Green Banks: Rapidly Growing Clean Energy Markets

By Jeffrey Schub, Executive Director, Coalition for Green Capital

A recent report by the Center for American Progress show the transition to the U.S. clean power platform requires $200 billion of investment per year for the next 20 years. There are two challenges to meeting this need. On the supply side, there are huge markets gaps where capital is unavailable. And on the demand side, consumers have not been marketed to and enticed with attractive, clear clean energy offers.

Green banks offer a solution. A number of states, including Hawaii, Connecticut, New York, and New Jersey, have created green banks, and momentum is building rapidly. Green banks are state-chartered financing authorities that use limited public resources to leverage greater private investment in clean energy. Their goal is to grow clean energy markets as quickly as possible while saving money for consumers and preserving tax-payer dollars.

Clean energy markets, particularly for energy efficiency, are far from perfect. Banks say plenty of capital is available, developers say good projects cannot get financed, and consumers rarely understand their clean energy choices. To make markets grow, supply and demand must meet. All sectors of the market need reasonably-priced capital and driving consumer demand requires new behaviors and market structures. This is where green banks come in.

Green banks address capital challenges by “crowding-in” investment for homes and businesses that are otherwise shut-out of the market. $200 billion per year cannot be borne by taxpayers alone, but there is not enough private investment available. Green banks fill financing gaps and draw in investment by taking the first dollar of risk. For instance, a green bank loan loss reserve paired with a commercial loan allows homeowners to make an efficiency installation with no upfront cost and pay it back over 12 years. The homeowner gets a loan not otherwise available, saving money on day one, and the bank has a new market opportunity.

Green banks also plays a critical role in bringing clean energy investments to scale. Small disaggregated projects are notoriously hard to finance, especially for energy efficiency. It is too expensive for institutional investors to underwrite such small loans. Green banks warehouse smaller loans and securitize or sell the loans once the warehouse is adequately large.

And the greatest barriers to demand are torn down with green banks. Consumers can adopt energy efficiency with no upfront cost and begin saving money on day one. Green banks can use tools like property assessed clean energy (PACE) or on-bill repayment to ease consumer payback. And green banks can proactively reach out to customers, directly or through partners. Modern techniques can be applied, using data to give customers a tailored marketing offering that shows potential savings. Green banks can make the consumer process turn-key and reduce complexity by coordinating multiple aspects of the transaction.

Green banks need not replace existing programs. Rather, green banks enable faster consumer adoption and cover costs otherwise left to customers. For instance, energy efficiency grants are used to entice consumers to retrofit their homes. But if a home retrofit costs upwards of $10,000 or includes a range of technologies, grants still leave significant cost the customer must cover. A green bank can finance that gap so customers pay nothing out-of-pocket. And because public dollars are used for loans and not grants, there is no net cost to taxpayers.

The Connecticut Green Bank (CGB), formed in 2011, proves green banks work. In three years the CGB has facilitated $350 million in clean energy investments – the same amount the prior grant-making entity did in eleven years. New York created its own $1 billion green bank in 2013, and has already announced $800 million of clean energy investments – $600 million of which is from private investors. Hawaii, California and New Jersey have created similar clean energy finance initiatives. All leverage private dollars to increase investment in clean, reliable energy. Minnesota, Vermont, Maryland, Rhode Island, Nevada and others are also exploring their own finance initiatives.

Green banks are a proven solution for states to grow clean energy markets while saving money for consumers, creating jobs and leaving taxpayers unharmed. This is appealing in any context, but especially with new EPA regulations that many states falsely claim will bring economic ruin. With green banks consumers can adopt energy that is both cleaner and cheaper. Any state can create a green bank, building a bridge to a booming clean energy marketplace.

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