The clean energy sector, backed by innovative entrepreneurs, investors, and government policymakers, has seen enormous growth over the past 6 years. US solar power capacity recently surpassed 10 gigawatts as the price of solar panels has fallen some 75% during the past 5 years. Every 4 minutes, US installers put a new solar system on a rooftop according to GTM Research. Wind installations have surged past 60 gigawatts and non-hydro renewable energy sources accounted for more than 99% of all new US electrical generating capacity installed during January. These numbers are spurring new investment from the private sector, but this investment is not enough to close the gap and avoid the worst impacts of climate change.
Ceres, a coalition of investors, industries, and environmental groups that advocates for sustainable business development, recently completed an analysis looking at closing this gap, identified as the Clean Trillion. In order to limit global warming to 2°C and avoid the worst effects of climate change, the world needs to invest an additional $36 trillion in clean energy, an average of $1 trillion per year for the next 36 years. Likewise, groups such as the World Economic Forum (WEF), the UN Intergovernmental Panel on Climate Change (IPCC), and the International Energy Association (IEA) have produced studies of the shortfall of current clean energy investment. Everyone agrees that closing this gap will be an enormous challenge, and will only be possible if businesses, investors, and policymakers join forces.
Image courtesy of Ceres.org
One solution to the investment gap are public-private entities known as “green banks.” Federal support for clean energy has dropped sharply, declining to a projected $11 billion in 2014 compared with $44 billion in 2009 (the year of the stimulus package) according to a recent analysis by the Brookings Institution. As partisan bickering currently paralyzes Congress, the government funds that remain need to be leveraged to maximize the private sector role in offering investment opportunities for clean energy.
“There are major financing gaps in almost all clean energy markets, and you know something has to give, since the whole subsidy-based develop-deployment model of the last decade is really probably collapsing, and not only are generous subsidies under widespread threat of attack, but in fact they’ve already been severely downsized,” said Mark Muro, a senior fellow and director of policy for the Metropolitan Policy Program at Brookings.
Clean energy growth has been hampered by the lack of low-cost capital available to projects and new technologies. Affordable capital is vital to advance ideas and technology from the research and prototype phase to commercialization. Clean energy competes for investment capital with well-established and politically protected and subsidized conventional energy sources such as oil, gas, and coal. The clean energy industry also faces what is known as the ‘valley of death,’ where investment needs are too high for typical venture capital firms and the perceived technology risks remain too large for institutional investors and bond markets to finance the commercialization of technology advances and projects at scale. This is where a green bank can step in and help solve the issues surrounding low-cost capital and help the clean energy industry survive the valley of death.
The Valley of Death
A green bank is essentially a quasi-government agency that uses a small amount of taxpayer or ratepayer dollars and leverages that money to draw in private capital to invest in clean energy. A green bank can use a combination of loans and credit enhancements to leverage greater private financing and to multiply the impact of public dollars to reduce the risk of these energy projects and to encourage private finance to step in.
National green banks in the United Kingdom, Germany, and China, along with the successful development of Connecticut’s state green bank, have provided momentum for more states to pursue these innovative structures. New York and Hawaii are the most recent states to develop green banks, and several more are moving down that path as well. With little action coming out of Washington, state governors and legislatures face mounting climate and energy challenges in their own backyards. Green banks can help each state spur public and private investment in clean energy.
With momentum for creating state Green Banks gaining steam, a non-profit advocacy group, the Coalition for Green Capital (CGC), recently held its Green Bank Academy in Washington DC. Co-sponsored by the Brookings Metro Program and Connecticut’s Green Bank, the Clean Energy Finance and Investment Authority (CEFIA), the Academy featured expert panels and hands-on working group sessions. Participants focused on working together to facilitate the development of case studies, lessons learned, and opportunities to further collaborate in order to scale their efforts to spur private investment in clean energy.
Connecticut’s Green Bank – A Case Study
As a co-sponsor of the event, CEFIA was able to give the Academy participants a valuable perspective on setting up a successful bank. In 2011, Connecticut became the first state in the country to establish such an entity. Since then, Connecticut has experienced a tenfold increase in deployment of renewable energy. In 2013 alone, CEFIA was able to use $40 million of public funds to leverage $180 million of private capital.
CGC worked closely with the state to help develop its programs over the past 3 years. CGC CEO Reed Hundt comments, “In Connecticut, which is a state of only 3 million people, we are adding $40 million of capital to the state green bank every year. We are finding so far that about 10 times as much capital comes in from the private sector whenever we put a dollar in.”
CEFIA focuses on lower risk projects that are less likely to lead to loan defaults by project owners and more likely to generate a return for private investors. In doing so, CEFIA has funded projects that use proven technologies with deployment opportunities, rather than technologies that are still in early development or demonstration stages. These type of investments help CEFIA reduce its reliance on public funds and develop long-term, sustainable capitalization through its portfolio of loans and investments.
