New York's Green Bank casts wide net over clean energy sector

In September, the New York State Energy Research and Development Authority launched the first step in capitalizing the state’s proposed Green Bank by filing a petition to New York’s Public Service Commission.

The move came nine months after New York Gov. Andrew Cuomo announced an ambitious clean energy policy for the state last winter, appointing former U.S. Energy Secretary Steven Chu’s senior advisor on clean energy finance, Richard Kauffman, as New York’s chairman of energy and finance.

In his role as the state’s energy czar, Kauffman began explaining the proposed Green Bank to an array of New York audiences last summer, most notably at NYC’s inaugural Energy Week and Amsterdam-based TBLI’s first U.S. conference.

In his summer testimony on clean energy financing before the U.S. Senate’s Energy and Natural Resources Committee, Kauffman stressed that government subsidies alone haven’t and won’t create a robust clean energy marketplace. But by using powers of the state, including its convening and regulatory power, government can encourage the development of private capital markets by fostering demand to support them.

Kauffman took time out of his whirlwind schedule to talk briefly with me about some green bank basics.

Ann Goodman: What is a Green Bank?

Richard Kauffman: Last winter, Gov. Cuomo announced a $1 billion Green Bank to mobilize private sector capital to finance the transition to a more cost-effective, resilient and clean energy system. The Green Bank will advance the state’s clean energy objectives by accelerating the deployment of clean energy through a variety of financing tools targeted at alleviating financial market barriers and harnessing capital markets.

Goodman: How would the Green Bank do that?

Kauffman: Because we’re mobilizing private-sector capital, the Green Bank will expand markets and ultimately benefit the people of New York state. We want to increase the quantity and availability of clean energy projects, deploy more clean energy, reduce overall demand through greater adoption of energy efficiency measures and make energy prices for all more affordable.

The bank will accomplish this by meeting its primary socioeconomic objectives, including:

1. For every dollar of state money spent, increase the amount of clean energy deployed.

2. Spur economic development and clean energy jobs across the state.

3. Leverage private sector capital so as to develop stable, sustainable clean energy financing markets

4. Animate capital markets to reduce the cost of capital and, ultimately, the need for government support.

Goodman: Why does the state need such a bank?

Kauffman: This question was also raised in my Senate testimony. The Green Bank is a crucial tool the state will employ to facilitate a transition away from an unsustainable subsidy-dependent market toward a scaled and functional private market. New York state entities spend around $1.4 billion every year to incentivize clean energy, and yet the state is still not meeting its clean energy goals. One reason for this is that approximately 80 percent of the $1.4 billion is allocated in one-time-use subsidies to support individual projects. While the state will continue to have subsidy programs for clean energy, the Green Bank will allow the state to deploy its limited resources more strategically.

Goodman: Why involve the state?

Kauffman: Because currently there are gaps in private sector financing that the state hopes to fill, including three I listed in my testimony: 

1. Reliance on tax equity. The industry relies on a small number of tax equity partners that, in spite of the term “equity,” offer debt-like financing in exchange for tax benefits. The limited number of providers means that tax equity can be expensive and also that it is primarily rationed to the largest projects and developers.

2. Bank capital rules and insurance company regulations. After the financial crisis, it is understandable that banks and insurance companies need to be more prudent, and [so] the amount of capital that banks need to reserve against smaller loans or loans that have long tenors mean that smaller renewable energy projects simply cannot get loans from large financial institutions at any cost. This is one of the reasons you seldom see solar installations on all those flat warehouse and factory rooftops when you’re landing at airports.

3. Little use of stock or bond markets. In most sectors of the U.S. economy, companies use stock and bond markets to raise billions of dollars of capital. Those markets typically offer cheaper and deeper pools of capital than private markets. However, in the clean energy sector, stock and bond markets are scarcely used, except for bonds for the largest of projects.

Goodman: Why harness private sector activities?

Kauffman: What we’re trying to do with the state Green Bank is … focus on areas of the market where private sector entities are making progress … but are limited by lack of availability [or] cost of financing. It’s hard to get financing for suppliers and service providers, such as solar installers.

