Clean Energy Finance 3.0 - The Rise of the State Green Banks

Clean energy finance banks or “Green Banks” are shaping up to be the latest in clean energy finance technology, as convincingly set out in a report issued last week by the Brookings-Rockefeller Project on State and Metropolitan Innovation.

The Green Bank opportunity has emerged just as the US clean energy industry is poised at an important crossroads – the industry is maturing, creating jobs and cutting costs but faces challenges from inconsistent policy support, political attacks and low natural gas prices. 

Led by wind, the renewable energy industry is a job creator.  NRDC was also busy last week – we delved into the contribution of wind on US jobs in two reports, one of which demonstrates that just a single 250 MW typical wind farm creates 1,079 direct jobs over the lifetime of the project.  The wind industry now employs 75,000 Americans and U.S. companies and their workers produce approximately 65 percent of every wind turbine part.  

However, much of this economic activity is at near term risk if Congress cannot find a way to extend the production tax credit (“PTC”) this year. 

Even if the PTC is extended, its duration is uncertain, and for the sector to thrive, we must create new flexible solutions that can adapt to changing conditions over time.  State-level Green Banks are one such solution.

Simply put, a Green Bank is a public-private financing institution with the authority to raise capital through various means, including issuing bonds, selling equity, legislative appropriations, dedication of utility regulatory funds, or foundation grants for the purpose of supporting clean energy and energy efficiency projects through financing tools such as loans and loan guarantees, often at below commercial rates.  

A green bank can be formed at the federal or state level – but in the US, as is the case in most other clean energy policy innovations, the states have been out in front.  

NRDC is involved in developing Green Bank burgeoning efforts in multiple states but Connecticut is the early leader with its recently constituted Clean Energy Finance and Investment Authority.

How do Green Banks work?

As mentioned above, Green Banks obtain low cost capital and then use that cheap money to support clean energy projects a cost that is lower than purely private sector transactions, resulting in significant savings in the cost of delivered clean energy (15-20% in some instances, according to the report).

There are very successful precedents for energy and infrastructure banks in both the US and abroad. Notably in the US, The Export-Import Bank of the United States (Ex-Im Bank) and the Overseas Private Investment Corporation (OPIC) have been financing power and other infrastructure overseas for decades and have yielded positive returns to the taxpayer.  The model has also been successfully deployed in Germany through development bank KfW and a national Green Bank is currently being launched in the United Kingdom.

Informed by OPIC and Ex-Im Bank and constituted along the lines described in the report, state level Green Banks are a powerful tool for many reasons. Here are some of them.

1. Green Banks make public dollars invested go farther and give the public a return on its investment.   Because of the underlying quality of investments in mature clean technologies (stemming from the use of solid underwriting criteria and risk management techniques), a well-structured and professionally managed Green Bank will have a very low default rate, earn revenues from interest and fees and be self-sustaining.  As the report notes, OPIC has recorded a positive net income every year since its founding in 1969.
2. Green Banks stimulate additional private sector investment.  Currently, due to the European banking crisis and other factors, there is a limited amount of bank debt available to fund clean energy projects. A Green Bank lending alongside private lenders will create capacity for those lenders to participate in more deals.  This is particularly important in large projects, like offshore wind.  In areas like financing energy efficiency retrofits in buildings where banks need an incentive to enter an unfamiliar market, the Green Bank can provide tailored insurance to lenders to enable them to take the leap.  NRDC and the City of New York have pioneered just  such an approach with the New York Energy Efficiency Corporation (NYCEEC).   A properly structured Green Bank will never “crowd out” private investors since its role is not to compete with private investors but to facilitate additional investment by them.  Indeed, as the purely private market evolves to fill the gap, the Green Bank should change its products and sector focus to fill the then-current “green need”.
3. Green Banks morph to fit to local conditions.  In keeping with tried and true American tradition, each state can act a laboratory, borrowing what works from other states but ultimately designing its own program to fit its own needs.  As discussed in detail in the report, Connecticut last year established the first state Green Bank though new legislation that repurposed several existing funds and programs and it is now examining how to effectively scale up PV market in state.  Other states may decide to create “financing windows” within an existing clean energy policy framework without passing new legislation or create banks that combine the financing of clean energy with the financing of infrastructure like bridges and roads.  It’s just a matter of working with stakeholders to find the sweet spot under the circumstances.
4. Green Banks institutionalize sustainable finance.  The transition to a more sustainable clean energy economy will be a long one and it will need different innovative financing tools over time.  A professionally staffed, self-sustaining Green Bank will be flexible enough to meet those challenges and will not be dependent on appropriations which dry up during times, such as now, when state balance sheets are under pressure.

Imagine what could happen if states across the country embraced the Green Bank model. They could make a sizeable difference in the deployment of low-pollution energy technologies. These banks have the potential to transform our energy system, along the way creating jobs for American workers, protecting our health and safeguarding the planet.