Why and How: Green Banks

Why Should Green Banks Loan Money?

The bottom line is that green banks offer capital below market cost. As the cost of renewable energy technologies continues to fall, soft costs associated with clean energy deployment (access to startup capital) continue to impede growth in this sector. Here are some specific reasons why green banks should loan money:

1. Low cost loans purposely serve as a subsidy intended to replace—or at least complement—cash  grants and tax policies. The reason for the subsidy is to lower the delivered price of renewables so as to increase the generation market share of renewables and in turn to reduce dependence on greenhouse gas emitting generation (i.e. coal and natural gas).

2. Loans have the added advantage of creating over time a revolving fund that slowly but steadily increases in size.

3. Low cost loans can be maintained at a constant rate so that as the private debt market oscillates (and the data show huge oscillations year to year depending on Fed and GDP conditions) the clean energy market can steadily grow. Growth in this sector is critical because the world cannot afford for climate reasons to slow, much less halt, the progress in substituting non-emissions generation for emissions-heavy generation.

4. Low cost loans permit the lender to create patterns of lending and borrowing to specific types of projects now unfamiliar to commercial lenders, such as residential rooftop solar, fuel cells, fuel oil/gas switching, and community solar. These patterns can be used by commercial lenders, and as they enter these markets with increased familiarity of techniques and likely default rates they can lower the cost of capital for developers and owners.

5. Loans, as opposed to grants or tax policies, permit lenders to maintain more legal authority over projects. Lenders have the ability to gain information and step in through normal commercial means in order to further performance in the event of accident or bad acts by developers.

6. A loan by a nonprofit state green bank offers rates below traditional commercial rates because they do not need to return a profit and are not chartered to permit lending to other, more profitable activities.

7. Green bank lending is intended to permit returns to be allocated to companion private sector investors in a greater proportion than to its debt. Therefore, green banks can attract private sector investors to clean energy projects that they might not otherwise invest in. The involvement of private sector actors leverages green bank money and also brings into this field the skill sets of private lenders.

How Should We Think About Discount Rates?

The purpose of any discount rate is to determine the present value of some stream of spending or receiving money over the future. The riskier the prospect of receiving, the higher the discount rate. A green bank logically should have a discount rate as to its prospects of repayment that is lower than a private lender for the following reasons:

1.  Green banks may have more data about performance of clean energy projects than currently is possessed by private lenders not in these markets.

2.  Green banks may have more diversified portfolios than private lenders, so risk assessment is lower than that of a commercial lender.

3.  With low interest rates, green banks may have less risk in obtaining payback than a commercial lender at a higher rate. (A project is more likely to generate enough money to pay back a green bank lender with low rates than it is to generate funds sufficient to pay back lenders with high rates.)

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