Can Green Banks Bring Energy Investing Into the Mainstream?

by Christopher Weber

What’s a green bank?

That’s the question Bryan Garcia finds himself answering again and again, more than any other. As president and CEO of Connecticut’s Clean Energy Finance and Investment Authority, he is as qualified to answer it as anyone in the country. Founded in 2011, CEFIA was the nation’s first state-level green bank and may soon change names to “Connecticut Green Bank.” The question does not bother Garcia. Time and again, he explains that a green bank, also known as a clean energy finance bank, is not a brick-and-mortar institution but a government-supported lending program.

“A green bank is an entity that uses public resources to attract and deploy multiples of private capital investment in commercial clean energy projects,” he says. “Green banks do not support early stage companies or pre-commercial technologies. Instead, we invest in commercially viable projects.”

With two new green banks opening this year, and more than a dozen under consideration, these lenders are well on their way to becoming the next big thing in the energy sector.

In the broadest sense, a green bank is a non-profit lender that focuses, at least in part, on renewable- or energy- efficiency infrastructure. Whether public, private, or a mixture of both, it aims to help build out under-developed markets—and then get out of the way as (fingers crossed!) the renewable and efficiency marketplaces bloom.

“We need a financial system that provides abundant financing to these projects at a rate that enables them to be built and to generate electricity at a reasonably competitive price,” says Kenneth Berlin of the Climate Reality Project. Until this April, Berlin was executive vice president and general counsel for the Coalition for Green Capital, a leading advocacy group that was involved in the establishment of CEFIA. “Green banks allow that to happen.”

A particular graph appears in many of the presentations about green banks that offers an easy way to envision their function. Two mountains sit beside each other along a timeline. The mountain on the left is labeled “public investment,” while the one on the right is called “private investment.” Between them lies a deep valley called “the deployment gap.”

Green banks in several states are trying to keep worthy technologies from getting stuck in the “deployment gap” between public and private investment.

As public investment dollars taper off, all kind of worthy technologies take a tumble and become lodged in the deployment gap. Currently, the gap has stalled such potential game changers as electric vehicles and residential solar PVs. We know these technologies work. They’re just too expensive to compete very well in the marketplace at this point.

“The goal is to bring all these technologies to scale,” says Berlin.

The Poster Child

The new generation of green banks consists of state-level institutions like CEFIA. The larger scale, it’s hoped, will give them greater staying power, attract more investors, and capitalize bigger projects.

In this model, state governments provide seed money. In CEFIAs’ case, that money—$27 million—came from ratepayers via Connecticut’s Clean Energy Fund, and was later supplemented by grants from foundations, nonprofits, and the federal government.

The vast majority of CEFIA’s budget, however, comes from private investors. In the 2013 fiscal year, the bank lent $220 million, or 10 investor dollars for every ratepayer dollar.

“We focused our initial efforts on using limited public resources to attract multiples of private capital investment,” says Bryan Garcia.

CEFIA operates a number of lending programs: one for residential solar; another for homeowners making energy-efficiency improvements; a third for commercial properties doing the same; and finally, a solar lease program. In FY 2013 alone, the bank can boast 1,500 jobs created; 250,000 tons of greenhouse gases conserved; and 27 MW of new generation capacity.

Now, the bank is shifting its focus to the consumer side. “We are providing consumers with easy access to affordable capital from these investments to help them receive cheaper, cleaner, and more reliable sources of energy.”

Paul Michaud, renewable energy attorney with the law firm of Murtha Cullina, credits CEFIA with ending a boom-and-bust cycle of grant funding in Connecticut that had handicapped local businesses.

“CEFIA has helped buttress the renewable energy and energy efficiency components of the local economy. It created a clearinghouse to provide mid- to small-sized solar projects and energy efficiency projects with low-cost financing.”

CEFIA has also bolstered the local fuel cell industry, for which Connecticut is a hub. Its loans helped building the second-largest fuel cell park in the world in Bridgeport.

A local company named FuelCell Energy constructed the 14.9-megawatt facility. CEFIA committed $5.8 million in ratepayer funds to the project, leveraging a lifecycle investment of $125 million from Dominion, which owns the park. Connecticut Light & Power buys the resulting electricity.

Follow the Leader

CEFIA’s success has state leaders calling Bryan Garcia and Kenneth Berlin for advice as they weigh green banks of their own. NY Green Bank began operations in February 2014, and Hawaii’s Green Energy Market Securitization Program will crank up later this year. According to one estimate, these institutions will facilitate a total investment of $1 billion.

