The Connecticut Green Bank (CGB) recently closed on its biggest solar project financed to date—a 995 kW rooftop solar array was installed at Lesro Industries, a local manufacturer. This deal exemplifies the value of the Green Bank model.
The CGB sits at the center of the clean energy finance market in Connecticut, and is tremendously flexible in how it operates. In the Lesro deal, the CGB and its private partners deployed capital to finance the solar project, and the CGB became the “third-party owner” of the project. This allowed Lesro to avoid paying any upfront cost for the solar panels, and save money every month by paying for the clean, cheaper-than-grid solar electricity produced by CGB-owned panels on its roof.
The CGB also administers Connecticut’s successful Property Assessed Clean Energy (PACE) program. This program allowed the CGB to secure the stream of money-saving electricity payments with a PACE lien on the property. The PACE structure provides greater security for investors—this is crucial for increasing the flow of private capital into PACE deals.
Finally, the CGB agrees to buy all the Renewable Energy Credits (RECs) generated by the solar project, allowing Lesro to capture their monetary value and recognize savings immediately. This is also helpful for the utilities in the state—the CGB sells a steady stream of RECs at predictable prices to utility buyers.
By playing these roles of REC aggregator, third-party owner, and PACE financer and administrator in the Lesro deal and many deals all across the state, the CGB drives more clean energy deals in Connecticut and hastens the development of a mature clean energy market in the state.
As CGB gets more deals done, market participants (such as commercial lenders, contractors, appraisers, property-owners, etc.) get more experience with financing clean energy projects, investors’ perception of risk decreases as ability and willingness to underwrite more similar deals increases. As a result, clean energy project capital for property owners will be more accessible and cheaper.
Connecticut has proven the value of the Green Bank model many times over, and we look forward to seeing more Green Banks in more states enjoying similar success!
At the historic Paris climate summit in 2015, governments raised their level of climate ambition and agreed to hold global average temperature increases to well below 2°C above pre-industrial levels and to pursue efforts to limit temperature rise to 1.5°C. To achieve this goal, immediate, deep cuts in global carbon emissions are required. Shifting to a low carbon growth pathway calls for massive investment in renewable energy and energy efficiency. Investments in clean energy have rapidly increased in the last five years and reached a record level of $286 Billion in 2015. (UNEP, BNEF, Frankfurt-UNEP School; Global Trends in Renewable Energy Investments, 2016.) Despite the accelerated growth, the total amount invested is still insufficient to meet the world’s climate goals.
A new report by the International Renewable Energy Agency (IRENA) puts the investment need in stark terms. Closing the finance gap by 2050 requires doubling current investment in renewables to $500 billion US dollars per year up to 2020, and then increasing annual investment to $900 billion through 2030. IRENA notes that public funding alone will simply not be enough to close this investment gap, and the Paris agreements highlighted the role that non-state actors must play in the low carbon transition. Private financiers—including institutional investors, pension funds, insurance companies, endowments and sovereign wealth funds—will play an increasingly central role in scaling up renewable energy and energy efficiency investments. Mainstreaming private investment in clean energy infrastructure will be critical to achieving the world’s climate goals.
Green Banks, such as the UK Green Investment Bank featured in the new IRENA report, are well suited to help mainstream climate finance. Green Banks work hand-in-hand with the private sector to mitigate risk—both real and perceived—in clean energy projects. Using tools like credit enhancements, project aggregation and standardization, Green Banks use public dollars to “crowd in” private sector investments, by improving lending terms and increasing project bankability. Green Banks also help connect developers with low-cost capital for clean energy projects.
IRENA conducted a survey of risk mitigation tools and found that use of risk mitigants in many public finance institutions is limited—surveyed institutions on average dedicated 4% of risk mitigation funds to renewables, and several institutions had never implemented a risk mitigation tool for a clean energy project. Of course, many of these institutions do most of their investment outside of the clean energy sector, but this still demonstrates a clear opportunity for growing the use of these risk mitigation tools to increase private investment in clean energy.