CEFIA has developed several products, including a Commercial PACE (which stands for Property Assessed Clean Energy) program, a Smart-E Loan, and Solar Loan and Solar Lease programs that allow customers to adopt solar without paying upfront costs. With its C-PACE program, CEFIA has originated $20 million of energy efficiency deals, which have been bundled and sold to a private capital provider. The program enables businesses to access lower-cost, long-term financing for clean energy and energy efficiency improvements by placing a voluntary assessment on their property tax bill. The energy improvements are paid for over time, and costs are transferred to the new owner if the property is sold.
Through its solar programs, CEFIA subsidizes direct homeowner and commercial solar system purchases, as well as leases offered by third-party solar PV system installers, in order to make PV systems more affordable. CEFIA aims to install at least 30 megawatts of solar PV by 2022 using public dollars for no less than one-third of total investment. CEFIA partnered with commercial banking institutions such US Bank, which acts as a tax equity investor. Local banking institutions such as First Niagara Bank, Webster Bank, Liberty Bank, and Peoples United Bank provide debt capital as well.
Most recently, CEFIA announced a new project with Sungage Financial Inc, a Boston-based developer that will loan the funds to Connecticut residents who want rooftop solar systems. CEFIA is providing an initial $5 million to fund originations, while The Hampshire Foundation will provide $1 million and crowdfunding startup Mosaic has committed to provide an additional $4 million through either its institutional backers or its crowdfunders’ investments. Sungage has already made solar loans totalling over $2.2 million to more than 100 Connecticut homeowners.
Benefits of establishing a green bank
Through discussions and working groups, the participants of the Green Bank Academy established several key attributes that a successful green bank program should have.
Most importantly, a green bank needs to reduce costs of clean energy for taxpayers and ratepayers by allowing private capital to flow more efficiently into publically beneficial projects. If the bank is structured to increase private-sector participation in the market for clean energy, this will gradually reduce the need for public subsidy as the market achieves maturity and commercial scale. The bank can create market certainty, compared to traditional subsidies and mechanisms that rely on inconsistent government support. Green banks need no continuing action or appropriations in order to maintain their operations once they become financially self-sustaining, which greatly reduces any policy-related risk to investors and developers.
Green banks add value to a state’s renewable energy and energy-efficiency market by facilitating the securitization of asset-backed investments by aggregating clean energy projects. In many cases, the volume and project size of clean energy transactions are often too small and decentralized to attract private capital efficiently into the market. Energy efficiency retrofits and distributed solar projects often fit into this category. Green banks can pool such projects into larger pools, thus securitizing the investment for private investors.
A lack of standardization, processes and program structures is one of the oft-cited barriers in the clean energy finance sector. If clean energy investors, developers, installers, and stakeholders share common practices, private investors can assess risks and make clean energy investments far more easily and cheaply. If state green banks work together to share best practices, they can help alleviate these issues facing the industry. Finally, because the banks are able to take on more risk than the private sector, they have the potential to experiment with a variety of finance mechanisms, and improve upon existing ones based on their own and other bank programs.
States moving forward with green banks
Last year, New York Gov. Andrew Cuomo set the foundation for a $1 billion state green bank to support private investment in clean energy in New York. In December 2013, the Governor announced an initial capitalization of $210 million to fund the bank’s launch in early 2014. CGC helped the state in its preparations for the New York Green Bank, which is housed inside the New York State Energy Research and Development Authority (NYSERDA). The bank is using funds from an existing systems benefit charge, along with its cap-and-trade revenues to capitalize its operations.
“With this funding we will attract greater investment in New York, accelerate clean energy deployment, and modernize our grid,” he said in a statement at the time. “Working hand-in-hand with the private sector, the New York Green Bank will also promote job growth, improve air quality, and provide New Yorkers with greater choice and value for their money.”
Also in 2013, Hawaii enacted S.B. 1087, which authorized $100 million in bonds to finance a renewable energy loan fund that can provide low-cost financing for homeowners and businesses to invest in solar panels and other clean energy projects. The loans are designed to offset the upfront cost of photovoltaic systems. They are paid back through on-bill financing, a payment plan that allows homeowners to pay back the loans through a premium on their utility bills. Funding for the loan program will be recycled as private investors purchase the bonds.
In Vermont, Governor Peter Shumlin signed into law House Bill H.395 to establish the Vermont Clean Energy Loan Fund, which will consolidate clean energy programs that currently exist under the Vermont Economic Development Authority. The bill establishes a credit facility of up to $10 million from the State Treasury to support sustainable energy loan programs, and an additional $6.5 million to support residential energy efficiency loans.