These three represent only the first wave of state green banks. Leaders of eight other states are currently considering green banks of their own: Illinois, Massachusetts, Minnesota, New Hampshire, New Jersey, Pennsylvania, Rhode Island, and Washington.

Meanwhile, legislation to create green banks is working its way through the California and Maryland state assemblies. Kentucky has a green bank, but has yet to give it permanent funding.

Berlin cautions that a green bank can take more than one legislative session to establish. “Ultimately, to pass legislation, there’s got to be very strong support from constituencies in the state, and then you’ve got to get the executive and legislative branches to go along,” he says.

Berlin’s Coalition for Green Capital works within states to build support for green-bank legislation. In addition to environmentalists, Berlin and his colleagues find ready allies in clean energy companies, banker associations, agricultural groups, and the construction industry, as well as firms that own and manage buildings—which stand to benefit from the lower costs of green bank loans.

Together, these stakeholders petition legislators to undertake a major reshuffling of a state’s energy programs, an often complex system of rebates, grants, loan write-downs, and subsidies. Some of these programs work very well, leading legislators to question the necessity of change.

Kevin de Leon, a state senator in California, summed up the dilemma in remarks at a February 2014 hearing: “Are the current state bureaucracies in California effective at reducing our greenhouse gas emissions and providing a bustling economy? Should we collapse these programs together and create one giant green bank?”

For de Leon, the answer is a resounding yes. “I believe we have billions of dollars on the sideline waiting, but we have to entice and leverage them with public dollars.”

If CEFIA is any indication, green banks certainly have the potential to attract more outside investment in a time of declining state budgets. But some state regulators are wary of the shift in priorities represented by outside investors.

On the other hand, new priorities might not be so bad if they help funnel state investment into the projects with the strongest chance of success.

Different Banks for Different States

NY Green Bank is projected to have a budget of $1 billion. The state contributed $210 million, including $165 million redirected from other clean-energy programs by the New York State Public Service Commission and nearly $53 million from the Regional Greenhouse Gas Initiative.

Who’s funding the other $790 million? “Most anybody you can think of, we are talking to or planning to talk to,” says Alfred Griffin, president of NY Green Bank. Before joining the bank, Griffin worked in corporate and investment banking for Citibank. He helped develop the Warehouse for Energy Efficiency Loans, which in April began purchasing publicly supported energy efficiency loans with capital provided by Citi and the Pennsylvania Treasury.

According to Griffin, the bank’s first proposal for funding came in a very week the bank formally opened for business. “We don’t have a particular sector that’s our focus,” he explains. “We’re looking to the private sector to tell us how we can help.”

“A rational banker will go to where there’s certainty of demand. One role of NY Green Bank is to make these clean-energy transactions lower-hanging fruit for the private sector.”

The New York bank will tackle everything from credit enhancements to portfolio aggregation. Griffin believes
there’s a lot of progress to be made, for instance, by standardizing contracts for smaller energy projects.
“With Solar City, they use the same contract for every homeowner, and there’s a very standardized way to approach the credit underwriting. So once the banker understands that first contract, they generally don’t have to read the contract again. They don’t have to read a separate set of documents for every $25,000 rooftop system.

“If you think of other sectors, including energy efficiency or distributed generation, you don’t have that sort of standardization yet. An important role for us is to promote standardization wherever practical so that a systematic underwriting methodology can be developed and applied to every similar project that comes in.”

While Griffin expects openness and flexibility to remain hallmarks of the New York bank, he also anticipates its lending priorities will evolve over time.

“We think that the types of transactions we’re involved with will change over time. We will be involved in certain sets of transactions this year that we hope won’t need our involvement in future years because we would have created precedent, standardization, and scale—all things that will help make the clean-energy sector more interesting to private investors.”

Half a world away, Hawaii’s green bank has a narrower focus and a very different funding model.

According to the Energy Information Administration, the cost of power in Hawaii was 37.4 cents a kilowatt hour as of January 2014, by far the highest in the nation. (Notably, the two other early adopters of green banks, New York and Connecticut, have the third and fourth highest energy costs of the 50 states at 19.52 and 18.3 cents, respectively).

“Right now, most of the power that’s not generated by solar and wind on the islands is brought in oil tankers and burned,” says Cisco DeVries, president and CEO of Renewable Funding, a San Francisco-based company who helps manages the bank on behalf of the state of Hawaii. “That’s not a sustainable option, either economically or environmentally, to meet Hawaii’s clean energy objectives.”

