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Apr 11, 2013

NRG Doubles Down on Distributed Generation


What’s a good way to get someone’s attention? If you’re David Crane, president and CEO of NRG Energy, you threaten to upend an entire industry. In recent weeks, Crane has done just that, outlining a vision for the future where consumers disconnect from their electric utility—with NRG’s help.

NRG would offer individual customers a package that includes both solar photovoltaics (PV) and natural gas-fired generation, allowing them to autonomously create their own electricity without the need for the rest of the grid. As Crane put it during the MIT Energy Conference last month: “The individual homeowner should be able to tie a machine to their natural gas line and tie that with solar on the roof and suddenly they can say to the transmission-distribution company, ‘Disconnect that line.’” And to add another option to their menu of utility-free offerings, just last week NRG announced plans to soon release a “solar pergola” with battery backup. If Crane’s vision—of customers literally pulling the plug with their traditional utility—comes to fruition it could mean the end of the electric utility industry as we know it.

But here’s the irony: in a lot of ways, NRG is the electric utility industry. Though not a traditional vertically integrated utility, NRG is an S&P 300 company and the largest independent power producer in the U.S. (it owns nearly 47 GW of generating capacity). Meanwhile, its subsidiaries operate as both utility-facing electricity wholesalers and customer-facing electricity providers in deregulated markets. Needless to say, NRG’s roots run deep in the existing electricity industry. With Crane’s new model, NRG is essentially making a daring end-run around its bread and butter business to engage consumers directly. What could possibly possess NRG to begin taking customers off the grid, launching a veritable coup d’etat against not only electric utilities, but against its own business models?

A number of factors may have influenced the move: concerns about grid resiliency in the wake of superstorms such as Hurricane Sandy; plummeting PV costs that make solar an increasingly attractive option as both a source of zero-carbon energy and a way to help generation portfolios meet renewables standards; concerns about nuclear—formerly a cornerstone of NRG’s energy future—in the wake of Fukushima; and the proliferation of third-party solar companies offering customers a way to, at least partially, side-step their utility (if you can’t beat ‘em, join ‘em, right?).

Even viewed in the light of such influences, NRG’s maneuvering of late is bold to say the least. NRG is no startup. It’s a big corporation with a lot of weight to throw around. And if these new business models start to gain serious traction, the repercussions will reverberate throughout the entire electricity industry.

Enter the Utility Death Spiral

To be clear, NRG has flourished under David Crane’s leadership, its stock price nearly doubling in the past year alone. So why would Crane rock the boat, as he just has? The plan that Crane has put forward seemingly contradicts NRG’s current formula for success, and it threatens to alienate others in the industry, to boot. This is a serious challenge to the status quo.

One theory would be that Crane sees the writing on the wall: distributed renewables are forcing centralized fossil-fueled generation to go the way of the dinosaur, opening the door for customers to manage and meet their electricity needs with increased independence. Granted, at today’s pace it’s going to be a while before the electricity industry is no longer dependent on coal and nuclear, but Crane seems to be positioning NRG to get in front of the curve by establishing itself as the go-to provider of islandable micropower. Sun Tzu said: “though we have heard of stupid haste in war, cleverness has never been associated with long delays.” Crane would seem to have taken this to heart.

Should the electric utility industry be worried? At a time when utilities’ business customer satisfaction is already falling, the answer is an unequivocal ‘Yes.’ If NRG steps in and takes people off the grid, there are suddenly fewer customers remaining to pay for the infrastructure needed to make the system work (the same infrastructure that’s needed to bring renewables like Wyoming’s wind power to major load centers across the country). As a result, a utility would have to distribute these fixed costs over fewer customers, raising prices for individual customers and driving even more people to think about switching over to NRG and other options that may emerge. This phenomenon results in a positive feedback loop termed “the utility death spiral.” Investor-owned utilities are taking notice, as this death spiral could result in a cycle that continues shifting customers away from the utility until there’s nobody left.

NRG’s plan hinges on a belief that if a utility can’t prove that it offers more value to its customers, those customers will leave—kicking off the aforementioned death spiral. It’s for this reason that Crane believes that utilities think “distributed solar is a mortal threat to their business.” But does this have to be the case?

Alternative Business Models

I applaud the audacity of the business model that Crane has put forward for NRG, and I think that he is doing us all a great service by doubling down on distributed generation in his high-stakes game of poker with our nation’s electric utilities. Still, there are some significant lingering questions about his strategy.

1) While Crane seems acutely aware of the long-term challenges faced by a business-as-usual electric utility industry, his proposal simultaneously ignores the potential future risk that NRG would lock its customers into by tying them to natural gas. Natural gas may appear cheap, sexy, and easy today, but it has a long history of price volatility. New England provides a perfect example of how a homogenous fuel mix, pipeline constraints, and unexpected demand spikes can cause natural gas prices to skyrocket. Does committing to natural gas (and, in some cases, to batteries) really make the most sense?

2) From a societal perspective, the most significant flaw in NRG’s plan is the overbuild that it invites. Recall that NRG wants us each to have our own personal power plant—a system big enough to handle our individual peak loads. Making every customer stand alone might be a good idea for someone selling customers the necessary generation equipment, but it means a massive overbuild of assets, while throwing away the benefits of diversity on both the supply and demand side, which are crucial to achieving high renewable electricity futures. We’d lose the collective efficiencies that we unlock by connecting to our neighbors and community, where complementary peak loads can blend together into a flatter, more manageable shape. Such efficiencies would mean that to meet the same total demand, we need less—less natural gas capacity, smaller solar arrays, and fewer batteries. Neither today’s grid nor NRG’s proposal fully capture the potential value of diversity—millions of islanded customers and an ancient, “dumb” grid both have disadvantages. However, somewhere in between these two extremes there is a ‘Goldilocks option’ that capitalizes on the benefits of each, achieving an optimal blend of efficiency, resiliency, and sustainability; an option in which the grid still figures prominently, used in part to maximize the benefits of diverse renewable sources of energy.

