The “Why?” Behind State Green Banks – Reed Hundt, CEO

 At CGC we often get asked about the benefits of Green Banks to states. Most people understand the need to increase investment in clean energy infrastructure, but what is it about the Green Bank model that is helpful for this goal? Why implement a Green Bank to address clean energy challenges locally?

We’ve outlined a few of our responses here:
A) New institutions to focus on implementing new energy goals. – States are extremely important to the structure, conduct and performance of the energy sector – in many ways more than the federal government – and state Green Banks are institutions that focus state efforts to fulfill their energy plans. Whether these plans are meant to comply with the CPP or state clean energy goals that are even more challenging to meet, it is very useful for states to create these focused institutions.
B) State Green Banks, unlike any other institution at the federal or state level, typically have three specific goals, each of which are critical to moving the country to a clean energy platform quickly enough to abate climate change before undesirable results become inevitable:
a)     Leverage private capital into rapid expansion of clean energy markets. – Green Banks provide public capital, which is critical to getting clean energy generation, distribution and efficient consumption, as well as clean driven transportation, to occur at scale. Why? Because public capital typically reduces the risk/reward calculation for private capital to a point where private capital is willing to invest in these markets. The result is that public-private investment grows substantially in volume and the private capital provides 80% to 90% of the total investment.
b)     Create the markets – Green Banks convene developers, private sector investors, and regulators so as to have holistic solutions be deployed at scale.
c)      Help states use their limited resources more efficiently; taxpayer protection – Green Banks permit states to reduce or refocus rebate programs where possible, and instead to assure that capital is returned over time, with reasonable returns.
C) Consumer protection – State Green Banks protect consumers, especially in low to middle income quintiles. Many approaches to the energy sector assume consumers should bear all the costs of moving from the carbon to the clean platform. That is politically impossible and ethically unfair. State Green Banks unlike any other institution have the mission of making sure that everyone has the opportunity to pay less or the same for their energy needs.
Green Banks dispel three myths.
1) Myth one: there is plenty of capital. There in fact are few sources of capital that is patient enough to tolerate low risk and low return projects, but that is what carbon energy comprises and what clean energy solutions also must be in order to compete effectively with carbon energy solutions. Of course if the returns are really high then there’s always plenty of capital, but returns in energy markets cannot be really high because existing electricity and transportation fuel pricing is very low. The problem is that if you want consumers in a market to choose clean energy solutions then the price has to be the same or lower. Trust markets to make the switch to clean come quickly. For price to be effective as a change agent, lower cost capital needs to enter the energy sector.
2) Myth two: regulation is sufficient to move the economy to clean energy. The carbon tax, the Clean Power Plan, cap and trade, building codes, and many other forms of regulation are important and desirable, but they are means to ends, not perfect solutions. It’s unrealistic to imagine a regulatory system that imposes such high costs on carbon energy that the move to clean energy occurs quickly – the core idea would be to punish the economy in order to save the environment, and that idea has a long history of failing to attract support save in some theoretical circles. Besides, litigation, legislative changes, unpredictable prices, innovation, competition and numerous other factors all stymie the ability of regulators to predict the future, much less shape it, with perfection, and the world does not have enough time to tolerate anything other than success in a hurry. To achieve the necessarily rapid and massive switch from carbon to clean, we must use market forces, especially price. Regulation alone is never sufficient for massive change in market structure, conduct and performance.
3) Myth three: private capital always makes the right capital allocation decisions. This premise might have been thought to have been undercut by the collapse of the financial markets in September-October 2008. However, even for those who continue to assert the primacy of private sector capital allocation decisions, there are two major obstacles to efficient allocation of capital in energy markets: monopoly and network effects. The utility distribution grid is either a natural monopoly or close to it. It is intensely regulated for that reason. The combination of monopoly and regulation blocks the free flow of capital. Agency capture is a common problem that favors incumbents or at least militates against competition. And as to network effects, they come in at least three kinds. First, delivering electricity from a grid, or on a distributed basis, or delivering efficiency measures are all much cheaper for a firm that serves everyone in a community as opposed to merely some because the incremental cost of adding a new user is reduced to materials but the upfront cost is huge. Second, for electricity to flow its voltage must be balanced across a grid. And the bigger the grid, the cheaper is the cost to achieve that balance. Third, because demand shifts quickly over time and geographical location, anyone with a big grid has a nearly insurmountable advantage over any other distribution mechanism. (Very similar effects are found in all networks that deliver anything, from FedEx to cable TV.) Monopoly and physics block the creation of a truly efficient capital allocation system.

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