Hawaii’s famously sunny climate is perfect for photovoltaics. Hence its green bank, called the Green Energy Market Securitization Program, or GEMS, will focus on democratizing solar PV.

“The market for solar has been growing very fast in Hawaii, but it has not been growing evenly,” DeVries explains. “Folks with lower incomes, renters, and a whole variety of underserved markets don’t have ready access to a solar system.”

GEMS aims to change that by bringing rooftop solar to state’s entire population. It will begin lending later this year.

In establishing the bank, the state worked closely with two distinct stakeholders—including local contractors and the state’s electric utility—as well as its new counterparts in New York and Connecticut.

The message to Hawaii’s 300 existing solar suppliers and installers: We’re going to bring you more business. “The goal of GEMS is not to displace those already working in the market or other financing options that may exist. We’re feeding into this existing market rather than creating new products that have never been seen before.”

Hawaii’s electric utility, HECO, and the state’s public utility commission worked together to implement an on- bill financing program authorized by the legislature. “Without a willing partner in HECO,” says DeVries, “not only would the state not be able to develop the kind of product it wants, it wouldn’t be able to get the funding to get going.” A $150 million rate-reduction bond will anchor the GEMS program as it solicits potential investors.

Both CEFIA and NY Green Bank openly shared their methods with their Hawaiian colleagues. “One thing we talked to them about their sources for consumer credit analysis,” says DeVries. “That probably saved us a month of phone calls.”

What Green Banks Could Become

Green banks may well become much more than funders of loans. They will give states a fresh way to take on debt. States, depending on their needs, may authorize green banks to issue bonds. And the banks will likely create loan “warehouses,” where small, short-term projects are aggregated in to packages and sold off as securities, thus freeing up cash for the banks to make still more loans.

Moreover, green banks will serve as key conduits for information about clean-energy projects. The engineers, scientists, and environmentalists who have long served as clean-energy experts will have to get used to bankers knowing as much, if not more, as they do about the prospects of state-of-the-art technologies.

Green banks may become make- or-break arbiters for technologies stuck in the deployment gap—for instance, alternative-fuel vehicle infrastructure.

“Vehicle manufacturers have already invested billions to create and sell alternative fuel vehicles, especially electric vehicles,” says Sarah Dougherty, a finance fellow at the Center for Climate and Energy Solutions, a nonpartisan advocacy group.

“Without upfront investment in charging infrastructure, many consumers will remain hesitant to consider buying an EV. And infrastructure providers cannot afford to install the equipment and pay the loan payments or other financing costs when there aren’t many EVs on the road.” It’s a catch-22 situation that can’t be resolved with the kind of cheaper capital available via green banks.

For these reasons and more, some politicians have argued that we need a national green bank, and U.S. Representative Chris Van Hollen of Maryland has announced plans to introduce legislation to that effect later this year. But given the gridlock in Congress, the prospect of its passing seems remote.

That means that for the foreseeable future, state green banks will dominate clean-energy finance.

Market Barriers Remain

State green banks could dominate clean-energy finance—assuming a number of things go right.

First, will green bankers do the legwork necessary to understand rapidly progressing clean-energy technology? “One of the reasons why the private market isn’t doing much with clean energy now is that it doesn’t understand the technology and its potential,” says Douglass Sims, director of energy finance for the National Resources Defense Council, which supports green banks.

Green banks won’t come close to achieving their potential if the bankers make loans based on incomplete or inaccurate assessments of the technology.

Second, is there adequate information available on which clean-energy projects make good long-term investments? Not necessarily, according to Kenneth Berlin. “It depends of which technology you’re dealing with,” he says. “On solar, there are many, many thousands of loans out there that people can analyze. If you’re doing a fuel-cell project or an electric vehicle infrastructure, there’s not as much. We’re gathering the information and trying to make the early loans safe.”

Third, will green banks merit funding in cash-strapped states? Illinois, for instance, wants to start a green bank at the same time it’s mired in a debt of between $1.9 and $3 billion.

Fourth, will investors be as interested in green banks as everyone assumes? New York and Connecticut are banking hubs. Will bankers show equal interest if a green bank opens in, say, Arkansas?

There are other barriers, too, such as the cost of clean energy versus fossil fuels.

Assuming these barriers can be overcome, green banks will be major player in clean energy for decades. The constantly shifting face of technology ensures that there will always be new types of projects to fund.

In the words of Alfred Griffin of NY Green Bank, “We’ll constantly look for other areas facing financial barriers and work on those.”