1 Utility May Find the Future of Energy More Difficult Than Anticipated

By Markets Fool.com

If there's one utility in the U.S. that can make a successful transition to a future with more renewable energy, it's NRG Energy . The company is already one of the largest renewable energy owners in the country, and unlike most utilities, it has made the transition to renewables a priority.

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But making the transition won't be easy. NRG has long operated as a traditional utility -- the old world of energy -- and it's trying to move into a quickly changing solar and distributed energy market, which is the new world of energy. Convincing young, connected consumers that NRG is the "cool" new energy company in town will be tough when SolarCity , Vivint Solar , and SunPower are selling an anti-establishment energy product NRG is competing with.

Here's what the company has planned and why I think it will be a challenge executing on NRG's vision without major changes.

NRG becoming more things to more people
In a presentation last week, NRG outlined its vision for the future, including a transition to a company offering multiple services beyond energy. NRG wants to provide traditional utility electricity and natural gas, but also sign customers up for solar leases, eVgo electric vehicle charging, home security, energy management, and much, much more. The illustration below shows its vision.

Source: NRG Energy.

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If any company can do this, it's NRG Energy. The company has touch points with millions of consumers, and providing a one-stop shop could be attractive for consumers. But it could be going after a segment of the market that'll be a tough sell, even for a new-age utility.

How NRG Energy is getting the future of energy wrong
The challenge transitioning from a traditional utility to a provider of renewable energy and connected services is that you're trying to disrupt your own business model. In NRG's case, it's trying to justify replacing one consistent revenue source with multiple consistent revenue sources that actually add up to more revenue. You can see below that NRG thinks it can double the EBITDA (a proxy for cash flow) from each customer with new products.

Source: NRG Energy.

The problem with this view is that consumers who are interested in solar energy or Goal Zero products(which NRG acquired last year) don't want to pay more for more products from a utility; they want freedom from the utility altogether. That's the appeal of going solar or owning an energy management system. The control transfers from the utility to you.

You can see this strategy from companies like SunPower, which is making consumer control a tenant of its products. In an interview late last year (which you can view here), CEO Tom Werner said that with solar, "as a consumer you go from no control to freedom; no control to total control." That's the appeal of a product like solar and storage. It's a way to cut the long-term ties to your utility.

Products like Goal Zero portable electronics, home security, and solar also have little to do with each other operationally, and functionality is moving from a centralized controller, like a utility, to consumers, particularly as homes get smarter. Home security systems are becoming easier to use and install by homeowners, allowing access through the cloud, while solar and energy management systems are tapping into third-party control systems like Google Nest, Apple Home Kit, or Wink. This gives customers control over energy through smartphone apps, moving control to the customer, not adding more contact points with the utility.

On top of all of this, I think NRG Energy is getting its distributed energy strategy wrong. It's trying to add additional revenue from customers instead of looking at solar or energy storage as ways to add value to customers.

Entire communities are going solar, but will they do so through their utility? Source: SunPower.

How renewable energy is really playing out
In my opinion, NRG Energy is looking at the future of energy from the lens of 2012's market instead of 2015 and beyond. In 2012, solar leases dominated residential solar, meaning customers would sign up to be 20-year customers of NRG Energy, or whoever provides their lease. For NRG, this is attractive because its retail utility customers churn every three years on average.

The value of leases is also attractive. SolarCity has added 168,000 customers on that model, building $1.54 billion in contracted retained value in the process. NRG Energy sees that and wants a piece of the pie.

The problem is that the future of solar energy isn't the long-term lease agreement, because customers will get more value by owning their own solar systems through cash purchases or loans. In fact, GTM Research has predicted that 2014 was the peak of leasing as a percentage of market share in the residential market, and purchases with cash or loans will be a growing part of the market. SunPowerhas long offered cash and loan options, and SolarCitylaunched a loan product called MyPower late last year. Already, over 8,000 SolarCity customers have chosen MyPower for their financing, and its share of SolarCity's business will grow in the future.

There are a number of reasons buying solar systems are better for consumers, including lower overall costs of energy (covered here) and higher home values (which I discuss here) by purchasing using cash or loans. The bottom line is that NRG Energy is taking a strategy in its own best interest, not its customers.

Choice is the future
The broad theme here is that utilities like NRG Energy are looking at new technologies as ways to add more touch points and revenue sources from customers, which is the wrong way to look at it. Customers who want solar energy, energy management, and personal solar products want freedom and choice in how they use and interact with energy. NRG is trying to tie them down instead of setting them free.

The companies that make a successful transition into distributed solar, energy management, or any of these other products need to look at the business from the view of a customer who wants to unplug and have full control over their energy future. Only then will they be able to offer the services innovative energy companies of the future will be offering.

The transition from being an old-guard utility to a renewable energy company with an upstart attitude is easier said than done. NRG Energy can do it, but it isn't quite there yet.

The article 1 Utility May Find the Future of Energy More Difficult Than Anticipated originally appeared on Fool.com.

Travis Hoium owns shares of SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of NRG Energy, and SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.