By Peter Behr
Aug. 31, 2020
A very unusual bond offering hit the market last month: $16.8 million in $1,000 chunks offered first to ordinary investors, a strategy that reached back to the public war bonds that helped the U.S. bankroll World War II.
They are called Green Liberty Bonds, issued by a state-backed nonprofit called the Connecticut Green Bank to add capital to the bank’s campaign to fund rooftop solar panels on the state’s homes and business.
The bonds were snapped up, even with the state shut down by the COVID-19 pandemic that forced the bank to market them with online webinars. Nearly $10 million worth were purchased by individual investors, with the proceeds going to help fund the bank’s programs.
The bond sale is an innovation from the Connecticut Green Bank, which is pioneering an unconventional strategy for using state policy to accelerate investments in clean energy at the community level, said bank President Bryan Garcia. The bank’s complex program structure includes solar installations, home energy investments and renewing hydroelectric dams on state rivers.
With state budgets hit hard by the pandemic, the transition is essential, Garcia said in an interview. “Government isn’t going to solve this problem, so we have to enable more private investment to come in to finance clean energy so we can scale it up and get it deployed,” he added.
Instead of tapping the federal budget for support, as the Obama administration did a decade ago with its clean energy stimulus grants and loan guarantees, the Connecticut strategy is to entice commercial bank lending to accelerate clean energy investments. The private loans are coupled with federal solar tax credits where they can be used, an assessment on Connecticut ratepayers that comes to under $10 a year, and state greenhouse gas reduction credits.
“The prior model was just giving the money away,” Garcia said. A dozen other states and the District of Columbia have followed Connecticut’s lead with a green bank or similar strategy. Green lending is part of Democratic presidential nominee Joe Biden’s energy platform and the climate platforms of House and Senate Democratic leadership (Climatewire, Aug. 26).
Last month, the House authorized creation of a federal green bank to be funded with an initial $20 billion stake. Two dozen state governors acting through the U.S. Climate Alliance wrote congressional leaders calling for enactment of a similar measure in the Senate.
“The momentum for a national climate bank is stronger than it’s ever been in more than a half-dozen years” of pressing the strategy with Congress, said Jeffrey Schub, executive director of the Coalition for Green Capital.
The program poses a contrarian question for Biden and progressives on his side: Does green energy need an infusion of green capitalism to hit its far-reaching climate and job growth targets?
And it may offer a counterpoint to accusations that Biden and his party would turn clean energy programs into socialism, said Reed Hundt, a director of the bank and former Clinton administration official who is considered a father of the green bank strategy. “The green bank is designed to accelerate market trends, not fight them,” Hundt said.
More support for solar
Between the Connecticut bank’s formation in 2014 and mid-2019, it has spent $260 million on its agenda while raising $1.42 billion from banks and other private investors, according to its most recent audited financial statement. It has funded solar panels and other projects for more than 40,000 homes and 375 businesses in the state, generating $87 million in state taxes. The clean energy projects will reduce carbon emissions equal to the reductions from removing 1.1 million vehicles from the road, the bank said.
The added solar power is still a fraction of the state’s power generation, which totals 10,464 megawatts, according to the U.S. Energy Information Administration. But according to solar developer James Moore, it has opened an important door for residential solar development.
“What the Green Bank has done has shown leadership in ways to make more projects work financially for Connecticut business and homeowners, that leverages private financing as well,” said Moore, co-president of SunCommon in Waterbury, Vt. His company’s solar unit installations in Vermont and New York’s Hudson Valley approach 100 MW.
Soon after Connecticut’s green bank opened, Garcia met with members of the state’s banking association, who were not happy with the new competition.
“They said, ‘The last thing we want is another state bank standing in front of our business,’ and I was like, ‘Whoa. Well, my goal is to enable more of your private capital investment to solve the problems that the state is trying to address, which is climate and clean energy,'” Garcia said.
Over the past decade, banks and credit unions have become a lot more comfortable with solar lending, which is winning a place alongside car, mortgage and home improvement loans, Moore said.
The steep decline in the costs of solar power to customers, compared with utility electricity rates, created a built-in dividend that property owners can tap either by buying or leasing solar units, Garcia said.
The bank’s C-PACE solar program looks to private banks to fund an approved solar installation. The costs are spread over a 15-20-year term, like a mortgage, but are added to the owner’s property tax bill. The payments go to the bank, which reimburses the private lender.
Garcia said that for a typical customer, solar installation in the state now delivers power at 12 to 13 cents per kilowatt-hour, 6 cents better than the utility’s bill.
“The solar contracts deliver a predictable value over a long period of time,” Moore said, with the rooftop electricity offsetting a large part of the monthly electricity bill. Customers “know they will be able to offset a large portion of their electric bill for decades to come.”
