US Emissions House of the Year: JP Morgan

Energy Risk Awards 2012

Energy Risk Awards 2012
Energy Risk Awards 2012

While other banks withdrew from the US environmental markets in 2011 and early 2012, JP Morgan has maintained its presence in the sector. In fact, the integration of RBS Sempra’s environmental trading business, completed in the second quarter of 2011, helped to expand JP Morgan’s client base. “We had a fairly active business with respect to carbon, renewable energy credits (RECs) and sulphur dioxide (SO2) and nitrogen oxides (NOx) prior to the RBS Sempra deal, but that acquisition brought a whole new tranche of clients that we hadn’t looked after before,” says Paul Posoli, head of global power, natural gas, coal and environmental markets at JP Morgan. This included compliance players such as industrials and utilities to whom JP Morgan was not only able to offer risk management solutions, but also provide policy insight. This was crucial in new markets such as SO2 and NOx under the Cross-State Air Pollution Rule and California’s carbon cap-and-trade market, which is due to begin its first compliance period in 2013. “Many of the same clients who came to us for deals also came to us for regulatory and policy insight and advice,” Posoli says.

Martin Lew, vice-president, North American environmental markets at JP Morgan, adds that the bank’s balance sheet, strong credit rating and wide physical footprint have provided clients with confidence to continue trading in these transitioning markets.

For example, the bank has worked with developers to aggregate allowances to satisfy requests for proposals (RFPs) in the new California carbon market from compliance players such as Pacific Gas and Electric, and Southern California Edison. “Many RFPs carry stringent credit requirements, so developers that are offering a particular set of offsets have to post a letter of credit or provide some other form of credit support,” Lew says. “Many developers don’t have the balance sheet to do that, so over the past six months we’ve been working to aggregate projects and offer them to utilities backed by the balance sheet and credit rating of JP Morgan.”

Another new trend observed by JP Morgan’s environmental desk is increased interest from US companies that need to manage their exposure to the European Union Emissions Trading Scheme (EU ETS) for the first time because they may own private jets that fly in and out of the region, according to Lew. “Many clients have limited experience managing their carbon exposure under the EU ETS, so we’ve been helping them understand compliance requirements, assisting them with setting up their registry accounts, while also providing them with the future carbon credits they will need for compliance. That’s a new business that has really started to pick up a lot of momentum over the past six months,” Lew says.

In the RECs market, JP Morgan provided liquidity to generators that suffered from weak power and RECs prices during 2011 by taking over in-the-money contracts in exchange for cash that the generators can use for working capital. This involved monetising in-the-money power-purchase agreements bundled with RECs and REC contracts independent of the power.

We provide liquidity and a policy perspective in a market that can often be opaque

As one of the few banks left in the US environmental markets, Posoli argues that JP Morgan plays an important role in terms of providing environmental risk management services, but also in providing risk management solutions across the entire commodity complex. “[These markets are] a very valuable component of our power, gas and coal business,” he says. “And not only can we provide liquidity and a policy perspective in a market that can often be opaque, we also have the ability to do cross-commodity deals. I would say that when you look at the current spectrum of players in the environmental markets, not many can offer that strength.”

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