Innovate or Perish

Clearly, there are plenty of alternatives to both the traditional electricity system and to NRG’s proposed business model. This is a time of exciting and sometimes uncertain innovation in the electricity sector. When we see incumbents like NRG subverting their own business model, we should all sit up and take notice. The stakes are high. Expect more innovation, and enjoy the footrace—the last one to innovate will be extinct.


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Images 1 and 2 courtesy of Shutterstock.com.


Showing 1-10 of 11 comments

April 11, 2013

Great piece James & RMI. Readers should also be aware of the similarly cautionary report published by Edison Electric Institute in January 2013: "Disruptive Challenges:
Financial Implications and Strategic Responses to a Changing Retail Electric Business", linked here:


Whether it's a "death spiral" or a "vicious cycle" the message is the same: distributed generation and micropower/microgrid models portend the end (or at least the massive transformation) of the status quo centralized generation model. Or am I missing something?

I hope most utilities can figure out a way to make the transition.

April 11, 2013

The utilities are simply catching up to John Q. Public. Is this not what RMI's Lovins has been preaching for a good long while now? If so, then why would the author of the article concern himself with the plight of the utilities? In another article published by RMI this week, RMI's VP of Communications rails against the misguided self-interest of the corporatist industrials and their shareholders who, individually and collectively, are (if the statements in that article is to be believed) an unwitting Plague on the rest of Mankind at present, and in sore need of reformation to a more gentle and kinder form of endeavour (i.e., conversion to the spiritual renewal energy source mix). Evidently, the author of the article above would much prefer retaining the industrial complex (just re-purpose it, the article's author implies) than allowing (permitting) or encouraging individuals to make their own arrangements (like Lovins did with his own Colorado house) for sustainable renewable energy sources. So which is it to be, Sir -- are we supposed to wait for the industrialist capitalist to be reformed before we are to be permitted to attain the Nirvana of renewable energy, or may we with your permission achieve what we can today with what tools we have at present to strive to rise to that calling for a sustainable future now in emulation of Dr. Lovins? What say you?

April 11, 2013

Great article! However, I am not concerned about overbuild. Either utilities will adapt their cost/billing structure to represent the 'benefits of diversity' that the interconnected system offers, or they will risk losing business to this new competition. Regulators have a major role to play here in precipitating this change to protect the public/ratepayer investments in the grid infrastructure.

April 13, 2013

Thanks for reading, and for taking the time to comment!

Andy: I completely agree, the EEI report provides great insight into what investor-owned utilities are thinking today. David Roberts at Grist provides excellent analysis of its significance: ow.ly/jYm2I

Brent: Great points, and regulators will definitely play a crucial role in protecting customers from paying for unnecessary investments. But how does that role change if individual customers begin disconnecting from the grid en masse?

DJ: You raise some important points. My goal with this piece was not to engender sympathy for the plight of utilities. Rather, I wanted to shed light on the fact that the business model NRG is proposing would result in a highly suboptimal collective outcome. Individuals should absolutely be able to harness their locally available renewable energy sources! But shouldn't we also take advantage of the heterogeneous set of renewable resources we are afforded by our nation's great geographic diversity? Sharing these resources will require someone to manage the requisite grid infrastructure--there's no guarantee that this 'someone' will be an electric utility of today's ilk.--James Sherwood, Analyst

April 13, 2013

Crane's strategy is effectively anti renewables.
PV electricity on a grid is much more cost-efficient than battery storage.

April 15, 2013

Given the oil and gas industry's strategic and extremely well-funded effort to position natural gas as a kind of "green" fossil fuel or as a "bridge fuel," it's worth noticing that this pairing of gas with solar has some obvious marketing benefits for the most powerful (and dangerous) industry on earth.

To me it looks like this "innovation" is designed to satisfy Wall Street's desire for gas profits, and not as a practical solution to our energy problems.

April 15, 2013

Jim, per others, thanks for an excellent piece.

Natural gas fracked out of the ground is methane and has to be refined. Europeans are already getting methane from cows (methane digesters), biomass (via pyrolysis), solar/wind (via hydrogen via electrolysis), refining it and injecting it into their natural gas lines. http://tinyurl.com/cwesj5y

That's the "battery" .

April 17, 2013

More technical details on how to by-pass the electrical transmission grid using dynamic charging of eVehicles by solar panel is available at:


Additional background information can be found on my blog:



April 22, 2013

There are several other important questions that need to be answered:

1. How will people get their power when their gas generator is down for major maintenance? Solar and batteries are unlikely to be nearly enough.

2. What are the local noise and air emission issues that will be raised? Walking through a neighborhood on a hot summer night could be quite noisey with all of the generators and A/C units operating.

3. Does the local gas distribution system have adequate capacity to serve a large number of new users? What will be the cost to expand capacity and who should pay?

I suggest that for the vast majority of people, disconnecting from the grid and becoming a utility manager is not something that will appeal to them unless the economics are extremely compelling. If people were unhappy with the amount of time it took for utiliites to restore their power, just think how long it would have taken to procure hundreds of thousands of gas generators and solar panels, not to mention the labor required to install them all. That kind of inventory and excess labor is unlikely to exist.

May 28, 2013

Solar, wind, ng fuel cells... Whatever source I suspect utilities will more and more fill the energy management/battery space.

Backup power?

That may be conveniently provided by electric vehicles when we are at home, but how many really want the hassle and expense of dedicated battery backup? In my experience not many, that idea is harder to sell than a backup generator, even though IMO it makes infinitely more sense.

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