Green Banks and other public finance institutions play a key role in mitigating project risk and creating track records for new energy technologies. Green Banks are also an efficient use of public dollars as risk mitigants (like loan loss reserves and subordinated debt) are repaid and then “recycled” back into Green Banks to finance new rounds of projects.
The IRENA report highlights the role of risk mitigation as an important step to mainstreaming climate investment, and demonstrates the clear benefits of Green Bank and other structured financing models to help achieve the world’s climate goals. Governments and public finance institutions can also structure and design on-lending and co-lending options which improve access to finance and build local lending capacity. Green Banks are a special category of financial institutions well-positioned to catalyse the transition towards a low-carbon, climate resilient development pathway. Innovative Green Bank finance instruments address common barriers of entry into the clean energy market and help mitigate risk inherent in low-carbon, climate resilient projects.
To lower barriers to market entry and offer private investors improved access to capital, Green Bank financial products are designed to optimize the capital debt structure through mechanisms such as on-lending, loan syndication, subordinated debt, convertible grants and convertible loans. As quasi-public entities, Green Banks also offer various guarantees and risk instruments which reduce or reallocate investment risk. A suite of risk mitigation instruments offered by Green Banks are useful in addressing currency, liquidity, political, policy, regulatory, credit and technology risk.
Guarantees are the most prominent financial mitigation tools and they offer an efficient way of leveraging private sector investment using limited public capital. Guarantees also have an enormous potential to bolster private investment in clean energy. It is estimated that increased use of guarantees could result in an additional USD 100-165 billion in private sector investment in Low-carbon, climate resilient infrastructure over the next 15 years (Bielenberg et al., 2016, referenced in IEA report). The most common forms of guarantees offered by Green Banks and Development Finance Institutions include Government-backed Loan Guarantees, Partial Risk guarantees and Export credit guarantees. Structured finance mechanisms aim to scale up investment by making renewable energy investments available through mainstream investment channels. Structured finance mechanisms address barriers associated with renewable energy transactions, including high due diligence costs and the small and discrete nature of some renewable energy and energy efficiency projects.
Credit enhancements, standardised contracts, loan-loss reserves and project aggregation are just a few of the standardized finance mechanisms Green Banks have incorporated into their deal structures to attract private sector lending.
While the scale of the climate burden calls for a raft of strategies to combat climate change, Green Investment Banks are a promising first step on the path towards a low-carbon, climate resilient trajectory.
 IRENA Survey of: ADB, AfDB, Africa Trade Insurance Agency, Development Bank of Southern Africa, UK Export Credits Guarantee Department, Export Development Canada, EBRD, GuarantCo, International Bank for Reconstruction and Development, Islamic Corporation for the Insurance of Investments and Export Credit, IDA, IFC, Korea EximBank, MIGA, OPIC and Swiss Export Risk Insurance.
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:
- 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.
- Create the markets – Green Banks convene developers, private sector investors, and regulators so as to have holistic solutions be deployed at scale.
- 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.
“Renovate America, the leading provider of residential Property Assessed Clean Energy (PACE) financing in the U.S., and the Missouri Clean Energy District (MCED) today announced a recruitment effort to register local contractors to offer new kinds of financing for Missouri homeowners to make energy-efficient and renewable energy improvements. HERO, Missouri’s new residential PACE program, will give local contractors an important new tool for growing their businesses and reaching more customers with energy-saving technologies.” Bank of China Jumbo Green Bond Shows Growing Asian Presence“Bank of China’s $3 billion multi-currency green bond underlines Asia’s rapidly growing share of global green funding as countries such as China and India, among the world’s biggest polluters, finance their environmental targets.” Obama Injects Climate Into General Election Campaign“President Barack Obama went hard on climate change and energy in a campaign speech on behalf of Hillary Clinton in North Carolina, a sign the issue could be a major theme of the upcoming general election campaign. While Hillary Clinton and Sen. Bernie Sanders dueled over climate and energy policy in the primary, the subject was virtually absent from the Republican primary debate. Obama seems to believe that a strong climate message can win even in a state that has only voted for a Democrat for president twice in 40 years: Once for Jimmy Carter, and once for him.” Senator Heinrich to Introduce Energy Storage Tax Credit Bill Next Week“Sen. Martin Heinrich (D-NM) will introduce an investment tax credit for energy storage the week of July 11, based on the existing credit for solar energy. The legislation would give businesses and homes a 30 percent credit, but the credit would taper off starting in 2020. Rep. Mike Honda (D-CA) introduced similar legislation on the House side in May.”
