Direct Energy doesn’t own generation assets, and Gutierrez said the transaction would reduce NRG’s “carbon intensity” in terms of earnings.

Direct Energy’s natural gas sales don’t involve production of the fuel, but selling it to customers does bring added exposure to gas’s life cycle of emissions.

David Crane, a clean energy investor who was ousted as NRG’s CEO in late 2015, said Friday that retail is the “mother ship” for NRG now as it seeks to expand its holdings. He said low, stable wholesale prices benefit the retail power business, and Crane called retail expansion a good strategy in the short term.

“Buying retail was clearly not driven by carbon goals one way or the other,” he told E&E News, adding that NRG will have to figure out how it accounts for emissions associated with gas sales.

Crane, whose departure as CEO followed concerns about the power market, NRG’s stock performance and investments in solar, said companies across the energy space are fighting for customers as the industry evolves. Acquiring the Reliant retail electric brand was among Crane’s achievements at NRG.

“The [company] who wins at the end of the day is the [company] that integrates solar on the roof with two electric cars,” Crane said, and “smart thermostats and other controls and smart appliances in the house with a little bit of backup from the grid or from the gas supplier.”

Gutierrez, who followed Crane as CEO, said the Direct Energy deal is consistent with a road map NRG provided in 2018 as it outlined a plan to focus on customers (Energywire, March 27, 2018).

The company, which is based in Houston and New Jersey, listed 2019 numbers suggesting it could go from about 3.6 million mass retail customers to about 6.9 million by adding Direct Energy’s holdings in the United States and Canada, including services customers. NRG’s mass segment today includes residential and small business customers.

Gutierrez said the transaction also would balance the generation and retail portfolio in the East and add a “very well-respected” gas retail platform, among other upsides.

“It enhances opportunities for organic growth and our ability to thrive through an increasingly cleaner and [electrified] economy,” Gutierrez said. “And it will create significant and sustainable shareholder value.”

The seller of Direct Energy is Centrica PLC, and CEO Chris O’Shea said in a statement that the deal would allow his U.K.-based company to realize “significant value for our shareholders at an attractive valuation.”

The transaction, which needs various regulatory approvals, could close by the end of 2020. The price is subject to some potential adjustment, and customer counts may change.

Competitive concerns

In the past, Direct Energy has talked about a desire to help customers use less energy (Energywire, March 26, 2015).

Robert Gaudette, senior vice president of business solutions at NRG, said Friday that the focus on customers will continue.

“At the end of the day, what we need is customers that thrive, right?” he said in an interview. “And so working with them to understand efficiency, working with them to understand how they use power — that builds a loyal customer and a valuable customer, and it builds a relationship for the long term.”

While Direct Energy will provide a boost to NRG in the eastern United States, it also will give the power provider more customers in Texas. Questions have started to surface about how the marriage could affect power prices and options in cities such as Houston and Dallas where people have customer choice for retail electricity providers (REPs).

But Gutierrez said Friday he wasn’t worried about market power issues in Texas, labeling it as “a very highly competitive market.” A spokesman for the state’s Public Utility Commission echoed that sentiment when referring to the region managed by the Electric Reliability Council of Texas, or ERCOT.

“Competition is alive and well in the Texas retail electricity market, with low barriers to entry for retail electric providers encouraging new entries — in fact 44 REPs registered with the PUC since 2015, to bring the total REP count across ERCOT to 91,” Andrew Barlow, a PUC spokesperson, said in a statement.

Still, a number of those retailers have been consolidated under the umbrella of NRG, Direct Energy or Irving, Texas-based Vistra Corp.

The Texas Coalition for Affordable Power, a nonprofit bloc of cities and political subdivisions that buy electricity in the deregulated market for governmental use, signaled concern in a statement Friday.

“TCAP believes that it participates in a competitive wholesale market, but the consolidation that continues among retail electric providers might signal that retail competition (as opposed to wholesale competition) is not functioning as the Legislature intended, and that individual consumers perhaps do not enjoy sufficient shopping options for electricity,” said Geoffrey Gay, TCAP’s general counsel. “It is hard to claim that competition is vibrant if so much of the market will be controlled by just two firms.”

Vistra CEO Curt Morgan said his company has expressed interest in Direct Energy but decided not to put in an unsolicited bid at a price needed to enable exclusivity.

“Competitive retail markets across the country, in particular ERCOT, are incredibly important for Vistra, and we must ensure that they remain fair and equitable for all market participants,” Morgan said in a Friday statement. “As such, we expect to stay very close to the contemplated transaction as it moves through the approval process.”

NRG retains a large generation portfolio that relies heavily on natural gas and coal plants. It has pushed ahead with renewables through power purchase agreements to help support customers’ electricity needs, according to NRG’s Gaudette. He said that approach could be used in the eastern United States as NRG looks to expand through Direct Energy.

“I can still sleep at night that we’re driving towards where we want to be,” Gaudette said.