Another reason we want to harness private sector activities is because the government shouldn’t play the role of selecting winning and losing technologies. By incentivizing the private sector to finance a robust market for clean energy, we’re allowing market forces, based on consumer demand, to determine the future of this industry and this marketplace. The Green Bank will leverage private sector activity, and once we demonstrate these projects are attractive, the Green Bank will move on to the next market barrier.

Goodman: How will the state incorporate private-sector financing?

Kauffman: The Green Bank will partner with private sector lenders by providing financial products such as credit enhancement, loan loss reserves and loan bundling to support securitization and build secondary markets. These products will support economically viable clean energy projects that can’t currently access financing due to market barriers, such as federal policy uncertainty, insufficient performance data, and the lack of publicly traded capital markets for clean energy. These barriers limit private sector capital flows into otherwise attractive renewable energy and energy efficiency projects. By alleviating these barriers, the Green Bank will enable the flow of private capital to fill these market gaps.

Goodman: How will this be funded? 

Kauffman: Capitalization of the bank will come from existing ratepayer funds collected from New York state’s ratepayers. These funds already go to programs that support renewable energy and energy efficiency programs, so there is no increase for ratepayers, but instead, a reallocation of funds from one set of programs to others over time. Because the bank will allow for more clean energy to be generated for every state dollar spent, we believe this will be a very good value for ratepayers.

Goodman: How will this bank differ from programs in other states?

Kauffman: There are only a handful of Green Bank programs in the country, including Connecticut’s Clean Energy Finance and Investment Authority, Hawaii’s Green Market Securitization Program, Massachusetts has a similar financing entity, and California’s CalCEF is similar as well. A handful of states are trying to figure out how a green bank model will work for them, and a larger number of states are examining a number of options and considering which strategy to pursue in order to scale up their renewable energy market. Some are more interested in subsidies, others in low-cost financing, and some, as I mentioned, are considering their own version of a green bank model.

Goodman: How will the Green Bank help end users, and what are the opportunities for business and others?

Kauffman: First, since the controversy surrounding U.S. federal involvement in the Solyndra loan, there have been questions about whether the government picks winners and losers, and whether this is an appropriate use of taxes. When critics take aim at the Loan Guarantee Program based on this alone, they’re only considering a small part of the DOE portfolio, which overall has been successful by private sector standards. Most projects the program supports are generation projects, not manufacturing projects, and are doing well. Those are the things the New York bank will be targeting (again, generation, not manufacturing). This will ultimately help end users, because we’re fostering a clean energy marketplace, while keeping rates low and increasing consumer options.

The second point is that we’re not in business in New York to crowd out the private sector. By contrast, we want to increase opportunities for private-sector lending. A potential criticism of government lending is that it crowds out the private sector, but we’re trying to crowd it in. In our 100 interviews with private-sector entities, the vast majority highlighted the need for this type of activity, showing different kinds of financing gaps and expressing interest in working with the Green Bank in addressing them. This demonstrates that there are vast opportunities for businesses and individuals, because we’re setting the groundwork for building a completely new marketplace. Much as we witnessed the telecommunications industry transition to a completely new type of industry in the 1990s, we’re [now] on the brink of a new era for clean energy -- and the opportunities are virtually infinite. 

So we see this as a win-win proposition for the private sector, ratepayers and the clean energy economy.

Goodman: What are the potential gains?

Kauffman: Preliminary models suggest that over a five-year period, the Green Bank can at least double the amount of private capital available to grow clean energy markets; and over a 20-year period, it has the potential to deliver nearly 10 times more private capital into the current system. The Green Bank’s ultimate goal … is to enable a stand-alone, dependable market that no longer needs government support. That will provide the greatest value for ratepayers.

Goodman: Now that you’ve filed a petition with the Public Service Commission, what are the next steps?

Kauffman: After the public comment period, which ends Oct. 28, we hope to have an order by the end of the year to provide initial funding of the Green Bank. We’ll refine the products that will be offered to the market and will begin staffing the bank. We hope the bank will be in business, releasing products to the market by the first quarter of 2014. 

Solar panel and coins image by electra via Shutterstock. This is an updated version reflecting that TBLI is based on Amsterdam.