Environmental products house of the year, Asia: Macquarie Bank

Energy Risk Asia Awards 2019: Tailored, innovative structuring and breadth of coverage set Australian bank apart

Andrew McGrath, Macquarie

Australia’s Macquarie Bank has leveraged its capabilities and capacity in infrastructure investment and energy trading to carve out a strong position in Asia’s environmental markets. Whether financing renewables projects, trading carbon credits or combining weather hedges with wind power offtake agreements, the bank has demonstrated innovation, risk appetite and a cross-commodity approach that has won plaudits from clients, as well as the inaugural Energy Risk Asia environmental products award.

Andrew McGrath, its Singapore-based executive director, believes Macquarie is one of the largest traders of environmental commodities – including carbon credits and renewable energy certificates – across Australia and New Zealand, certainly among financial institutions. “That’s not just by volume, but also in terms of the products; how far out we’ll go, and the entities we’ll trade with,” he says.

Macquarie is also increasingly acting as a developer of renewable energy projects. For example, it has developed solar assets in Japan and has played a leading role in the early stages of the development of Taiwan’s offshore wind market. In Australia, it has developed two onshore wind farms – the 429 megawatt (MW) Murra Warra project, and the 228MW Lal Lal wind farm.

McGrath adds that Macquarie is also active in terms of helping to finance environmental products, amortising the environmental commodities as they are generated to repay the loan.

For example, the firm provided upfront financing for Corporate Carbon, a company that develops and operates reforestation projects that generate Australian Carbon Credit Units (ACCUs), which can be sold to the government-run Emissions Reduction Fund (ERF), as well as to corporate buyers. “As far as we know, we’re the only institution providing funding and balance-sheet solutions that enable entities to undertake these projects based solely on the carbon credit generation,” he says.

“They brought the willingness to look at a new commodity and the risk appetite to apply an innovative solution against that commodity,” says Gary Wyatt, executive director at Corporate Carbon. “Certainly in the Australian market, they were the only financial institution prepared to be a market leader in ACCUs.”

Given that project developers bid in ACCUs at a fixed price to the ERF, linking funding to a government-backed revenue scheme is relatively straightforward. However, the New Zealand carbon market is a more complicated proposition, given that project developers sell credits into a floating market, where prices have swung over the past two years from NZ$18/tonne of carbon dioxide to almost NZ$26/tonne.

“We’ve done a range of structures there,” says McGrath. These include forward transactions and management of inventory, as well as operating in the voluntary market to source additional demand from companies that don’t have mandatory carbon targets. 

Macquarie’s presence in so many environmental markets in the region sets it apart from most of its peers. The small size and heterogeneity of those markets discourages other institutions, McGrath believes. “On a global scale, most of these markets are still relatively small. Asia is a very broad region with many different operating jurisdictions … there are unique aspects to every market.”

Macquarie attributes much of its edge in environmental products to its deep presence and experience in price risk management solutions in electricity markets. Its ability to work across markets was exemplified by an innovative structure Macquarie put together for Australian packaging company Orora, which was looking to source green power through a direct investment in renewables. It involved Orora entering into a corporate power purchase agreement with the Lal Lal wind farm, accompanied by a supply guarantee to absorb the intermittency of power supply, and the management of Orora’s renewable energy certificate exposure, alongside working capital financing. 

“This was quite a challenging deal to execute,” says McGrath. “It required a range of different appetites, including the ability to put development capital at play, to understand the various markets involved, and to be able to wrap it into a retail supply agreement. It saw all of Macquarie as an institution come together to provide this solution,” he says, emphasising the crucial involvement of another of the operating groups, Macquarie Capital, in the transaction.

The deal saw Orora receive a firming product structured by Macquarie and specialist weather risk provider Nephila Capital, backed by global insurance entity Allianz Re – to offset any mismatches between the timing and volume of the wind farm’s generation and Orora’s demand for power. When incorporated into the retail supply contract, this provided attractively priced firm renewable energy for Orora.

“Most wind farm deals in Australia are run-of-plant – you take the power when it’s there, and when it’s not, you’re exposed to the spot price,” explains Peter Dobney, general manager, resources and energy, at Victoria-based Orora. “The financial firming proved very useful … we need power all the time.”

In addition, at 10 years the deal is much longer in duration than the two- to three-year contracts typically available in the market, Dobney says. It also absorbed the risk of mismatches between the power price in Victoria, where the wind farm is, and New South Wales, where much of Orora’s load is.

“Macquarie was very competitive. We had other offers, but Macquarie’s deal was better,” he adds.

What sets Macquarie apart, McGrath believes, is the ability to combine solutions across different markets to meet a precise client need. “It’s about the detail that we go into to offer these solutions,” he says. “It is a key focus for all of Macquarie Group, and that’s where we stand out in this space.”