NRG: From Challenge to Opportunity in a Carbon Constrained ...library.corporate-ir.net/library/12/121/121544/items/281012/CS08... · David Crane President and Chief Executive Officer

David Crane President and Chief Executive Officer

NRG: From Challenge to Opportunity in a Carbon Constrained World

Credit SuisseFebruary 5, 2008

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Safe Harbor Statement

This Investor Presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to certain risks, uncertainties and assumptions and typically can be identified by the use of words such as “expect,” “estimate,” “should,” “anticipate,” “forecast,” “plan,” “guidance,” “believe” and similar terms. Such forward-looking statements include the expected benefits and timing of NRG’s carbon strategy through RepoweringNRG and econrg projects. Although NRG believes that its expectations are reasonable, it can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Factors that could cause actual results to differ materially from those contemplated above include, among others, general economic conditions, hazards customary in the power industry, weather conditions, competition in wholesale power markets, the volatility of energy and fuel prices, failure of customers to perform under contracts, changes in the wholesale power markets, changes in government regulation of markets and of environmental emissions, political, legislative and regulatory developments, the condition of capital markets generally, our ability to access capital markets, unanticipated outages at our generation facilities, adverse results in current and future litigation, failure to identify or successfully implement acquisitions, repowerings, and other development projects, the inability to implement value enhancing improvements to plant operations and companywide processes, our ability to realize value through our commercial operations strategy, and our ability to achieve the expected benefits of our comprehensive capital allocation plan and our RepoweringNRG and econrg projects.

NRG undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause NRG’s actual results to differ materially from those contemplated in the forward-looking statements included in this Investor Presentation should be considered in connection with information regarding risks and uncertainties that may affect NRG's future results included in NRG's filings with the Securities and Exchange Commission at www.sec.gov.

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NRG’s Carbon Strategy Implications

Emerging carbon legislation not likely to negatively impact NRG’s current fleet until 2019

With , if we achieve a reasonable degree of success, carbon constraints will likely be positive for NRG

NRG’s “first-mover” advantage in key low carbon technologies will allow us to further leverage and accelerate decarbonization plan

NRG is poised to turn Carbon Risk into Carbon Opportunities

&

4

Capitalize

Capital Reinvestment

Gas Peaking Fleet

FORNRG 1.0

Fuel Diversity Program

Asset Based Comm-Ops

Current Industry Dynamics: NRG Remains Ahead of the Curve

New Gas Peaking

IGCC/CCS

Post-Combustion/CCS

Advanced Nuclear

Convert

Capitalize on Favorable Trends While Converting Natural Challenges to Opportunities

Fleet/Site OptimizationCarbon Uplift

Policy Voice

Origination Green Premium

Development Premia

Venture Capital Opportunities

Challenges

Economic RecessionCarbon RegulationAging WorkforceAging Fleet

Benefits to NRG

Dark Spread

Heat rate

Strategic Premium

Value of FleetCapacity PaymentsHedging Costs

Capacity Markets

Cash Collateral

Favorable Trends

Gas Demand Pressure

Reserve Margins

Cost of New Entrant

ConsolidationLocational

5

NRG Scenario Analysis of Carbon Margin Impacts: Conservative Policy Scenario

Outlook for Carbon Regime from 2009-20301

NRG’s upside potential outweighs the long-term downside, even under a conservative carbon policy assumption, so long as repowering plan succeeds

Note: All curves exclude potential gas, heat rate and capacity adders driven by carbon regime. 1 35% allocations from 2012 declining to 0% by 2030, and allowance prices of approximately $10 to $27 price per short ton2 Phase I Repowering (2007-2015) assumes carbon margin uplift from 40% ownership in STP 3&4, 300 MW of wind per annum, 125 MW post combustion capture with CCS, 375 MW IGCC with CCS, and carbon margin neutrality from 650 MW CCGT, Limestone 3, appx. 1,600 MW of gas peaking and Big Cajun 1. Low carbon assets assumed to retain carbon benefit; high carbon assets are assumed to be carbon mitigated through offtakers.3 Phase II Repowering (2016-2030) assumes Repower I plus carbon margin uplifts from 2,250 MW nuclear, 3,000 MW post combustion capture with CCS, 800 MW IGCC, and 1,500 MW wind and carbon margin neutrality from 3,000 MW of CCGT’s. Straight lined pro-rated 2020 through 2030.

