Innovative Electric Utility: That is not a phrase you hear too often (or hear at all). I would like to make the case, though, that NRG Energy (NYSE:NRG) fits that description.
On the surface, NRG Energy appears to be your typical electric utility. NRG Energy does indeed stand out as having one of the largest portfolio of 'green-energy' power production in the entire nation. But other than generating power from much clean sources, NRG seems very much like other electric utilities. NRG Energy owns and operates power plants, currently produces enough electricity to power 20-million homes, and has retail operations in 16 states (as well as some assets internationally in Australia and Germany). This all seems fairly typical for an electric utility. Where is this innovation I alluded to? The innovative part of their business, that I believe is overlooked by analysts, is their wholly-owned subsidiary, called eVgo.
eVgo is America's first comprehensive, privately-funded electric vehicle infrastructure of home charging stations and public fast charging stations. The eVgo network is not depending on any government funding programs for development, operations or expansion. This is a very important aspect of the eVgo network, which I feel should be highlighted right away. The political climate for everything in Washington is very partisan and polarized. With no reliance on the government, NRG Energy's eVgo network will neither stumble nor prosper based on which direction the political winds in Washington are blowing. Success for eVgo will be based on NRG Energy's own privately-funded investments and initiative.
Unlike efforts to build other types of alternative fueling stations (such as natural gas or hydrogen fueling stations), electric charging has the significant advantage of having a ready substitute for the over 100,000 tradition gas stations in the United States; your home. The home eVgo charging dock will, of course, be installed at a customer's home. A subscription to a monthly electric charging plan will result in no up-front cost to the customer for the home charging dock or for the installation.
For Tesla (NASDAQ:TSLA), General Motors (NYSE:GM), Ford (NYSE:F), Toyota (NYSE:TM) and other electric vehicle automakers, an obstacle that needs to be overcome is public charging infrastructure. That is where the public eVgo charging network comes into play.
Like the home eVgo charging, the public eVgo charging network is a subscription model, with plans that include combined home and public charging (although pay-as-you-go is an option for public charging). The public eVgo charging network is comprised of two types of stations: Freedom Stations and Convenience Stations. Freedom Stations include Level 3 DC fast chargers that can add 30 miles of range in as little as 10 minutes. Convenience Stations are typically smaller sites hosted by a retailer, such as Best Buy (NYSE:BBY), Walgreens (WAG), supermarket chains and other retailers, where electric vehicle owners can charge their cars while shopping. Much like the home eVgo charging docks, the Convenience Stations will cost the retailer nothing other than the space in their parking lot to host an eVgo station. This is a great incentive for retailers to participate in the building of the eVgo network.
NRG Energy expects 80-90% of electric vehicle charging to take place at home. If only 10-20% of charging is expected to take place away from home, you may be wondering why NRG would invest in public charging stations. Why not just solely invest in the home charging aspect of the eVgo network? The answer to that question is fairly simple.
Electric vehicles suffer from what is commonly known as 'range anxiety'. This range anxiety is the worry that your electric vehicle will run out of power with no way of recharging it away from home. Range anxiety is, empirically, a relative non-issue (as 95% of all daily commutes in the United States are less than 30 miles). But that anxiety, nonetheless, definitely does exists. The spreading of public eVgo charging stations will alleviate this range anxiety, ensuring that electric vehicle owners will have the confidence that they will never run out of power away from home. The alleviation of this anxiety will go a long way to encourage the further adoption of electric vehicles. The more electric vehicles on the road, the more electricity will be used. Whether that electricity is used at home or used at one of NRG Energy's public eVgo charging station makes little difference to NRG so long as there are electric vehicles plugged into the grid somewhere. The investment in public eVgo charging stations is the investment in more electric vehicles charging everywhere.
NRG Energy launched the eVgo network in late 2010 in Houston, Texas. From there, NRG expanded to the Dallas/Fort Worth area. By the end of 2012, NRG expects to have built 70 public eVgo charging stations in the Dallas/Fort Worth area and 50 in the Houston area (with plans later for stations in San Antonio and Austin, Texas).
Beginning later this year, NRG Energy will expand their eVgo operations to California. Over the next four years, NRG will build a minimum of 200 Freedom Stations in California (currently plans for 110 Freedom Stations in the Los Angeles area, 55 in the San Francisco-area, 20 in the San Diego area and 15 in the San Joaquin Valley area).
In addition to the 200 Freedom Stations in California, NRG Energy will invest in the infrastructure for at least 10,000 'make-ready' units at about 1,000 locations across California (such as apartment buildings, offices, schools, colleges, hospitals and other such sites).
Aside from Texas, NRG Energy plans to initially focus the eVgo network on the West and East Coasts. In addition to NRG's recently announced expansion plan into California, next geographical area of interest for NRG is the US Northeast. The Northeast presents many advantages for building a network of charging stations. Much like California, the Northeastern United States has made a commitment to electric vehicles. An addition advantage for the Northeast is the distances between high-population areas are shorter, making the building of a comprehensive network much easier to accomplish.
eVgo won't move the needle for NRG Energy in the short-term. The eVgo business of NRG Energy is a long-term investment thesis for long-term investors. Over that long-term, however, I believe this will be a very profitable endeavor for NRG Energy. NRG is also a great 'paid to wait' opportunity for investors. Starting in the third quarter of this year, NRG will initiate their first quarterly dividend payment, an annual dividend of $0.36 a share. The dividend payout ratio is expected to be a very manageable 15%, leaving plenty of room for NRG to increase the dividend in the future.
Disclosure: I am long NRG.