By Michael Kuser

NRG Energy posted sharp losses in the first quarter on lower hedge margins and declining capacity revenues in the eastern U.S., signaling that 2017 is turning out to be a predicted “trough year,” CEO Mauricio Gutierrez said.

The company lost $203 million ($0.52/share) during the quarter, compared with net income of $47 million ($0.24/share) for the first three months of 2016.

“The roll-off of higher-priced hedges that were executed after the polar vortex of 2014, lower capacity revenues in the East and a few known one-time items accounted for almost 75% of the total decrease,” Gutierrez told analysts during a May 2 earnings call.

NRG management last quarter established a special committee to make recommendations to the company’s board on its stated initiatives, especially regarding refinancing of debt for subsidiary wholesale electricity provider GenOn Energy, which the company last year said might be forced to file for Chapter 11 bankruptcy protection.

ERCOT Most Promising, Needs Better Price Signals

Market fundamentals make ERCOT the most attractive market for NRG, but management said it wants to see improved price signals before making more capital expenditures there. With future reserve margins in the high teens, the company is focusing on how increased loads, fewer new builds and more retirements can quickly tighten the market and create scarcity conditions in Texas.

“ERCOT has historically understated the actual number of megawatts leaving the system. … Looking forward, we see the same anemic estimate for retirements in the reports, assuming only 840 MW between 2017 and 2022,” Gutierrez said.

NRG last month announced that it will mothball Greens Bayou 5, taking 371 MW out of the ERCOT system.

“And we believe that there are close to 5 to 6 GW of already identified generation at risk today in the market,” Gutierrez said.

East Challenges Margins

Low natural gas prices and new efficient generation in the East continue to challenge NRG margins, although PJM this month will implement its first 100% Capacity Performance auction, helping the company maintain a positive outlook on capacity markets.

The higher reliability requirement under this new construct will be problematic for megawatts that cleared in previous auctions as base capacity, including less reliable generation and demand response.

“These resources will have to make a decision between taking themselves out of the market or pricing in a higher reliability premium,” NRG said.

The company is concerned about recent actions by various states that it thinks could undermine the integrity of competitive markets.

“Out-of-market subsidies and contracts bestowed pricing that was needed to attract new capital investment, but often [by] raising prices for the end users,” Gutierrez said. “We and a number of other parties have filed legal challenges to the nuclear subsidies in both New York and Illinois because we believe they’re not legal and because regulators should focus on crafting competitive solutions for public-policy objectives.”

Other first-quarter highlights included the transfer of 311 MW of utility-scale solar to subsidiary NRG Yield for $130 million. The company also offered NRG Yield its remaining 25% interest in NRG Wind TE Holdco, an 814-MW portfolio of 12 wind facilities.

NRG also started construction on the 600-MW Carlsbad Energy Center in Southern California, which it expects to complete on deadline in the fourth quarter of 2018.