Just days after rebuffing an unsolicited $8 billion takeover bid from Mirant because its management believed the offer undervalued the company, NRG Energy announced an aggressive plan to develop approximately 10,500 MW of new generation capacity over the next decade.
As part of this “repowering initiative,” which represents a total investment of $16 billion, NRG plans to add almost 8,000 MW of new baseload capacity-including 2,700 MW of nuclear-and 2,500 MW of intermediate and peaking capacity. (See table.)
The new capacity is intended to help meet the energy needs of NRG’s high-demand, capacity-constrained markets in Texas, the Northeast, the South Central region and the West, and to support NRG’s continued growth. NRG plans to fund this repowering initiative with the support of partners and project finance debt.
The planned new capacity is intended to diversify NRG’s fuel mix and reduce its reliance on higher-priced, imported fuels, not only through solid-fuels repowerings, but also through the acquisition of Padoma Wind Power LLC, a wind energy development and co-development that is actively developing wind projects in Texas and California.
NRG is approaching this initiative with the environment in mind, planning to build the expansions adjacent to existing generating units so that it can use existing infrastructure, including roads and water treatment facilities, to minimize environmental impact to the surrounding areas. In addition, NRG plans to use a variety of state-of-the-art environmental technologies on the new generation. Upon completion, NRG expects this initiative to increase its U.S. solid-fuel generation capacity by 46 percent while reducing its air emissions and carbon intensity by 67 percent and 20 percent to 25 percent, respectively, compared to current levels. The initiative should also create thousands of new construction jobs and 1,500 permanent jobs, NRG said in announcing its plans.
“NRG is strategically located in domestic markets with high and growing demand for power and an over-reliance on expensive natural gas for power generation,” said David Crane, NRG’s President and CEO. “NRG’s development program is designed to meet the growing energy needs of these regions, while both reducing their dependence on natural gas for power generation purposes and making meaningful progress towards reducing our carbon profile.”
NRG’s proposed mix of baseload plants includes two nuclear units, three gasified coal units, two traditional pulverized coal units with full back-end controls, at least one modern combined-cycle plant and at least two wind farms.
Finance and Risk Management
Given the size, capital intensity and long development time for many of these new plants, particularly the baseload plants, NRG intends to contract at least 70 percent of its new output through power purchase agreements, bilateral contracts or hedges with financial firms. Because the new capacity will be located in regions that currently have opportunities for long term offtake agreements, NRG said it believes it will be able to successfully carry out this strategy.
“Investments will be underpinned by long-term offtake contracts and hedges that support non-recourse project financing as well as third party equity partners and the company’s (NRG’s) existing cash flows,” said Robert Flexon, NRG’s executive vice president and chief financial officer.
The day before announcing its initiative, NRG revealed an agreement to acquire privately held Padoma Wind Power LLC. Padoma has helped develop, finance, construct and operate more than 40 wind farms in the United States and Europe, resulting in more than 1,300 MW of installed capacity. The company is currently developing three projects on its own, as well as more than a dozen projects in conjunction with third parties.
NRG sees this acquisition as a step toward building a scaleable renewable energy platform. It believes future carbon production constraints will increase the cost of entry into the renewable energy market in the mid- to long-term.
“Acquiring Padoma is consistent with NRG’s multi-fuel strategy and provides us with immediate access to industry-leading expertise and a robust project pipeline in the growing wind generation market,” said Crane. “With Padoma, NRG is well-positioned to meet this demand for renewable energy sources, while also reducing our own carbon intensity and providing financial upside opportunities through the expansion of our energy services offering.”
NRG’s Texas development plan calls for the most capacity of the four regions. NRG plans to add 3,500 MW of baseload capacity with new pulverized coal plants and nuclear power plants, as well as 500 MW of gas-fired intermediate and peaking capacity.
