Big power companies grapple with a rapidly changing market
A surge of renewable energy, persistently low natural gas prices, and the high costs of operating coal and nuclear plants are driving some of the nation’s top merchant power companies to rethink their businesses — and consider mergers, sales or spinoffs — in an attempt to stay profitable and relevant in rapidly changing electricity markets.
Three of those companies, NRG Energy, Calpine Corp. and Dynegy, are headquartered in Houston, and all have made moves to reshape their companies as they grapple with thin margins, billions of dollars in debt and electric grids that are buying more and more power from wind and solar farms. Calpine is reportedly exploring putting itself up for sale, while Dynegy, operating under the weight of $33 billion in debt, is said to be in talks with Dallasbased Vistra Energy about a possible merger.
At NRG, major shareholders earlier this year ousted the company’s board chairman and secured two open seats in a bid to boost the company’s stock and
unload underperforming assets, including taking NRG subsidiaries into bankruptcy.
These moves are the result of disappointing performances by the companies and the power sector in general. The three Houston companies have struggled over the past several years — struggles that included bankruptcy filings by Calpine and Dynegy in 2005 and 2011 respectively — and seen their stock prices fall by more than half since 2014. More recently, Calpine’s 2016 profit, at $92 million, was down 60 percent from $235 million in 2015. NRG made a slight recovery from its 2015 annual loss of $6.4 billion, but still reported a loss of $891 million in 2016. Dynegy reported a $1.24 billion loss in 2016, as compared with a 2015 profit of $50 million.
A spokesman for Dynegy declined to comment. Officials at Calpine and NRG said electricity prices, particularly in Texas, are too low to make money or to justify building plants.
“We are quite literally losing money delivering power to the grid” in Texas, said Brett Kerr, Calpine’s director for external affairs.
Power generators face changing markets that increasingly favor cleaner, cheaper and decentralized forms of energy and challenge traditional models of power generation and distribution, analysts said. In the coming years, the outlook for companies tied to coal and nuclear plants is growing worse as natural gas prices remain low and the costs of wind, solar and other renewable sources drop.
Making that transition, however, has not been easy. Dynegy, for example, has divested much of its coal holdings but finds itself burdened with heavy debts through the acquisition of gas-fired plants at a time when wholesale electricity prices — and profits — are low. NRG’s efforts to increase its renewable energy holdings led to the ouster in 2015 year of CEO David Crane, a champion of electric car-charging stations and residential solar panels, as shareholders demanded higher returns.
Calpine operates only natural gas plants, save for one geothermal facility in California and a solar farm in New Jersey, but has still struggled, despite the cost and environmental advantages of natural gas. Part of the problem is Calpine has sizable operations in Texas and California, where large amounts of cheap wind and solar are coming into wholesale markets, driving down prices and squeezing profit margins.
“Generators really rely on energy prices for the bulk of their revenues,” said Dana Lazarus, a senior analyst with PIRA Energy, an analytics unit of S&P Global Platts. “Because prices have been so low, the margins have been tighter.”
Market structures in some states are causing additional problems for generators. In Texas, for example, power generators are only paid when they deliver electricity, unlike other states where they receive so-called capacity payments for keeping plants ready and able to provide power when demand rises.
For years, power companies were able to cover the costs of keeping plants on the sidelines from the big profits they made on hot summer days when demand and prices spiked. But the growth of wind power has helped reduce those shortages, moderated prices and made it harder to cover the expense of plants that only generate power occasionally. Power generators in Texas, without capacity or similar payments, are particularly reliant on energy prices.
“If you are getting paid less than it costs you to provide the equipment and the service, this is just a recipe for disaster,” said Ed Hirs, an energy economist who teaches at the University of Houston.
As long as wholesale electricity prices remain low, the merchant power industry has more struggles ahead — building new plants will be out of the question, and maintaining existing plants will become harder to do.
“Legacy generation is not as cheap,” said Tom Alley, a vice president at the Electric Power Research Institute, a Californiabased research nonprofit. “Economics will prevail.”