“The banks see they can get positive cash flow from day one,” he added.
In moving to a climate bank strategy, Connecticut officials are accepting the opposite sides of the lending equation. They have gained the leverage of a fivefold increase in clean energy investments thanks to the impact of borrowed capital, but have exposed the state and its citizens to the risks of customer delinquency and default. A collision between leverage and risk played out disastrously in the 2008 mortgage banking collapse.
“To engage private investors into this market, somebody had to take the risk,” Garcia said. If a solar customer can’t keep up loan repayment, the private investors are paid first, the Green Bank last. “If the household stops paying the bill, who is left holding the bag? The Connecticut Green Bank,” he said. “We are first at risk for non-repayment.”
He cited the bank’s capital, $211 million for the fiscal year ending June 2019, as the foundation of its strength. “We fully believe people will pay us back,” he said.
But it was clear the pandemic’s huge impact on the economy created a new, unimagined test. The business shutdown in Connecticut reduced electricity rates. The state’s unemployment rate soared from 3.8% in February to 10.2% in July.
Before this year, the default rate on the bank’s projects averaged 1% or less, its audit reported.
“When COVID hit, every financial institution took a look at, what are the risks of non-repayment?” Garcia said. Bank policymakers came up with a plan that gave solar customers an option to defer payments due this year, adding a year to the end of the lease period, he said. “We want to help customers manage through this challenging time,” the bank president said.
Connecticut Green Bank reported that 10 property owners in the main solar unit program, representing $11.8 million in installations or 16% of the total loan program, inquired about the deferral program. Seven ultimately received six-month extensions in payments.
“So far very few [customers] have come to us and said they needed to restructure their payment this year because they were struggling,” Garcia said. “Knock on wood.”
“Worrying about [defaults] is like worrying about fraud in mailed-in ballots,” said Hundt. “It’s fantasy.”
One of the distinguishing features of the National Climate Bank Act is that it funds an independent, nonpartisan non-profit to operate as the country’s national green bank. It does not create a new agency or government owned-corporation. This is a very intentional and critical design element, and last week the Australian government shows us why.
In a new “Orwellian” proposal, the Australian Energy Minister introduced legislation that will provide its national green bank with AUD 1 billion in new capital to finance an expanded list of eligible technologies that now includes natural gas and coal-fired generation.
The green bank, the Clean Energy Finance Corporation (CEFC), has driven nearly $20B into renewable, efficiency, transmission, and sustainable agriculture projects, among many other innovative solutions. It is the world’s largest and most successful national green bank, proving out the model, expanding clean energy markets, lowering GHG emissions, and mobilizing private investment.
Unfortunately, the CEFC was established as a government-owned corporation, with the national government in control of its charter and investment mandate. The result has meant that since the day it was created, it has been fighting for its continued existence and climate-focused mission.
As politics and control of government has changed in Australia, so too have attitudes towards the CEFC. Opponents have tried to shut it down, change its mission, sell it and increase its required rate of return so as to shrink the market for viable investments. The fact that the organization has persisted and continued to invest effectively is a testament to the CEFC’s leadership and professional staff.
But it’s also a huge warning sign to those in the U.S. hoping to implement lasting climate finance policies. A government-owned corporation or agency within government can easily be dismantled, shut down or countermanded as politics change. Look at the DOE Loan Programs Office, for example. This kind of political interference is particularly harmful to any finance-based policy solution like a green bank, where long-term stability and reliability is essential for partnership from market actors.
This is precisely why the National Climate Bank must be an independent nonpartisan non-profit. If we want it to survive the inevitable political change that comes and goes over the next decade, any financing solution placed within the federal government itself just won’t cut it.
FOR IMMEDIATE RELEASE
Aug. 25, 2020
Senate Climate Committee Backs New National Climate Bank Nonprofit
Mirrors House Climate Crisis Committee Action Plan Rec
New initiative would create 5M jobs, with requirement to prioritize investment in frontline and communities of color
WASHINGTON —The Senate Democrats’ Special Committee on the Climate Crisis has included a National Climate Bank nonprofit in its blueprint on how to solve the climate crisis while putting millions back to work. In its report, the committee wrote, “Green banks and climate banks have proven to be effective tools for leveraging clean energy investment, and Congress should act to further expand such tools.”
Earlier this summer, the House Select Committee on the Climate Crisis included the National Climate Bank nonprofit in its action plan. A day later, the chamber passed its infrastructure bill that provided $20 billion to start the nonprofit.
