Energy Risk Awards 2016
A Wall Street bank might not be the first company that comes to mind when one is looking for a way to be environmentally friendly.
But last year, when Facebook wanted a long-term source of clean energy for a planned data centre in Fort Worth, Texas, the social media giant approached Citi. On July 1, 2015, Citi agreed to provide the data centre with a 13.5-year physical power hedge. Under the agreement, which commences in January 2017, the bank will also deliver renewable energy credits (Recs) to Facebook's project company. Renewable energy firms generate one Rec for every megawatt-hour they produce; utilities and corporates use the instruments to comply with environmental regulations or to demonstrate their social responsibility.
Citi was able to execute the Facebook deal because of another transaction it was working on concurrently, which closed at nearly the same time: a 13-year, fixed-price physical power hedge for the Shannon Wind project, a 204-megawatt wind farm being built in Clay County, Texas, some 90 miles from the planned data centre, by Vancouver-based Alterra Power and Connecticut-based Starwood Energy. Effectively, Citi back-to-backed the two deals, laying off the power and Rec price risk it assumed with the Shannon Wind hedge by selling power and Recs to Facebook.
Both of Citi's counterparties gained from the three-way deal. Facebook got the clean energy it wanted without assuming the credit risk or construction risk of a wind farm project. The builders of the Shannon Wind project, meanwhile, got a comprehensive financing solution as well as the revenue certainty that came with Citi's long-dated hedge. Citi provided the project with a $212 million construction loan and participated in its $219 million tax equity financing, alongside billionaire Warren Buffett's Iowa-based Berkshire Hathaway Energy.
"Citi's performance for us as hedge provider for our Shannon project was exceptional," says Alterra chief executive John Carson. "Beginning with first indication through closing the transaction, they spent almost two years on the project and never wavered on their original commitments, in fact, bettering the product as we went on; there were no negative surprises, and that makes for great business."
Roxana Popovici, a Citi managing director who handles renewable energy deals, says the bank has much to offer sponsors of wind-power projects: it can provide the hedge, a portion of the tax equity and some or all of the construction lending. "Our niche on the renewable side has been the one-stop solution," she says. Being able to provide all three products facilitates execution, she adds: "Issues are sorted out much more easily when you have one entity sitting on all three sides."
While Citi has drawn attention for the growth of its commodities business over the past several years, its activities in the environmental product and emissions markets are not as well known. The numbers are impressive: in 2015, Citi traded eight million Recs, an internal record. It also executed record volumes and tenors of Class I and solar Rec offtake agreements. And between the Regional Greenhouse Gas initiative in the northeastern US and California's carbon cap-and-trade programme, Citi traded over 13 million tonnes of carbon dioxide credits, making it the largest US bank participant in those markets. The bank's reach extends to Europe, where it remains one of the top participants in European Emission Allowances, both in terms of volumes traded and as provider of cost-of-carry transactions to investors.
All that puts Citi in a strong position to serve corporate clients, such as Facebook, which are looking to procure renewable energy or comply with regulatory mandates requiring them to transact Recs or carbon credits.
Such companies must grapple with difficult questions about the future of green energy, especially if they want to make long-term commitments. Low oil and natural gas prices have pushed power prices to historic lows, raising doubts about the viability of some renewable energy sources. Meanwhile, political and regulatory risks persist in uncertainty over a possible carbon tax or the implementation – or not – of the Obama administration's Clean Power Plan, which was stayed by the US Supreme Court in February.
Against that backdrop, Citi is a reliable partner for corporates looking to navigate the unfamiliar terrain of renewable energy, says Naveen Arora, a Houston-based managing director at Citi. "There is a lot of uncertainty in the markets over what is going to happen over the next five to seven years," he says. "Our participation in [the Rec] market allows us to give our clients a solution to reduce their carbon footprint and lock in their carbon exposure over the longer term."
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