States look to “green banks” to leverage private investment in clean tech

Clean energy and energy efficiency can save wear and tear on the environment and climate, but sometimes it takes money to take action. And in a time of tight government budgets, where will that money come from?

A new and growing solution to this energy finance problem is called the “green bank” or “clean energy bank” — government-created institutions that help facilitate private sector financing for clean technology projects. States have used a variety of tools and incentives over the years to promote technology deployment. Green banks put many of the tools used to encourage private investment in one place.

Connecticut was the first state to open a green bank in 2011, and the idea is catching. New York opened a green bank in February. California state Sen. Kevin De Leon has proposed creating a green bank in his state. And U.S. Rep. Chris Van Hollen (D-MD) plans to introduce legislation to establish a federal green bank.

Green or clean energy banks can leverage a small amount of public money to significantly increase private investment in clean technologies. This leads to accelerated deployment of solar power, energy efficiency upgrades, and other clean technologies without creating a large burden on public budgets.

Before getting into how green banks work, let’s go back to the problem: the need for money up front. The owner of an apartment complex or factory might want to make energy efficiency upgrades or install solar panels, but might not be able to pay for the expensive equipment. A private investor or bank could loan money to the owner and earn a return, and the building owner could save on energy costs. But often that’s not what happens.

Loan officers may be hesitant to make loans if they’re unfamiliar with the equipment being financed or how likely or how quickly the equipment will result in forecasted energy savings. A limited history of loan performance is a barrier to private investment, as we have found with alternative fuel vehicles and infrastructure.

Enter green banks, which can help lower the risk for private lenders and investors. One way they do this is through credit enhancements, such as insurance against default. A green bank can agree to cover some of a private lender’s losses if borrowers don’t repay their loans, improving or “enhancing” the credit quality of the original loan. With lower risk, loan originators are often willing to make more loans, possibly at lower interest rates, and a history of loan performance builds.

So far, Connecticut’s green bank, the Clean Energy Finance and Investment Authority (CEFIA), has been able to attract $9 of private investment for every $1 of public money invested in clean energy projects, largely by lowering the risk for the private investors. If a project leveraged at 9:1 failed, CEFIA would at most lose 10 percent of the project’s cost. If a project succeeded, the public funds would be repaid, usually with interest, and be available for the next round of clean energy investments.

NY Green Bank, the nation’s largest, was created through a reorganization of the New York State Energy Research and Development Authority (NYSERDA). The governor has pledged $1 billion in funding. So far, it has received $165 million from existing ratepayer funds and $45 million from the Regional Greenhouse Gas Initiative (RGGI).

On the federal level, Van Hollen said he’d like to see a $50 billion national green bank that would offer direct support to private investments, as well as provide money to state green banks.

Without green banks, the private sector may eventually find ways to provide low-cost financing for deploying clean technologies, but this might be sometime far into the future. We can’t afford to wait.