Citigroup’s real estate portfolio covers millions of square feet in 160 countries. The investment banking and financial services corporation’s locations aren’t set in stone, though. “We’re constantly moving,” says Steven Avadek, director and global head of sustainability for Citi Realty Services at Citigroup. As a result, Citi has dynamic energy management needs.
Currently the corporation is exploring the energy-as-a-service model, which entails working with a partner that can provide greater control over energy costs. Avadek will be speaking about this unique option at the 2017 Environmental Leader Conference in June. We caught up with him to find out what such a service could mean for Citigroup.
What does energy mean for Citi Real Estate Services at Citigroup?
People think banks don’t move, but the reality is, if there’s better foot traffic kitty-corner, we’ll move across the street, if that’s in our strategy. Banks are constantly evolving. When I joined the organization in 2011, we had over 100 million square feet of real estate. Now we’re at about 50 million. We plan to be even smaller, taking advantage of trends like able to work from home.
It’s difficult for Citi to engage in long-term investments like power purchase agreements or virtual PPAs because our portfolio is so dynamic. We don’t have a huge team in-house to manage our energy. One of the solutions we’ve been exploring is energy-as-a-service: Can we find a partner that’s willing to take on the risk that Citi normally would, but also give them the rewards? Our goals are to reduce expenses as well as get budget certainty.
Energy is a variable cost. The markets go up and down. Typically we’ve done a block and index model. If we take a fixed position, we can probably buy forward for a year or two at a certain price. What we want to see month-to-month is budget certainty for delivered electricity.
What is your strategy to reduce expenses and see budget certainty?
What we put out to bid is energy-as-a-service and, in doing so, getting a guaranteed fixed price. We want to have a partner that’s actively engaged in managing our portfolio, where it’s to their benefit to outperform the contract because the better they deliver, the more money they make.
In the past with the broker-dealer model, you’re paying a transaction fee or a consulting fee and transaction fee. You need the broker to make the transaction for you. They had no skin in the game. We thought, what if they were getting paid for their performance? You could argue that all brokers are getting paid for their performance because if they don’t perform, at the end of their contracts you can get a new broker. But this incentivizes them.
They would be assuming the market risk. It would be open books so we would see what they’re doing. They would have full autonomy to say ‘we’re going to get a full position now.’ All they have to do is hit our guarantee. Everything above and beyond is money in their pocket. They are taking on a much larger portion of the risk, but they also stand to make more money than in a traditional broker-dealer model.
How do you find the right partner for energy management needs?
Most important is setting your own internal goals, knowing what you want to achieve, and having a clear definition of that. At Citi, everything must be competitively bid and sourced through a proposal process. There are advantages to putting everything to market, but it takes time to write a scope and find the right vendors. It’s not as simple as going to your local utility and hoping they can meet your needs all across the region. You have to find a partner that operates at the same scale as you do, based upon your needs.
We found the best way to go about this was engaging with big energy providers first. Initially people were skeptical at this energy-as-a-service model. We ended up running three RFPs until we found the right group to bid this with that believed this model could lead to profit for them, and that had the size and skill to take on that risk.
This is not a done deal. They have to look at the risks on their side, what they’re willing to take on, and current market conditions. I’m optimistic that this can be achieved, but there are hurdles.
What’s are the potential benefits?
What we are looking to achieve is 100% renewable-sourced energy — 100% carbon neutral — with guaranteed savings and budget certainty. Then we’re contributing to the overall success of the organization by managing expenses more efficiently, reducing our overall expense base, and doing it in an environmentally sustainable way. That’s the Holy Grail.
This is a completely different way of looking at energy. A lot of firms could take advantage of this. They may not be the large manufacturers with large fixed sites, but firms that want to engage, be green, and don’t know how.
Have a lot of companies adopted an energy-as-a-service model?
I don’t think there are a ton of examples. But you could have asked Microsoft when they first started doing power purchase agreements if they knew about anyone else buying them. Now everyone’s looking at PPAs and virtual PPAs. It needs to be part of the conversation when managing your energy. Energy-as-a-service might be similarly at the forefront. It could change the market.
Steven Avadek will be speaking at the Environmental Leader Conference in Denver June 5-7, 2017. His track, Exploring the Energy-as-a-Service Option, starts at 3 pm on June 6.