“Momentum has never been stronger to start a National Climate Bank—nor has the urgency. America needs jobs that build a cleaner and better future now, and this is a proven way to do it,” Coalition for Green Capital Executive Director Jeffrey Schub said. “Now is the time for the Senate to finish the job and take up the House-passed bill that provided $20 billion for the National Climate Bank.”
Nearly 100 organizations have sent a letter to U.S. Senate leaders requesting future economic recovery legislation include such funding. With tens of millions of Americans filing for unemployment due to the COVID-19 pandemic so far and studies showing that up to 42 percent of those jobs will not return, the groups argue that Congress must urgently make long term investments that create jobs and build a cleaner future.
As envisioned in H.R. 5416 and S. 2057, the green bank nonprofit model would pair each public dollar with multiple private ones to build a range of clean energy projects throughout the U.S. This includes renewable power, building efficiency, grid infrastructure like transmission, industrial decarbonization, clean transportation, reforestation and climate-resilient infrastructure. Because the dollars are repaid over time, they can be recycled to make additional investments in the future.
A significant portion of investment must go to low-income, frontline and communities of color. This means benefits and job creation will be prioritized in climate-impacted communities, many of which have also been hard hit by the COVID-19 pandemic.
The most common question about the proposed National Climate Bank is, what the organization will actually do. The concept of leveraging private investment, and delivering job creation and environmental justice benefits can be compelling. But there is nothing more clarifying than the real-world example themselves.
That is why CGC and its partners have been working hard to create a series of detailed “use cases” that illustrate precisely what markets the Climate Bank – or the Clean Energy and Sustainability Accelerator as it was named when it passed the House last month – will invest in. They explain what the barriers are that slow investment and technology adoption, and the exact interventions the Accelerator and its state/local green bank partners will make overcome those barriers and drive investment. The detailed transaction schematics show the flow of money, how the end-users and the clean energy industry benefit, and how new opportunities for private investment are created.
And we are pleased to share here the first of these uses cases, focusing on delivering lower-cost solar power to low-to-moderate income (LMI) households through community solar installations. Community solar is an exciting application of solar PV technology because it enjoys the scale benefits of ground-mounted, grid-tied larger projects while delivering the economic benefits of rooftop solar PV to participating households.
Community solar also presents a solution to the inherent inequity of rooftop solar – one has to own a home in order to put solar panels on the roof. Homeownership rates are decline as income level falls, which means LMI households who rent are left out of the rooftop solar revolution.
However, simply signing up hundreds of LMI households to subscribe a community solar project isn’t so easy. There are a number of barriers that slow investment and ultimately participation of LMI households. These include:
- Community solar projects are complex and expensive to develop and pull together, even more so when the serve LMI households due to high marketing and subscription management cost;
- Capital providers that would normally invest or lend to a community solar project are hesitant to do so if the subscribers (and the repayment source) are LMI households because the lack of repayment data from this set of customers leads to a perception of high repayment risk; and
- If capital is extended to projects, it is likely at a cost that results in a solar price offered to potential subscribers that is actually more expensive than current power prices.
In this first case, two interventions are presented to overcome these barriers. The first, developed by the Maryland-based Climate Access Fund, is the LMI Revenue Guarantee Fund. The Accelerator would provide the seed capital necessary to create the Fund, which would in turn provide a partial guarantee to the private capital providers. This guarantee will stand behind the LMI household subscription payments, ensuring that up to pre-determined limits, private capital providers can be certain they will earn the revenue they expect from the project.
The purpose of this intervention, besides unlocking clean energy and savings for LMI households, is to build up a track record of real data on the true repayment risk so that in the future private capital will flow into these projects more freely and at prices that accurately reflect the risk. There are 50 million LMI households in America, and every one of them deserves cleaner and cheaper energy, whether or not they own their own home. The Accelerator can unlock this investment and market opportunity with this intervention.
The second intervention offered is modelled off the work of NY Green Bank. High upfront development costs are not only a barrier to project completion, but have negative impacts upon project completion. Development capital is expensive, so the more that is used in the more, the higher the resulting price of solar power is going to be in order to generate revenue sufficient to repay the development capital.
But some of the development capital is used to pay costs that are actually very low risk. For example, community solar projects often need to pay a significant upfront interconnection fee to the grid operator or utility to secure the right to sell its power into the grid. This fee is paid well before the project is operating and generating revenue. So the developer must use expensive development capital to pay this fee. However, for a well-structured and planned project, the likelihood of that project ultimately reaching completion and producing revenue is high. So the Accelerator, again working with state/local green bank partners, will extend an interconnection fee bridge loan, which is at a lower cost than the limited development capital. And the bridge loan is repaid upon project completion.