Representatives from 10 states attended and participated in the academy: California, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, New Hampshire, New York, and Washington. According to CGC, representatives from Pennsylvania and Rhode Island were unable to come the Academy but have shown interest in working with CGC to help create state green banks.
California, with a large funding source already in place due to its cap-and-trade program, can utilize a green bank in order to leverage further private capital in its already booming clean energy economy. In February of 2013, Senator Kevin De León introduced Senate Bill 798, which would establish the California Green Infrastructure Bank, largely funded by allowances from the state’s cap-and-trade program. Auctions of cap-and-trade permits have already generated $200 million for investing in emissions-reducing activities and programs.
According to Lisa Sundeen, West Coast Director for CGC, other states are in early discussions and proposals. In Maryland, CGC is working with state legislators to draft a new bill that would allow the formation of a green bank housed within the Maryland Clean Energy Center. Candidates for Governor in both Massachusetts and Rhode Island have also explored making a Green Bank part of their campaign platforms.
A new federal effort
During a keynote at the Green Bank Academy, Rep. Chris Van Hollen (D-Md.) announced that he would introduce a new version of a bill to create a federal green bank. Van Hollen had proposed a similar bill as part of the Waxman-Markey cap-and-trade bill that passed the House of Representatives but failed in the Senate. The 2009 bill (Green Bank Act of 2009) would have created a Clean Energy Deployment Administration, a federal entity that would offer a suite of investment vehicles and credit enhancements to help clean energy technology bridge the “commercialization gap.”
“The green bank that we envision would be an independent, self-sustaining, not-for-profit, wholly owned corporation of the United States,” Van Hollen said.
Van Hollen stated that the bank will be capitalized with $50 billion of green bonds issued by the US Treasury. In order to make sure the legislation does not require any new funding, the Congressman proposed eliminating a loophole in current law that encourages US companies to reduce their tax liability by investing borrowed funds abroad rather than in the US. CGC CEO Reed Hundt proposed a similar mechanism in 2011 for funding infrastructure investment via a ‘infrastructure bank,’ where repatriated offshore dollars would be deposited tax-free.
According to the Congressman, the federal green bank would utilize a variety of financing mechanisms to attract private capital to clean energy investment—including loans, loan guarantees, debt securitization, and insurance for creditworthy projects. The federal green bank would also have the ability to partner with existing state green banks that meet certain federal funding criteria.
Where do States go from here?
Participants at the Academy discussed several ways to create momentum in their respective states. As demonstrated by CEFIA, private banks, credit unions, installers, and municipalities can serve as some of the best networks through which to market green bank products. To bring those groups on board, a green bank should collaborate with banks, installers, and municipalities early on to educate them and demonstrate the benefits of green bank programs.
“In every state it is necessary to have a conversation with the commercial banks so that they understand that you’re not competing with them. In fact, you don’t want to compete with them—you want them to engage in the same activity and to provide their own capital,” Hundt comments. “They don’t really know what a green bank is—so you have to have that conversation in every state. And you have to have it early.”
Finding sustainable sources of revenues is also a key issue facing the development of green banks. A green bank can receive its initial funding from several public sources. New state budget appropriation may be pursued only in rare cases, as political and budget restraints make new programs extremely difficult. Existing state funds for clean energy and energy efficiency were repurposed in Connecticut, Vermont, and New York; and Regional Greenhouse Gas Initiative (RGGI) revenues also provided initial capital for each green bank. Alternatively, as was done in Hawaii, the state can issue bonds to private investors.
Many states support renewable energy and energy efficiency through a variety of state programs, policies, and funds. State green banks are a uniquely flexible solution that can operate at the scale of this challenge and connect existing programs and sources of funding. This flexibility and scalability provides a more holistic approach to the issue of clean energy finance, which can drive innovation, fueling local and regional economic growth and job creation.
According to Sundeen, deciding where to house the green bank will be a key issue facing states. Both Connecticut and New York were able to use other state entities to house their banks, while other states may see ‘turf battles’ among state agencies. Some may have the difficult task of developing a state bank from scratch. But, ultimately, she believes that proper communication among stakeholders is the most important issue facing states. All parties involves should be made aware that a green bank will reduce the state’s reliance on public funds and develop long-term, sustainable capitalization for clean energy projects throughout the state. As state leaders understand first-hand the economic benefits of a strong clean energy economy, there is no sense for them to wait for action from Washington.
About the Author: James Lester is an energy and impact investing expert with over a decade of experience in energy finance, public policy, and measuring social and environmental impacts (SEI). He has authored a number of articles, publications, and research reports that provide sources and tools needed to promote investment in clean energy. He is Managing Consultant at Cleantech Finance and lives in Boulder, CO. Follow James on Twitter @cleantecfinance and @Impact_Invest0r.
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