GREEN BANKS: FINANCING TOMORROW’S CLEAN ENERGY PROJECTS
Dale C. Changoo
Managing Principal at Changoo & Associates(30,000+ LinkedIn Connections)
How green bank principles can be applied to achieve state energy goals.
In recent years several law firms participated in the inaugural Green Bank Academy held in Washington, D.C. State energy and finance officials from across the US attended the Academy to discuss the role of green bank financing and opportunities for coordinated state action. The Coalition for Green Capital (a pro bono client), the Connecticut Clean Energy Finance and Investment Authority (CEFIA), and the Brookings Metropolitan Policy Program hosted the event.
What is a green bank?
Green banks are entities that provide financing support for clean energy technology, products and services — including renewable energy generation projects and energy efficiency measures. They are intended to leverage public dollars to increase private capital investment that will accelerate and increase the number of clean energy projects that are deployed, with the goal of reducing greenhouse gas (GHG) emissions while promoting economic development in the clean energy and cleantech sectors.
How are green banks funded at the state level?
There is no one way to fund a green bank. For example, state green banks can be funded by taking existing public programs and repurposing the dollars by using them to capitalize on a green bank. A number of states already have publicly funded grant programs for renewable generation and energy efficiency projects. Instead, you could take that grant funding for which the public sees no direct return of and on its investment and put it into something that looks like a revolving loan fund.
So instead of giving a grant, the green bank would provide lower-cost financing support in the form of a loan or some other form of financing support, such as a credit enhancement, project aggregation and securitization. And in this way, the green bank would get money back — it could replenish its capital. In fact, if the green bank is prudent in its financing support activities, it should make more back than it gave out — even though it’s a non-profit — and could use that return of and on its past financing support to provide financing support to other clean energy projects.
It really stretches any public dollars that are used to set up or capitalize on a green bank. You can recycle that dollar to leverage private capital.
How can green banks change the economics of clean energy projects?
It will depend on how green banks provide financing support for clean energy projects. If you look at the capital costs for a distributed generation solar projects or an energy efficiency project, a green bank could lower their cost of capital if it can provide them access to lower-cost forms of private capital, such as that available in the public capital markets.
Or if you think about people who are out developing distributed generation renewable projects or energy efficiency projects, a developer might have 100 projects they want to develop. But it’s all going to be a question of economics to finance the projects. One group of projects might make economic sense if a developer can obtain equity and debt financing at a combined cost of 10 percent and another group of projects might only make economic sense if the developer can obtain such financing at a combined cost of 8 percent. If you think about these pipelines of projects, and you lower their cost of capital — there may be more projects that can get developed and deployed with green banks.
What types of projects can be funded using a state-level green bank?
At the state level, what initially have been the ideal project for green banks are distributed generation solar projects, though efforts on the energy efficiency front to promote the aggregation and securitization of these projects are quickly ramping up.
To give an example. On the distributed generation solar front, Connecticut’s green bank, CEFIA; Mosaic, a solar finance crowdsourcing company; and Sungage Financial, a solar financing platform company, have set up a crowd-funded financing mechanism for residential distributed generation solar projects.
Many homeowners today can arrange to have a solar electric system installed on their rooftop; there are lots of vendors out there selling the service — where the homeowner enters into a long-term off-take arrangement with the vendor in the form of a lease or power purchase agreement and in exchange does not have to pay the upfront cost out of pocket to put the system on their roof, or obtain financing from a third-party lender to do so.
CEFIA is funding loan originations and providing credit enhancements that have enabled Mosaic to lend crowd-sourced funds to homeowners in Connecticut to cover the up-front cost of rooftop solar projects. So a homeowner still gets the advantage of not having to pay out of pocket to put the system on their roof. But the crowd-sourced private capital being provided through Mosaic in the form of direct loans is at a very attractive rate as compared to what is currently available under long-term leasing or power purchase agreements. At the same time, Mosaic can start building up an inventory of these loans and warehouse them, package and resell them, and then use the money to replenish the fund they have to make more loans.
To give another example, on the energy efficiency front, CEFIA very recently did a deal to securitize a portfolio of loans for energy efficiency projects in the commercial sector; what some in the clean energy industry are referring to a first-of-a-kind deal. CEFIA is keeping a portion of these loans on a first loss basis to provide credit enhancement to the portion it sold. CEFIA will use the proceeds from this deal to fund new loans and replenish its loan warehouse facility for these types of loans.
What are some of the key factors involved in the successful creation of state green banks?
You need strong support from state policymakers and stakeholders. I don’t know that this support has to be at the level of the governor, but what we’ve seen so far in New York, Connecticut and Hawaii suggests that such support can be critical.
It’s also critical to see if there really are existing public funds and programs targeted at clean energy that could be better used by being repurposed for a green bank. You could have a situation where there are no existing sources of public funds for clean energy investment and the state would have to impose new costs on ratepayers or new taxes on taxpayers to fund a green bank — and that could be a hard sell. And if you have a state with really good programs already in place that are doing an effective job of getting projects deployed — there may not be a need for a green bank or as pressing of a need for a green bank as we’ve seen in other states.
Certain law firms are experienced at working with policymakers and stakeholders in individual states to help them determine possible structural and funding options for a green bank. For example, we have helped them determine where the existing public funding sources are, how they are being used and whether they can be legally repurposed. We have also helped them determine whether there are limitations on how a state green bank can be structured and placed. In Connecticut, for example, CEFIA is a free-standing entity — it’s a quasi-public corporation. In contrast, in New York, the New York Green Bank fits within an existing government agency.
To run a green bank successfully, you need a different kind of mindset. Green banks are trying to be market enabling. It’s really about using public funds as a lever to increase private capital investment in clean energy. You need people to come in and run a green bank more like an investment bank than a government grant program. This is definitely the path that the New York Green Bank and CEFIA have pursued with some success.