The biggest undertaking in Texas will be construction of 2,700 MW of nuclear power at the existing South Texas Project (STP) site. In June, NRG filed a letter of intent with the Nuclear Regulatory Commission to construct two new General Electric (GE) advanced boiling water reactor (ABWR) units. NRG says it intends to work with GE and Hitachi (which developed and built four ABWR plants in Japan) and other international suppliers to complete the project. It anticipates that the two units, STP Units 3 and 4, which are expected to cost $5.2 billion, to begin operation in 2014 and 2015, respectively. NRG Energy already owns 44 percent of STP Units 1 and 2.
“Nuclear power is an important part of the continued development of our baseload fleet in Texas,” said Steven Winn, NRG’s executive vice president and Texas Region president. “We recognize the need for new, low-cost generation and we recognize the importance of reducing the emissions profile of power generators within the growing ERCOT market.”
A 15-foot alligator suns itself beside South Texas Project’s 7,000-acre cooling reservoir. NRG plans to add two units there. Photo courtesy of South Texas Project Electric Generating Facility.
Other baseload projects in Texas include a new 800 MW pulverized coal unit at Limestone. NRG plans to invest $1.2 billion to construct the unit. Depending upon how quickly the permitting process is completed, the unit may be online by 2012. NRG reports it is negotiating with a range of potential power buyers.
Under a plan filed with the Texas Commission of Environmental Quality on June 21, the output of Parish Unit 7 will be increased approximately 40 MW in 2008, and the output of Parish Unit 6 will be increased by 60 MW in 2010. Along with these uprates, NRG will add one new scrubber at Parish in 2010 and a second scrubber in 2014. The two scrubbers should reduce SO2 emissions by approximately 30,000 tons annually.
Another potential NRG Texas project is the FutureGen integrated gasification combined cycle (IGCC) test unit. On May 1, 2006, NRG provided letters to state leaders in support of the FutureGen Industrial Alliance. One of the proposed Texas sites for the test unit would be on NRG-donated property near its Limestone facility
NRG also announced that in August it will file a multi-site permit application to allow updates to its Houston-based gas generation fleet. NRG plans to replace some of the existing capacity with more efficient gas units. The new, fast-start units will provide better grid support in and around Houston and are expected to come on-line between 2008 and 2010. The anticipated total increase in capacity is approximately 500 MW.
NRG’s Northeast strategy calls for adding 2,250 MW of baseload capacity using IGCC technology and 840 MW of dual-fuel oil and gas-fired intermediate and peaking capacity to serve high-demand, capacity constrained areas such as New York City and southwest Connecticut. As part of this plan, NRG expects to retire 968 net MW of less efficient, higher emitting units.
“Virtually all key stakeholders in the Northeast agree that new investment in power plants is needed to address rising and unstable power prices stemming from tightening of supply and demand and an over-reliance on natural gas as a fuel for power generation. This new investment must also address the need to reduce emission levels,” said Curt Morgan, NRG executive vice president and Northeast Region president.
NRG plans to add 1,000 MW of baseload capacity in the South Central region. Once this expansion is completed, along with development projects already underway, NRG should have 2,775 net MW of generating capacity in the region.
“By building coal-fired plants in gas-based markets, NRG will be able to provide consumers with lower-cost, stable and reliable energy solutions,” said John Brewster, NRG’s executive vice president and South Central Region president. “This is yet another way that NRG will strengthen relationships with stakeholders in Louisiana and distinguish itself from other power producers in the region.”
NRG has allocated $1.5 billion for the West redevelopment plan, which includes adding approximately 640 gross MW of gas-fired baseload capacity and 1,145 gross MW of gas-fired intermediate and peaking capacity. NRG also anticipates building a 150 MW wind facility.
NRG’s expansion in the West is predicated on receiving long-term off-take agreements from local utilities. Southern California Edison (SDE) and San Diego Gas and Electric (SDGE) announced competitive solicitations for new generation and NRG intends to compete in these solicitations. Its development projects will lie inside the Los Angeles and San Diego load pockets.
NRG Energy, a wholesale power generation company that was founded in 1989, owns and operates a variety of energy-related operations worldwide. It is one of the industry’s most diverse electricity generators in terms of geography, fuel source and dispatch levels. Over the past 24 months, NRG’s stock has appreciated 120 percent. – Teresa Hansen