ConclusionShort Term 2008-2011: Minimal Impact

Medium Term 2012-2018: Neutral to PositiveLong Term 2018 and beyond: Depends on Us

RGGI Period Federal Transition Period

Carbon Constrained World

Technology Transition

($800)

($600)

($400)

($200)

$0

$200

$400

$600

$800

Incr

emen

tal M

argin

Im

pac

t ($

mm

)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Current NRG Portfolio

w/ Phase I Repowering2

w/ Phase II Repowering3

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The NRG Differential From CS Flat $10 Carbon Price/No Allocations Scenario

Taking everything into consideration NRG has significant opportunities under carbon regime

Step 1:Our “Sanity

Checked” math

Step 4:Assumes

CS 2020 Snapshot $10/ no allocations

Step 5:Assumes

Phase II

Step 2:Conservative Realpolitik

&

2030

NRG’s 5-Step Point of View on Carbon Impact

(all

$ in n

om

inal

val

ues

and r

efle

ct 2

020

impac

ts u

nle

ss s

tate

d o

ther

wis

e)

Phase I

&

The Basic Math NRG InitiativesMarket Drivers

($400)

($300)

($200)

($100)

$0

$100

$200

$300

$400

2020

Incr

emen

tal M

argin

Im

pac

t ($

mm

)

Step 3:Potential

impact on gas, heat rates and

capacity

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Step 1: A Simple Sanity Check Using CS Scenario of $10 Carbon Price/No allocations

We start with a lower negative impact

1 An assumption that gas is on the margin 85% of time when NRG’s coal units dispatch would produce a more favorable impact to NRG 2 Excludes Big Cajun, which is assumed to continue to have a carbon pass through 3 This scenario excludes benefits from allowance allocations, carbon uplift for other assets, specifically nuclear, gas price adder, and coal on the margin in the northeast

Allowance Price per short ton

CO2 per MWH (short tons)

$10

1.1

Gross allowance cost to NRG ($495 Million)

$225 MillionPartial cost recovery to NRG

CS 2020 Coal Margin Impact as Recalculated3 ($270 Million)

NRG Coal MWH2 45 Million

CS 2020 Coal Margin Impact as Calculated

($440 million)

Carbon Price Impact on Coal Assumes NRG coal units operate in 100% marginal gas markets1

Gro

ss C

ost

Model Considerations

Texas Heat Rates: In our recalculation, we use 0.45 metric tons/MWH (0.5 short tons/MWH) as marginal emissions rate in Texas, consistent with an 8500 heat rate

Market Uplift: Our recalculation assumes that when gas is on the margin, our coal plants always recover a portion of the cost

Cost Recovery: South Central load contracts allow for recovery of newly enacted carbon emission-based costs

Rec

ove

ry

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Step 2: Realpolitik and Key Carbon Policy Design Features

Extreme approaches to allocations and price are just not politically realistic

Note: NRG and CS prices in short tons 1 Non-inflation adjusted; in real dollars in 2012 2 Referenced on slide 5 3 Referenced on slide 7

All

oca

tio

n a

s a P

erc

en

t o

f Em

issi

on

s1 Bingaman - Specter

$35

Coal – gas fuel switching

$70%

100%

75%

50%

35%

?

House: Boucher -

Dingell

NRG moderately bearish

scenario2

Lieberman - Warner

CS blended scenario

CS no allocation, $10 case3

Positions of Key Legislative Policy Proposals vs NRG and CS Scenarios

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Step 3: Gas and Heat Rates Rise

Additional factors could provide incremental upside potential toour conservative but neutral outlook from carbon impacts

Higher Heat Rates?Incremental Gas Demand

Dramatic increase in gas demand with significant CO2reduction before low carbon technology is available

Likely price pressure from demand growth

Modest gas price impact of $0.20 to $0.25/mmbtu possible even under moderate carbon regime

Uncertainty for new entrants

− Coal cancellations

−18.0 GW of planned coal development cancelled in 20071

− Challenge to hedge new power investment

− Limited environment for project financing

+Ultimate Impact

− Earlier coal retirements

−60 GW of small coal units2 could be eligible for retirement

− Anticipated nuclear and clean coal development not on-line until late next decade

Higher heat rate expectations not included in our analysis

Source: Credit Suisse; The Inconvenient Math, exhibit 27 [excludes 50% reduction scenario which had one data point]

