New NRDC report highlights pathways for innovative private financing of green infrastructure retrofits
As a kid in San Diego, I remember how after a rainstorm, long after the skies had cleared and the day was beautiful, the ocean would be polluted -- so polluted that it was dangerous for my brother and I to go to the beach for several days. I remeber being surprised to learn that stormwater runoff (surface runoff from rain) was the primary culprit, and that it was a significant enough problem to pollute beaches all the way up the California coast. When I was old enough, I joined the Blue Water Task Force, a volunteer beach water quality testing program. Through that work I learned that the problem was not unique to San Diego-- in the U.S. alone, 10 trillion gallons of polluted stormwater runoff and untreated sewage flow into our rivers, lakes and coastlines each year.
Nationwide, our existing storm and sewer infrastructure is extremely old, costly to maintain, and does nothing to clean or treat our polluted stormwater before dumping it into local waterways, turning our clean rainwater into a public health hazard. It should therefore come as no surprise that cities nationwide are looking for more cost-effective ways to manage their stormwater runoff. A number of cities (leading cities are highlighted in the recently-released NRDC report Rooftops to Rivers II) are beginning to transition to stormwater management strategies that integrate “green infrastructure" elements with existing stormwater management practices.
The shift toward green and the funding challenge
In contrast to existing "gray" pipe and cement sewer and stormwater systems, “green” infrastructure productively harnesses stormwater on-site. Green infrastructure functions through mechanims such as permeable pavement, rainwater harvesters, tree planting, green roofs and other low impact development best practices that mimic natural hydrologic functions, transforming urban runoff from a liability into a major resource. Managing stormwater through green infrastructure helps cities become better places to live because not only are stormwater management costs and energy costs significantly reduced in the long-term, but our communities and waterways also become more beautiful, resilient and clean as a result.
Concurrently with the shift toward green infrastructure, municipalities and towns realize that they can no longer rely on the usual mix of local bond initiatives and subsidized dollars from federal and state governments to make the necessary improvements and expansion to their storm and sewer systems. In order for cities to systematically adopt green infrastructure, therefore, they will need new sources of capital to fund these improvements, and those sources will need to come from the private sector.
Exploring private financing mechanisms for green infrastructure
In “Financing Stormwater Retrofits: Philadelphia and Beyond,” a report the NRDC releases today, my co-authors and I illuminate a number of innovative financing approaches for “green” alternatives to help solve urban stormwater problems. We focus our attention on financing mechanisms that become available once cities create utilize policy incentives for property owners to replace “gray” with “green.”
Our paper takes an in-depth look at the green infrastructure policy framework thriving in Philadelphia - where a conversion to a stormwater billing system based on impervious square footage simultaneously creates financial incentives for property owners to invest in retrofitting their property. Philadelphia is leading the country with their creative green infrastructure policy (outlined in their Green City Clean Waters plan) and other major metros are following suit, taking steps toward cleaner, greener cities. Our Center for Market Innovation team has spent years honing our expertise in energy efficiency finance, becoming expert in Property Assessed Clean Energy, on-bill financing, third party project developer strategies, and design of credit enhancement mechanisms, to name a few. The paper borrows concepts from the energy efficiency finance space to imagine what sort of stormwater retrofit financing options could become available to property owners nationwide once the local government creates the appropriate policy framework. Our paper also presents three cash flow models which illustrate how a property owner financing her own retrofit represents a relatively unattractive return as compared with other financing alternatives: Traditional debt improves the rate of return for the property owner, over a self-financed project, but the best rate of return is demonstrated by the third party project developer model, where the building owner is cashflow positive from day one and the project developer realizes a return of 29% on stormwater retrofit investment.
Potential for a national market in private financing for green infrastructure
In Philadelphia alone, we estimate a potential market of over $350 million in stormwater retrofit projects. Certainly there is no singular approach to financing green infrastructure, and because almost 800 communities nationwide have obligations like Philadelphia under the Clean Water Act to reduce their gallons of polluted runoff, the market remains promising. We believe that a wide range of policy designs among communities will give rise to a diverse set of financing approaches, and our paper spotlights just one example of how the Philadelphia framework can help bring private investment into green infrastructure.
Our paper is aimed at federal, state and local policymakers, business leaders, private entrepreneurs, and environmental advocates alike, all who we hope can collectively and thoughtfully embrace combinations of policy and retrofit financing trends as they set important directions for the betterment of U.S. cities. With the right stormwater policies in place, critically-needed investment in green infrastructure can come from the private sector -- resulting in economic growth, job creation, urban beautification, and keeping our water clean.