The NY Green Bank recently submitted its 2016 Business Plan which showcased a strong year of performance and plan for the future.
Taken together, NY Green Bank’s closed transactions are estimated to have increased renewable energy capacity by 128MW and saved up to 1 million MWh of electricity from efficiency measures. NY Green Bank’s current portfolio of projects is expected to reduce greenhouse gas emissions by up to 2.9 million metric tons—equivalent to removing more than 37,000 cars from the road for 17 years. The Green Bank has approximately $500 million in its active pipeline, with an additional $121 million in closed deals. As we reported last week, NY Green Bank recently closed a $25 million financing deal with solar provider Sunrun.
Looking forward, the Plan lays out three objectives for the next year:
- Put ratepayer money to work, prudently: Commit $200 million to NY Green Bank investments over the next year, equating to an average of $50 million in closed transactions per quarter.
- Mobilize private capital: Achieve an average, portfolio-wide mobilization ratio of at least 3:1, driving towards a ratio of 8:1 across all NY Green Bank investments by 2025.
- Drive toward self-sustainability: Continue to grow revenues and manage costs to reach self-sufficiency in 2018.
On the drive towards self-sufficiency, NY Green Bank provided data that put it squarely on this trajectory. In the past year, the Green Bank’s revenues more than doubled while expenses grew only 40%. A significant benefit of all Green Banks is that their funding is preserved and repaid over time. This means lower costs for taxpayers, and efficient use of government funds.
That being said, Green Banks should be viewed as a complement to, not a replacement for, other public energy programs. In its Plan, NY Green Bank says it will continue to “take leadership roles in establishing financing approaches and solutions” for other energy programs and objectives in New York State. NY Green Bank gives examples of potential partnership opportunities with NY Prize microgrid program, the State’s community solar initiatives, and businesses providing services to low- and moderate-income customers. This approach fits with the role that Green Banks play in geographies around the country: not only developing new projects and driving scale, but also performing market development and customer engagement activities that remove barriers to existing programs across the state. For example, The Connecticut Green Bank conducted outreach to customers and contractors to help build demand for residential retrofits in the State’s Smart-E program, connecting consumers with both financing and available rebates.
Congratulations to the NY Green Bank team on an impressive year—we’re looking forward to seeing what’s next for New York and Green Banks around the country!
“NY Green Bank today announced the closing of a $25 million loan for Sunrun Inc., which will accelerate construction of more than 5,000 solar projects at homes across New York State. This loan complements a separate $25 million NY Green Bank transaction with Sunrun, announced by Governor Andrew M. Cuomo last month, which provides longer-term financing following completion of the projects.”
“Dividend is a solar financing firm offering residential loans that include performance guarantees and warranty management. Figtree provides property-assessed clean energy (PACE) financing for energy-efficiency improvements, including solar power and water conservation upgrades. PACE financing allows home or business owners to access long-term financing that is repaid through their property taxes. The merger represents the first-ever combination of a residential solar lender and PACE financing provider.”
“President Barack Obama, Canadian Prime Minister Justin Trudeau and Mexico President Enrique Pena Nieto completed a one-day summit in Ottawa Wednesday, where they unveiled a commitment to see half of the continent’s electricity generated by clean sources by 2025.”
Earlier this week, Hillary Clinton unveiled her technology and innovation plan. She plans to use funds leveraged by her infrastructure bank to “create a competitive grant program to give cities, regions, and states incentives to create a ‘model digital community.” This continues Clinton’s campaign theme of sparking innovation through private-public investment platforms like the national infrastructure bank.
“Exxon MobileCorp. is ramping up its lobbying of other energy companies to support a carbon tax, marking a shift in the oil giant’s approach to climate change as the industry faces growing pressure to address the politically charged issue.”
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