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.)
In President Obama’s recently released 2014 Federal Budget Proposal the Administration called for a “strategic review” of the Tennessee Valley Authority (TVA), including the possible privatization of the utility. Founded in 1933, TVA is currently the largest public utility with over 9 million customers located throughout the Eastern United States. TVA also has a debt of around $30 billion that counts towards the federal deficit. TVA has no federal taxpayer subsidy, and taxpayers are not legally responsible for the debt.
Although the idea of “strategic review” and sale of the public utility has created a buzz among both democratic and republican representatives, CGC is not at all unfamiliar with the notion. In 2010, CGC published an outline and discussion for proposed energy reform legislation for the 112th Congress advocating the role of private involvement and investment in the energy industry. CGC specifically recommends:
- Reducing artificial regulatory barriers to private sector investment in clean energy through promotion and development of uniform and predictable practices for regulation of utility rates and utility mergers, joint ventures, and other forms of corporate re-organization that tend to maximize efficient, long-term private sector investment in clean energy. In addition to the development of uniform and predictable utility rate making practices of general applicability, provide performance-based rate making incentives targeted to utility investments in or purchases of clean energy.
- Targeting public sector engagement in clean energy investment and deployment where it is most needed, while freeing the private sector to lead where it is best suited to innovate – including minimizing the use of agencies and instrumentalities of government in direct financing and deployment of clean energy – and focusing the federal role instead on research, development, and first of a kind deployment of breakthrough clean energy technologies.
The privatization of TVA has the potential to reduce the federal deficit by $25-30 billion, create new jobs, and efficiently deploy clean energy at more affordable rates. Although it may have taken a few years to reach this point, CGC is definitely of the opinion: better late than never!
For more information see:
CGC CEO, Reed Hundt, wrote a letter, May 10th, to the DC City Council regarding proposed XXXskins Resolution
A group of former FCC officials and distinguished practitioners before the FCC sent a letter offering support and advice to the District of Columbia City Council regarding its proposed XXXskins resolution.
Building on a letter written by George Washington University Public Interest Law Professor John Banzhaf, the signatories recommend that the City Council include in its resolution an appeal to broadcasters of the Washington, D.C. metropolitan area.
The signatories of the letter urge the Council to suggest in its resolution that broadcasters “reevaluate their use of the term ‘XXXskins’ and question its effect on ‘public interest, convenience, and necessity as required by law.’” Given that broadcasters use government-owned airwaves in exchange for an understanding that they will promote public interest, they can and should play a role in terminating the use of this racially derogative name.
The letter is addressed to Councilman David Grosso who proposed a non-binding resolution that would summon Washington Football Team Owner Dan Snyder to change the name of his team. Councilman Grosso told the Washington Post, “It’s been a long time that we’ve had this name associated with Washington, and I think it’s time we take a stand and change it.” The signatories believe that the inclusion of broadcasters in the resolution could potentially lead to the much-needed name change.
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According to the Scripps Institute of Oceanography, atmospheric carbon dioxide levels will surpass 400 parts per million (ppm) for the first time in human history.
Scientists guess that CO2 levels have surpassed 400 ppm at several points in the past, such as during the Pliocene Epoch. However, scientists estimate during that period global average temperatures climbed 3 or 4 degrees C (5.4-7.2 degrees F) higher than today’s and as much as 10 degrees C (18 degrees F) warmer at the poles. Sea level ranged between five and 40 meters (16 to 131 feet) higher than today.
Activists across the country are campaigning to reduce carbon dioxide levels to 350 ppm–what many scientists consider to be the safe level of atmospheric carbon dioxide.
We would like to congratulate the State Legislature of Hawaii for passing Senate Bill 1087 (SB 1087), innovative legislation authorizing the first ever combination of bond financing and on-bill repayment for clean energy infrastructure, including distributed generation solar PV systems.
SB 1087 will make it less costly to deploy clean energy projects in Hawaiiby creating a loan fund capitalized by low interest utility tariff-financed bonds sold to private investors such as pension funds. SB 1087 will also make it easier for all Hawaii residents to finance solar PV hosted at their residences or businesses by providing them access to low cost loans from the loan fund that can be repaid through on-bill repayment on their utility bill. ClimateWire explains that, “because consumers will pay those back with their monthly power bills, the packages become lower-risk and easier to sell.” The state plans to make $100 million in bonds available as a start. Neil Abercrombie, Hawaii’s Democratic Governor, is expected to sign the bill which would take effect next year.
