GE’s multi-billion dollar mistake

A new report says the industrial giant misread the tea leaves on clean energy — and should serve as a warning to businesses worldwide.

Last week, General Electric announced it would close a California gas plant 20 years ahead of schedule. The Inland Empire Energy Center in California, the company said, was “uneconomical to support further” in part because of outdated technology.

But California’s aggressive clean energy goals and commitment to using renewable energy was also a key determinant in GE’s decision to take the plant offline. What’s more, the closure is not just a hiccup in GE’s energy plans, but is just one small piece of the American giant’s substantial stumble on clean energy in recent years.

The company has lost hundreds of billions of dollars of investor money in just two years as its stock has plummeted. And a new report claims the downturn is in large part because the company failed to pay attention to the rise of clean energy.

“You don’t necessarily think of GE as an energy company,” said Kathy Hipple, a financial analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), which produced the report. “But every company on the planet will be impacted by climate risk.”

Founded in the late 1880s by Thomas Edison, General Electric was part of the 12 companies offered on the Dow Jones industrial average at its formation in 1896. While the name GE might convey images of light bulbs and household appliances to most Americans, the massive multinational conglomerate is a key player in several different industries.

GE now owns ten subsidiaries, including companies handling aviation technology, health care and financial services. Its energy offerings are split into two units: GE Power, a gas-focused division, and GE Renewables, a much smaller company focused primarily on wind technology.

GE’s energy troubles began in 2014, when the company announced it would purchase French gas turbine company Alstom for $13 billion. The timing of the purchase happened to coincide with a seismic shift in climate policy. The acquisition was completed in November 2015, just one month before hundreds of people gathered in Paris to ratify the landmark climate agreement in December of 2015.

“It was kind of like Bayer buying Monsanto just as the bulk of the class action suits were coming through,” said Ion Yadigaroglu, Managing Partner at Capricorn Investment Group, a clean-energy investment firm.

GE’s purchase of Alstom also coincided with a global downturn in the price of renewables, lessening demand for the gas turbines right after GE had made its costly pick. Between 2010 and 2016, the cost of solar dropped 69 per cent — putting it “well into the cost range of fossil fuels,” according to the International Renewable Energy Agency — while the cost of onshore wind dropped 20 per cent in the same time period.

Since then, costs have only plummeted further. In November, financial advisory firm Lazard reported that building and operating new renewable energy plants had become, in some cases, cheaper than operating older conventional plants.

“You’re in a situation where the market for one of your main products — literally the bottom falls out of it,” said Hipple. She explained that utilities became wary of spending millions on gas turbines that would take years or decades to pay off.

“Utilities and power plants were saying, ‘We don’t need to do things now. We’ll just wait and see,’” she said. “The price of renewables is dropping — why lock-in? Why lock-in now? Let’s keep an eye on the natural gas prices. Let’s keep an eye on renewables prices. We don’t need to act quickly.”

According to IEEFA’s report, GE lost investors a staggering $193 billion — 74 per cent of its market capitalisation — between 2016 and 2018. GE Power was a huge driver of this loss as it began to bleed money, going from bringing in $4 billion in profits in 2016 to losing more than $800 million in 2018. The company’s other subsidiaries only experienced slight variations in profits during this time.

Last year, GE was kicked off the Dow after 110 years on the index after its stock plunged. GE was the last remaining original member of the index and a remnant from a time when the U.S. economy was driven by industrial giants rather than big tech. “The company was often at the center of American capitalism” over the past century, the New York Times wrote last summer of the change in the Dow, noting the removal as a “fresh blow” to a company “reeling” from challenges to its power businesses. “As recently as the 1990s, GE was at times the most-valuable American company by market value,” the Times reported.

GE’s downfall, of course, can’t be entirely attributed to a lack of foresight on clean energy. The well-publicised leadership struggles within the company — its longtime CEO Jeff Immelt was forced into retirement in 2017, and his successor was removed by the board a year later — as well as myriad legal troubles have significantly eroded investor trust. And GE does have a substantial investment in renewables: Its wind turbine business is the third-largest in the world and has brought in hundreds of millions of dollars in profits over the past two years.

The Alstom acquisition was roundly praised by many investors when the purchase was completed in 2015, with the New York Times lauding the deal as helping to “strengthen GE’s footing in emerging markets like China and India, where air pollution from coal power is a menace to public health.” Analysts now say GE paid too much to acquire the company.

Experts agree that GE is, at best, suffering from bad timing, and at worst paying the price for a significant lack of foresight. The Alstom acquisition and the subsequent struggles of the Power division were key to bringing the rest of the company down. News reports on GE’s decline and the company’s grim future widely point to the Alstom acquisition as one of the main drivers of its plunging stock prices. A Fortune profile of Immelt painted the Alstom deal as a key example of the CEO’s often-ill advised tendency toward “paying top dollar to acquire the hot businesses of the moment.”

And in an interview last July with Bloomberg, JP Morgan analyst Stephen Tusa said GE’s power business was “in secular decline,” meaning that it is threatened by long-term market trends. Tusa predicted GE’s power business in the future “could be worse, not better, than today.”

This story was published with permission from Nexus Media. Read the full story.

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