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What Are the Opportunities and Challenges Facing NRG Energy?

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NRG’s presence in renewables

NRG Energy (NRG) restructured its business in 1Q15 to focus on renewable energy. Over the years, the company has expanded its presence in utility-scale solar, distributed solar, electric vehicle charging, and wind power, both organically and inorganically. The company can leverage its presence in various clean energy technologies to prepare for the clean power plan, which focuses on migration to renewable energy sources.

However, NRG Reset, which we discussed in Part 1, is the management’s attempt to scale back the company’s renewable energy ambitions to help the company reduce its debt levels.

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NRG’s reliance on wholesale markets

NRG Energy generates a substantial part of its revenues from wholesale electricity and capacity sales, as discussed in Part 8. Electricity prices in the wholesale market are volatile. Volatile pricing, coupled with stagnant demand for electricity in the US, doesn’t bode well for companies with large exposure to wholesale markets.

On the other hand, regulated utilities (XLU) like Florida Power and Light (NEE) exhibit stable cash flows. Thus, conservative yield-seeking investors may not find NRG Energy to be a suitable investment in comparison with some other power companies with large exposure to regulated retail markets.

Possible rate hike

The Fed is widely expected to raise interest rates in its next meeting. Utilities, being capital-intensive companies, have been the primary beneficiaries of the low interest rates. With a potential rate hike around the corner, interest costs of utilities may go up, impacting their profitability and valuations.

Moreover, a rate hike may make utilities less attractive than Treasury securities. NRG Energy, being one of the riskier power utilities, may be more negatively affected by the rate hike.

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