Green Bank Techniques
Financing is essential to rapid deployment of clean energy. Green Banks make it easier to finance projects in new markets, geographies and technologies that otherwise couldn’t be built. This mean cheaper and cleaner energy for customers and more investment for private capital providers.
Reducing the Cost of Capital
Cost of project financing is a major component of the cost of clean energy. The financial methods that green banks use are aimed at reducing these costs and making capital more affordable and available to clean energy projects.
The result is more clean energy being deployed at lower cost. Consumers save money, developers and investors get to build more projects, and dirty, polluting energy sources get replaced.
Green Bank Techniques
Barrier:
Perceived project risk.
Solution:
Credit enhancement.
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 unfeasibly 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.
Barrier:
Inefficiencies of scale.
Solution:
Aggregation and warehousing.
Inefficiencies of scale represent 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.
Barrier:
First-in-kind transactions.
Solution:
Technical assistance.
When a technology or transaction type is unfamiliar, it requires more work to complete the deal and costs end up higher. 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 take on some of this labor and work towards the establishment of scalable, standardized frameworks to reduce these costs.
Barrier:
Marginal economics.
Solution:
Co-investment.
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.
Barrier:
Customer credit score or homeownership status.
Solution:
On-bill financing.
On-bill financing (or on-bill repayment) is a structure through which an energy upgrade loan is repaid through the customer’s utility bill. 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.)
Barrier:
Customer knowledge.
Solution:
Information sharing and coordination.