The benefit to this intervention is that the developer can proceed quickly with project development without seeking raise additional capital or tapping into expensive capital on hand. And the project costs overall are lower because the bridge loan has a lower cost of financing than the development capital. This lower development cost translates to lower solar prices for customers once the project is operational. Lower solar prices mean more customers and a larger total addressable market.
Both interventions are principled designed to achieve the same goals: unlock private investment that wouldn’t otherwise flow into clean energy projects, and do so in a way that delivers more and cheaper clean energy to end customers. And in the case of LMI households, in particular, expanding access and lowering energy burdens are critical to ensuring a just and equitable transition.
This is just the first of many cases. Here are just few more in the pipeline:
- Aggregation of small business upgrades through commercial property assessed clean energy warehouse facilities
- Lowering the upfront cost of rooftop solar through REC-based upfront financing
- Swapping coal power for renewable power for rural electric co-ops + decommissioning and worker transition support
- Whole home clean energy and resilience upgrades for LMI households
- Home electrification financing with electric heat pumps
So stay tuned for these and many more use cases to see exactly what the Accelerator will do and how it will equitably create jobs, reduce emissions and lower energy costs.
For over a decade CGC has held fast to these core principles to guide a clean energy transition:
- consumers should pay less, not more, for clean energy;
- every American should have clean energy and access to the financing necessary to get it; and
- public funds should mix with private as needed to provide that abundant, affordable finance.
The institutional embodiment of these principles is the green bank. And Congress is now closer to creating a massive version of a green bank than it has been since 2009. Outside Congress, the topic of clean energy finance is being taken up by a growing and diverse set of stakeholders.
Last week, Rewiring America released a remarkable and novel analysis that calculated precisely how many heat pumps, electric vehicles, miles of transmission line and other electrification-focused solutions are needed to decarbonize America. And it prominently described how the method and cost of financing are essential components of our nation’s climate strategy. “If done right, innovative low–cost financing will be the most effective way to ensure equity and universal access to cheap, reliable energy in the 21st century.” The report’s companion “Handbook” goes further to say:
When people talk about the total cost of solving climate change, it sounds enormous, often in the trillions. This is exactly the wrong way to approach it. We should think about how much money it will save us. We must ask ourselves the question, “What market conditions, and at what interest rate, can we make solving climate change save us money?” We must then write the regulations and build the institutions and policies that make that possible.
Thankfully, the institution needed to deliver this kind of finance has already been designed, it has been road tested globally and in America for a decade, and the bill to create it has already passed the House of Representatives with $20 billion of funding.
The National Climate Bank Act was introduced by Senators Markey and Van Hollen, and Rep. Debbie Dingell in 2019. And last month it was passed as part of the $1.5T Moving Forward Act with $20 billion of capitalization for the independent non-profit that what was renamed the Clean Energy and Sustainability Accelerator. It was endorsed in the House Climate Crisis Committee’s report and included in the Energy & Commerce Committee’s CLEAN Future Act climate package. It has the support of nearly 100 organizations, including environmental and clean energy leaders. And the non-profit national green bank has the support of 7 out of 10 voters nationally, including majorities of voters across parties.
The Reconstruction Finance Corporation (RFC) is often looked to as the model for what is necessary to build our clean energy future. However, the RFC hasn’t operated in over half a century, while green banks are operating right now, designed for the very crisis we are confronting. They are proving in real time precisely how to do it.
In the U.S. green banks at the state and local level have financed more than $5 billion of clean energy and resilience projects, leveraging nearly $3 of private investment per public dollar. And every one of those projects saves money for the customer, and many were designed specifically for low-income communities. Globally, green banks have driven over $50 billion of investment.
As the Rewiring America report explains so well, merely saying something must be financed is not enough. The details matter, and we cannot wait until after the institution is formed to figure them out. Green banks are working as we speak to refine the precise techniques that will be deployed quickly at scale when the national green bank is launched. We must use the green bank tools, built for this exact purpose, that are right in front of us.
By Lacey Shaver and Ryan Shea
“To make Solarize campaigns work for LMI residents, cities can develop partnerships with local green lending institutions (a Green Bank, community development financial institution or local credit union) to address cost and credit barriers. Connecticut’s version of Solarize, the Solar for All Campaign, offers a great example of using a financial partnership to expand the reach of a typical Solarize campaign to LMI residents.
After realizing that business as usual wasn’t spurring solar uptake in low-income communities, the Connecticut Green Bank created new incentives specifically for LMI residents, paired solar with energy efficiency upgrades, instituted “no money down, no credit required” Solarize offerings and recruited contractors with experience reaching underserved markets.
In three years, this multifaceted approach increased solar penetration in Connecticut’s low-income communities by 188 percent, and helped over 900 low-income households go solar.”
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