Tesla Enters the Texas Retail Energy Market

We are reaffirming our $34 per share fair value estimate for NRG Energy NRG and $20 per share fair value estimate for Vistra Energy VST after Tesla took the first step to enter the Texas retail energy market. We are reaffirming our no-moat and high uncertainty ratings for NRG and Vistra. Tesla's TSLA application on Aug. 16 to become a retail energy provider in Texas will allow it to compete with NRG, Vistra, and more than 100 other REPs in the state. Tesla appears to meet the minimum REP requirements and we expect the Texas Public Utilities Commission to approve its application by Nov. 15. Tesla does not present an immediate threat to NRG or Vistra, which together control more than 60% of the Texas retail energy market. We expect Tesla initially will target its own customers to complement its retail EV, battery, charging, and solar products. However, Tesla's brand name recognition gives it an advantage in a hypercompetitive market. Tesla's entry confirms our long-held view that consumer-oriented technology or telecom companies might try to enter retail energy markets. NRG is most exposed to competition in the retail energy markets after its $3.625 billion Direct Energy acquisition and power generation divestures that have turned it into almost entirely a retail energy company. We estimate its Texas retail business will represent about $1 billion of its $2.4 billion consolidated normalized EBITDA in 2022. Vistra's Texas retail business is slightly smaller than NRG's, but Vistra's wholesale generation business offsets a substantial amount of financial exposure to the retail markets on a consolidated basis. We estimate Vistra's Texas retail business will contribute about $800 million of its $3 billion consolidated normalized EBITDA in 2022. We don't think any company can establish an economic moat in the retail energy business, which is highly sensitive to extreme weather and energy market volatility.

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