“While we conceptually have enough gas plant capacity, we might not have enough natural gas – a 30% reduction in CO2 emissions filled-in with gas could require an incremental 6–14 tcf of gas vs US supply of 22 tcf,”

-- Dan Eggers, The Inconvenient Math

Heat rate

0

2

4

6

8

10

12

14

16

7.0 8.0 9.0 10.0 11.0

20% Reduction 30% Reduction40% ReductionIn

crem

enta

l G

as (

Tcf

)

1 NRG estimates 2 NRG estimates; coal units of 50 to 250 MW and older than 30 years

10Reducing Carbon Intensity is Name of Game

PC

w/CCS

W/ Contract/Partner

NewNew

Coal

Coal

Step 4: NRG’s Low Carb Line-up

PC

11Success in our repowering program will turn a negative into a positive for NRG

NRG CO2 Intensity Targets

(Repowering NRG and econrg Phase I)

Step 4: First Mover Advantage In Key Markets

STP 3&4

Filing of COLA50% partner committedUltra heavy forgings secured80% offtakers identifiedBWR partners engagedState action completed Federal Loan Guarantee Final regulations

Huntley

IGCC

CCS plan completePartners identified / under negotiationFinancial sources secured/Execute PPAFeasibility study near completion

CBY 4

Air permit issuedEquity partner signedEPC contractedCommencement of construction

WindWind turbines securedSherbino Wind Farm, in TX, construction commenced

50% partner: BP Alternative EnergyAdditional TX and CA projects under development

Big

Cajun 1

Air permit issued50% offtakers committed50% equity partners committedEPC selected

Long Beach Operating reliably

Operating Under Construction Development

PC Carbon Capture/Removal Powerspan MOU signed

Select Projects Under Advanced Development

CO

2Em

issi

on I

nte

nsi

ty (

short

tons

CO

2/M

Wh)

NRG CO2Neutral Position

&

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

2006 2007-2009 2010-2012 2013-2015

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NRG CO2Neutral Position

Step 5 –

NRG is positioning its future growth to benefit in an environment where we face significant carbon constraints

&

Wind

Advanced Coal w/ CCS

Combined Cycle Gas

100MW / year from 2016

150MW / year from 2016

200MW / year from 2016

1

4

3

Quark Spread, No carbon

RECs, Green Spread

Low carbon, Bonus Allowances

Low carbon

Phase II

200MW / yearfrom 2020

Nuclear

Technology Development ImpactNRG CO2 Intensity Targets

(Repowering NRG and econrg Phase I & II)

2

CO

2Em

issi

on I

nte

nsi

ty (

short

tons

CO

2/M

Wh)

Phase II

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

2006 2007-2009

2010-2012

2013-2015

2016-2018

2019-2021

2022-2024

2025-2027

2028-2030

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Capitalize

Capital Reinvestment

Gas Peaking Fleet

FORNRG 1.0

Fuel Diversity Program

Asset Based Comm-Ops

Current Industry Dynamics: NRG Remains Ahead of the Curve

New Gas Peaking

IGCC/CCS

Post-Combustion/CCS

Advanced Nuclear

Convert

Capitalize on Favorable Trends While Converting Natural Challenges to Opportunities

Fleet/Site OptimizationCarbon Uplift

Policy Voice

Origination Green Premium

Development Premia

Venture Capital Opportunities

Challenges

Economic RecessionCarbon RegulationAging WorkforceAging Fleet

Benefits to NRG

Dark Spread

Heat rate

Strategic Premium

Value of FleetCapacity PaymentsHedging Costs

Capacity Markets

Cash Collateral

Favorable Trends

Gas Demand Pressure

Reserve Margins

Cost of New Entrant

ConsolidationLocational

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NRG Carbon Strategy

Carbon constraints are virtually inevitable and, eventually will significantly alter the complexion of the American power industry

Two years ago we began to implement our carbon strategy (the carbon pentagon)

Power companies can either get on the bus or get hit by the bus – we choose the former

Baseload Alternatives

Carbon H

edgePolitical StandingPo

litica

l Sta

nding

Car

bon H

edge

Policy Voice

Carbon R&D “Test Bed”Sequestration

Post- Combustion Capture

IGCCFirst Mover

NuclearExpansion

WindPower

Carbon Pentagon

Our Carbon Strategy Has Progressed On All Fronts

NRGNRG

Questions and Answers

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