Green Bank Techniques
Green Banks can attract more private capital at affordable rates through credit enhancements. Financing structures, such as loan loss reserves or loan guarantees, help de-risk investments for private investors, enabling more capital to flow to clean energy projects. If a private investor is hesitant to enter a new market, or is only willing to offer unnecessarily high interest rates, a credit enhancement can provide security to a lender and improve deal economics for the borrower. And because these tools are only used to support mature, low-risk technologies, the credit enhancements allow investors to become familiar with viable markets while minimizing public sector expenditure.
Green Banks can directly invest in a clean energy project—through senior debt, subordinated debt, or other mechanisms—in partnership with private investors. If a project is only able to secure financing for a portion of the costs, Green Banks can provide the gap financing needed to close a deal. Green Banks can form many kinds of investment structures to fill the needs of a given project or fund, with varying levels of public-to-private leverage.
In the event no private lender is willing to make loans to a certain market it may be suitable for a Green Bank to originate and finance and its own clean energy projects. This situation may arise if a given clean energy technology itself is perceived as too risky or new, if the market segment is viewed as having more credit risk, or if the investments themselves are not cost-effective to underwrite. This final challenge is a significant barrier to private investment in small and geographically dispersed projects like residential or small business energy efficiency projects. By their nature, the projects are relatively low-cost and may differ in terms of credit, technology and location. This makes the projects relatively expensive to underwrite for a bank. However, if a pool of these kinds of loans were bundled together to diversify risk and achieve scale, the projects then become far more attractive to lenders. A Green Bank can accomplish this by underwriting loans directly and warehousing them until scale is reached. The Green Bank can later sell the loans to private investors through securitization or private placement, replacing public dollars with private capital.
Property Assessed Clean Energy (PACE) Financing
PACE Financing is a structure through which a building owner repays an energy upgrade loan through property taxes via a new lien on the building. PACE liens typically sit senior to all other non-tax liens on a building, including the mortgage, and significantly reduce repayment risk for lenders. In any state that has passed legislation and any municipality that then allows PACE, technically a PACE loan can be made by any lender. The lender would provide a loan to a building owner to implement energy efficiency, for instance, and then the tax-collecting agency would place a new lien on the building equal to the loan repayment. That repayment is collected by the taxing agency and remitted to the lender. Though simple in concept this is difficult to execute and has struggled to attract private lenders in many states. However, Connecticut has found that the Green Bank is an ideal PACE program administrator and lender. A Green Bank could also offer a credit enhancement to get private lenders into the PACE market. Many states that have relied entirely on private lender origination and underwriting have failed to create active PACE markets. Green Banks present a successful solution.
On-bill financing (or on-bill repayment) is a structure through which an energy upgrade loan is repaid through the customer’s utility bill. Similar to PACE, this structure creates greater security for the lender because utility bills have historically had a very high rate of repayment. On-bill financing has additional benefits too, because it addresses the split incentive between building owners and tenants. By attaching a loan to a utility meter, rather than the customer, a tenant can reap the benefits of efficiency, repay only the portion of the loan that is due while still a tenant, and then hand the remaining payments to the next tenant who continues to benefit from the efficiency. This model has the power to open up many new markets for efficiency financing. Like PACE, a Green Bank could act as a program administrator and/or lender for on-bill programs. (Note: On-bill financing typically refers to programs where the utility itself uses its own capital to issue the loans. On-bill repayment refers to the programs that allow non-utility lenders to issue loans, where the utility merely acts as a collection platform.)
A critical barrier to customer adoption of clean energy solutions is lack of clear information on the value, the process and the options for purchase. There is no central point to find this kind of information, learn about and compare providers, and gather info needed to make a confident purchase decision. Green Banks can gather and publish this information, serving as a single repository for all resources relevant to a clean energy market.
The cost of capital in clean energy markets can be reduced by creating more standardized lending documents and processes. Larger capital markets, like those for homes and cars, have broadly standardized their underwriting process and contract language, thus reducing cost and uncertainty in the lending process. Green Banks can help initiate and develop industry standards to reduce these costs.
Many governments now offer multiple programs to support clean energy deployment. This includes subsidies, rebates, loans technical assistance, REC procurement and others. Yet this support and information is often scattered across multiple agencies and utilities, making it difficult for consumers to understand their options use all tools that are available. It also creates a complex process that may inhibit demand. A Green Bank can help coordinate the use of these resources by serving as a single point of contact for consumers seeking multiple forms of support.
Turn-key Product Design
Generating significant demand for clean energy solutions requires easy adoption and procurement. Evidence shows that demand dwindles as consumers are asked to navigate complex program processes, reach out to multiple providers, and find financing solutions. Green Banks can address this by working with industry partners and government to deliver turn-key solutions to consumers. For example, a Green Bank can facilitate whole-home upgrades by coordinating with multiple contractors, performing cross-technology energy analysis and review, and offering a single integrated financing solution. This places no burden on the customer other than signing on the dotted line.