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Summary Despite NRG Energy’s current troubles in the fossil fuels arena, the company’s decentralized generation segment is booming. NRG Energy’s heavy footprint in the distributed generation market ensures that it a place in the future energy landscape. NRG Energy’s enormous fossil fuels business will help pave the way for the company’s future. Although NRG Energy has a bright long-term future, near-term volatility in the fossil fuels arena represents a significant risk to the company. NRG Energy (NYSE: NRG ) has been on a steady decline over the past year, with its stock price dropping from a high of $37 to its current levels of around $25. Much of this drop has been associated with the company’s increasingly volatile fossil fuels business, in which recent fluctuations and margin compressions have taken a toll on the company’s financials. With the majority of NRG Energy’s business being based in fossil fuels, the company’s recent underperformance is not so surprising. Given the heavy oil price volatility, plummeting natural gas prices, and unfavorable coal rulings, it is no wonder that NRG Energy has been experiencing pressure on the margins front. While the company’s total revenues is on an upward trend, its net income is facing much more uncertainty. Given that nearly one-third of the company’s energy generation comes from coal, which is facing an unprecedented amount of industry headwinds, NRG Energy may face some difficulties in the near-term. Regardless of NRG Energy’s underperformance in its fossil fuels business, the company’s heavy presence in residential solar should provide it with a massive long-term boost. Whereas the benefits of the company’s early residential solar involvement are not yet apparent, they should be soon enough as NRG Energy ramps up its involvement. Given the comparatively small size of residential solar, it is only natural that investors are overlooking this crucial energy market. NRG Energy Is Hedging Its Bets As one of the first major power companies to enter the residential solar market, NRG Energy still has upside even in spite of the obstacles facing its fossil fuels business. If predictions of the global rooftop solar market being worth $2.7 trillion by 2040 are anywhere near accurate, NRG Energy is on the cusp of explosive growth. Given the growth trend of solar PV and the theoretical advantages of decentralized generation, this prediction may even underestimate rooftop solar’s impact in the long-run. As NRG Energy is one of the few large companies fully on board with rooftop solar, it is well-positioned to reap the benefits of such growth. Despite the fact that NRG Energy’s residential solar segment still only accounts for a tiny fraction the company business, with just over 16K customers as of Q1, NRG Energy is paying particularly close attention on the segment. Such enthusiasm about an extremely small but promising aspect of its business shows how dedicated NRG Energy is to distributed solar. Such a forward thinking mindset is exactly what will push NRG Energy to the forefront of the energy industry. Given residential solar’s potential, NRG Energy is definitely on the right path. In fact, NRG Energy CEO David Crane is so convinced of the distributed energy paradigm that he is even starting to throw jabs at the electric utility industry. David Crane has recently implied in an interview that utilities are too near-sighted to full embrace new energy concepts(e.g. distributed solar), stating that “There are no thirty-year-old C.E.O.s of electric utilities, no Zuckerbergs,” and that “You have to pay your dues, come up through the ranks. You become C.E.O. when you have five years, max, left. Some of them are just not worrying about ten, fifteen years in the future.” Clearly, NRG Energy is fully committed to the distributed generation paradigm in a way that most other energy companies are not. The company’s residential solar wing NRG Home Solar is growing in prominence, and is set to even compete with residential solar powerhouses SolarCity (NASDAQ: SCTY ) and Vivint Solar (NYSE: VSLR ) in the coming quarters. It would not be surprising to see its residential solar segment double or even triple in customer count over the next few quarters, which would place it squarely among the leading residential solar companies. Despite the uncertainty of NRG Energy’s fossil fuels business, the company’s residential solar business remains a bright spot. (click to enlarge) Source: NRG Catalyzing Residential Solar Growth Using Fossil Fuels With tens of billions in revenue from its fossil fuels business, NRG Energy is one of the largest power companies in the world. The company’s enormous fossil fuels business will allow the company to more easily dominate the distributed solar business. Rather than reinvesting its future profits into its fossil fuels business, the company will likely funnel more and more of its money into its solar operations. Given the hundreds of millions of dollars in annual net income that NRG Energy will likely see moving forward, the company is in a better position than most of its distributed generation competition from a financial standpoint. Rather than having to borrow enormous amounts of cash at relatively high rates, NRG Energy should have a wealth of capital from its fossil fuels business. While hundreds of millions of dollars is a negligible amount in the fossil fuel industry, such a quantity of money will undoubtedly make a huge impact in the comparatively miniscule solar industry. NRG Energy’s cheaper access to capital is likely a big reason why the company has been able to make such a large impact on the decentralized generation scene so quickly. While NRG Energy will have an extremely hard time outcompeting SolarCity in the long-run due to various other factors, the company definitely has the potential to eventually beat out second place residential solar company Vivint Solar. With $15.35B in revenues for 2014, NRG Energy should be able to produce net incomes of around the half-billion dollar range moving forward. Access to such large finances should allow NRG Energy to accelerate it distributed solar business. Obstacles NRG Energy still faces many obstacles in its transition to solar. Given that the vast majority of its business is still based on fossil fuels, the company’s near-term prospects are more uncertain due to the fossil fuel industry’s current volatility. Even if NRG Energy can stabilize its fossil fuels business, there are still many questions regarding the long-term viability of its residential solar business. Despite the enormous promise associated with the solar leasing model, this business model is still relatively young and untested. There is almost a complete absence of data regarding long-term default rates, module performance, etc. As such, the present value of the long-term solar lease contracts are still heavily debated. Conclusion Despite the uncertainty facing NRG Energy in the near-term, the company’s amazing progress in the residential solar sector is undeniable. The potential rewards associated with the residential solar business model far outweigh the risks, which puts NRG Energy in a great position moving forward. After dropping nearly one-third of its value over the course of a year, NRG Energy should experience significant upside moving forward. NRG Energy is at the forefront of the distributed generation movement, and has the financial resources to truly make a long-term impact. At a valuation of $8.12B , NRG Energy still has much more room to grow. Disclosure: I am/we are long SCTY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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