Solar panels on top of Rockefeller Center rooftop in midtown Manhattan in New York.
Source: Associated Press
As many of Wall Street's biggest banks commit to buying 100% renewable energy to power their global operations, their decision to invest in renewables internally may be guided by a strategy aimed at accommodating the demands of the sector longer-term.
Between them, Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. have committed to mobilizing investments equal to $575 billion in low-carbon energy and environmental initiatives through 2025, all in an effort to cut global carbon emissions through targeted capital allocation and financial advisory. Morgan Stanley and Wells Fargo & Co. have also combined to help invest more than $150 billion over the last decade through their own low-carbon oriented financing efforts.
As part of that effort, banks have joined a growing cohort of Fortune 500 companies looking to enter into long term power purchase agreements, or PPAs, in an effort to match 100% of their global energy consumption with a commensurate supply of renewable power. In such arrangements, banks, like their technology peers, can hedge long-term energy expenses across their global real estate footprint, and claim that their investments contributed to the development of an operational renewable asset, where it would not have otherwise.
But for banks, these in-house investments in renewables are also driving internal cohesion across various lines of personnel and departments. For example, several large commercial banks are wholeheartedly leveraging the expertise of renewable energy project finance specialists, in tandem with the risk management and hedging capabilities of commodities trading desks, all punctuated by relationships with corporate clients tapped to ultimately build and operate contracted assets.
According to several banking executives tasked with renewable strategy, the long-term aim, in addition to carbon cuts, is to establish the banking sector's role as the incumbent intermediary to corporate buyers of renewables, both big and small, as the market serving commercial buyers grows more competitive.
The mainstream appeal of buying renewables has spawned a competitive market for energy suppliers catering to commercial renewable energy buyers. The roster includes: Shell Energy North America (US) LP's recently acquired MP2 Energy LLC; Edison International subsidiary Altenex LLC; Renewable Power Direct, LLC, which has a services agreement with Tenaska Power Services Co.; as well as smaller shops like CustomerFirst Renewables LLC and 7x Energy Inc.
With the service market broadly dis-aggregated, banks are sensing an opportunity to coalesce their financing, hedging and advisory services around corporate PPAs to supply their own facilities, using internal procurements as real-time case studies for the potential needs of clients.
"We are all jumping on board now," J.P. Morgan Chase's Gary Levitan, vice president of global sourcing for energy and sustainability, said at a recent forum held by trade group Smart Energy Decisions in New York. "Banks are going to realize on the other side of renewable sourcing, like counter-party hedging, no one has the low cost of capital like we do to be able help others who maybe do not have enough offtake to close these deals."
J.P. Morgan this summer unveiled a $200 billion clean energy financing commitment, and announced that it would be going 100% renewable. The bank has contracted with NRG Energy Inc. for a 20-year PPA on the Buckthorn Wind Project in Texas.
Similarly, Citigroup announced in September that it would procure 100% renewable energy for global operations by 2020, part of its broader $100 billion environmental financing campaign launched in 2014. While Citi has yet to identify which projects it will contract with, the bank says it is soliciting clients for proposals as part of an internal effort to bring together various divisions, including its energy trading division, Citigroup Energy Inc. and its Alternative Energy Finance group.
"A 100% renewable energy goal for a bank with our scale is pretty ambitious in three years," Citigroup director and global head of corporate sustainability Valerie Smith said in an interview. "We are intentionally not going into the goal fully baked, but with the idea that we want to crowd source from our community of clients and relationships to get the right ideas."
Eyes on economics
The banking sector's familiarity with deal structuring and fundraising could confer an advantage against competing firms looking to serve corporate renewables buyers. But before full-fledged product offerings are made, banks are standing by to see the result of their initial investments, squaring their returns with those of other contracted assets. Pricing dynamics in wholesale power markets have only underscored the role of risk management to achieve corporate renewables goals.
"It will be interesting to understand in the next couple years as a lot of the plants get built, and broader influences on the market, how pricing is impacted at the end of the day," global head of ESG in Goldman Sachs' corporate services and real estate group, Cindy Quan, said in an interview. "There is a lot of curiosity on our team to see the economics, and once we see the realities of what's happening, we can cost-compare against different corporates."
Goldman's internal commodities group, J. Aron & Co., has taken the lead on hedging basis risk for the bank's long-term PPA signed with NextEra Energy Inc., effectively bringing together all the components of the project structuring in-house to help the operations team fine tune the terms.
"Given that we have a specific team internally, we quickly pulled J. Aron in as our core team to provide the market intelligence we needed to structure our deal," Quan added. "It's part of their core business to manage basis risk, which they are doing on our behalf for our PPA."
Basis risk has proven itself to be a thorn in the side of corporate buyers, leading some to highlight the potential for contracts to prove more costly than power in the spot market. That has driven first-movers like Microsoft Corp. to look for innovative hedging structures to manage basis risk in the form of proxy revenue swaps.
But by owning the hedging capability in-house, banks may have an edge toward attracting new renewable buyers, as well as the option to scale up their wholesale power and renewables commercial offerings should the market experience a recovery in wholesale prices.
"This internal 'all hands on deck' approach is really to bring in expertise from a lot of different teams, and figuring out how to mitigate risk," Smith said. "The benefit to a bank like Citi is to be able to participate in this trend of renewable goals, learn through the process, and be better advisers to our clients."