One benefit of this program is that “everybody, regardless of economic means, can access these alternative energy devices,” as stated to ClimateWire by Lowell Kalapa, President of the Tax Foundation of Hawaii. Previously people with sufficient upfront capital (or the access to capital) were the only ones installing solar PV and taking advantage of available tax credits. With this program, lower-income residents and those who can’t obtain bank loans will have access to low cost financing for solar PV. Additionally, renters of homes will be able to install solar PV panels with the approval of their landlords because the payment is attached to the meter, not the tenant.
As explained to ClimateWire by one of the creators of the concept of Property Assessed Clean Energy – “For the first time, the type of low-cost bond financing that has been available for utilities to build power plants is being made available for homeowners to put solar on their roofs.” He further explained that “this just changes the whole ballgame” and “if it is successful in Hawaii, it will be model that other states will look to.”
CGC has been working with the Hawaii State Legislature for several years to promote low cost financing mechanisms for the deployment of reasonably priced clean energy. The state goal is to have 70% clean energy by 2030; one of the highest in the country. We hope other states will follow Hawaii’s example and adopt similar financing mechanisms.
At the end of last summer, the Obama Administration finalized its historic “54.5 MPG by 2025 “ fuel-efficiency standards. These new fuel efficiency standards require that the U.S. auto fleet (cars and light-duty trucks) average 54.5 miles per gallon by 2025. If successful, these standards would nearly double today’s average fuel efficiency. Luckily, a new report by Jack Gillis and Mark Cooper of the Consumer Federation of America suggests that this goal is not out of reach.
Released just this April, the report presents the results from a series of surveys about American consumers and summarizes numerous government and auto-industry actions, suggesting that 54.5 mpg by 2025 is not only desirable, but also feasible. Government action has served as a catalyst to this trend since 2007, when Congress passed legislation that re-started the fuel-economy standards program. In 2008, the legislation was followed by a tightening of fuel-efficiency standards, sending clear signals to automakers.
Sensing the beginning of a long-term, government-regulated trend, automakers began selling a variety of hybrid and electric vehicles and improving fuel-efficiency standards across all models. In the last five years alone, the number of vehicles getting more than 30 mpg has quadrupled (from 1.3% of all existing models to 9.3%). Although there has always been consumer demand for more fuel efficient cars, introduction of new government standards served as a much-needed catalyst for automakers.
*CAFE = corporate average fuel economy
Luckily, American consumers also support increased fuel-efficiency standards. In a nationwide survey of 1001 representative American adults, a large majority (85%) said they support the new fuel efficiency standards. Furthermore, the support came from both sides of the aisle.
To spur government demand for fuel-efficient cars in the government automobile fleet, Dan Tangherlini, the acting Administrator of the General Services Administration, announced that he will now offer hybrids at the same price as standard sedans. Tangherlini said he is able to remove the extra charge that use to be associated hybrid vehicles because hybrids will ultimately save the administration money through decreased fuel costs. Tangherlini is looking to replace 10,000 cars in the federal fleet with new hybrid vehicles.
This combination of demand, supply, and government standards lays a solid foundation for the 54.5 mpg by 2025 plan. While these favorable trends in the auto-industry continue, we should analyze this trend in other energy industries. Why isn’t demand for solar where it needs to be? How can government emission standards catalyze more wind deployment? How can we achieve this perfect balance of supply, demand, and regulation elsewhere?
For more information:Jack Gillis and Mark Cooper, “On the Road to 54 MPG: A Progress Report on Achievability,” Consumer Federation of America, April 2013New Research: Consumers Embrace new Fuel Economy Standard, are Purchasing More High MPG Vehicles, and Plan to Significantly Increase Fuel Efficiency in Future PurchasesOffice of the Press Secretary, “Obama Administration Finalizes Historic 54.5 MPG Fuel Efficiency Standards,” August 28, 2012, The White House
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