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CEO Forum: Facing the Future

Three CEOs, three business models, one shared outlook.

Fortnightly - June 2012

automotive industry—10 million cars a year. If we get to the point where even 10 percent of the cars sold are plug-in EVs, that’s a huge potential market, and eVgo will become very valuable to shareholders.

Also, utilities should be banging the drum for electrification of transportation, especially in markets where demand growth is weak.

Fortnightly: Cheap gas is changing the U.S. power generation business. How is it affecting your investment decisions, as well as planning and development?

Crane: In the old days, when people wanted the elevator speech on NRG’s investment proposition, I’d tell them that NRG makes money by selling coal and uranium at natural gas prices. That’s the way the single-price auction system works in deregulated wholesale markets. It’s a great business when natural gas prices go up, but when gas is at $2—whether you’re running coal plants that get a price set by natural gas, or if you’re running a natural gas plant—nobody is making money on the wholesale side. You just can’t make money when the peak price of wholesale electricity in Texas is $20 to $25 a megawatt-hour. Many people seem to focus on the fact that gas plants are being dispatched more, but they don’t realize that they’re running on zero margin.

That’s one reason we like our model of marrying retail with wholesale. In markets like this, the retail side of the business does better.

On decisions of what to build, we’re building natural gas plants because the economics in this environment are compelling. But at the same time, like other executives I’m saying, ‘I’ve seen this movie before.’ We rushed out in 1998 and built gas plants, and then things changed and plants were no longer looking economic.

If I were ruler for a day, I’d say to everyone in the industry, utilities or IPPs, ‘We don’t want to sacrifice our greatest advantage, which is that we are a multi-fuel generation source.’ But I think we’re going to sacrifice it, because in this gas price environment I don’t know how anybody builds base-load capacity that isn’t gas-fired. I don’t know how you justify coal or nuclear.

Fortnightly: What about renewables? Does cheap gas kill wind?

Crane: Renewables have been insulated by the fact that a lot of states have bifurcated the market by establishing an RPS [renewable portfolio standard]. Any state where there’s an RPS, the key isn’t to be as cheap as gas, but to be the cheapest renewable source. Low gas prices are killing coal and nuclear, not renewables—yet.

When you run out of space in the RPS, gas will take its toll on utility scale renewables. But we think the future is distributed generation, because it effectively competes with the retail price of electricity, not the wholesale price. In a lot of states, the retail price is a pretty fat target. It’s gone up every year over the last six years.

Fortnightly: Many states’ RPS provisions have escape clauses or penalty options. Might rate shock drive states to pull back from RPS commitments?

Crane: There will be fewer RPS mandates

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