Filling the gap: Why demand for green banks is growing

How do green banks fill gaps in financing for clean energy projects?

For a commercial or residential developer seeking to install solar panels or make energy efficiency improvements to a building, getting financing from a traditional bank often can be a challenge.

That's largely because of the initial startup costs required to take on these projects as well as that it might take years before developers are able to make a profit from that investment.

Enter the green bank: a public-private institution that helps private-market participants reduce greenhouse gas emissions through projects such as these by stepping in to support projects that might get a pass from a traditional lender. Although a relatively new concept, green banks increasingly play a larger role in accelerating the transition to a clean energy economy at a time when federal level support for things such as clean power and energy efficiency is uncertain.

"Demand on the state and local level is through the roof," said Alex Kragie, a program director at the Coalition for Green Capital. "As leadership on these issues starts to pop up on the state and local level, people are taking notice and they are seeing the results of existing organizations."

State-formed green banks are creating new ways to finance renewable energy and energy efficiency projects that previously have gone underserved.

One example is NY Green Bank, a $1 billion state-sponsored entity that mobilizes clean energy investment and projects within New York state; the organization issued two new requests for proposals (RFPs) in late March.

NY Green Bank’s RFPs, including the two new recently launched investment solicitations, are an open invitation to private-sector capital providers and other clean-energy industry participants to propose transactions that could help finance clean energy projects in New York, according to NY Green Bank’s website.

One of the new solicitations, RFP 7, deals with providing financing to developers of solar projects that are selling to commercial, industrial and other institutional organizations. The other, RFP 8, deals with providing financing to commercial and multi-family building owners  seeking to make renewable or energy efficiency improvements. 

These RFPs by NY Green Bank also show that despite President Donald Trump’s support for fossil fuel projects, state and municipal governments are playing a larger role in furthering clean-energy policies and reducing greenhouse gas emissions. In addition, they support New York Gov. Andrew Cuomo’s Clean Energy Standard, which requires that 50 percent of New York’s electricity come from renewable sources by 2030.

"We have found a couple of markets where there is large opportunity, but there seems to be a lack of activity, there’s little standardization and a high degree of fragmentation," said Alfred Griffin, president of NY Green Bank. "We want to facilitate standardization in the marketplace.”

What is a green bank?

Green banks use public dollars to encourage deeper private investment in clean energy. And they can provide financing in different ways, including through credit enhancements, directly investing in clean energy projects and even originating and financing loans through a process known as warehousing.

Connecticut established the first green bank in the United States in 2011. Today there are six in states including Michigan, Hawaii, New York and Rhode Island.

Green banks exist to fill financing gaps in the clean energy marketplace that exist, in part, because of a lack of standardization in the process. That fragmentation, along with the relatively short track record for such investments, may make it difficult for traditional commercial banks to offer developers terms that are economically viable. This is where green banks step in and can provide financing.

Marshal Salant, global head of alternative energy finance at Citi, said that green banks also can help investors find opportunities to finance renewable energy and energy efficiency projects.

"When we look at energy efficiency and renewable energy, there are many projects that developers would like to do and where they need funding," said Salant. "In the same way, there are many investors that would like to invest but can’t always find the right projects to invest in."

According to the Coalition for Green Capital (PDF), a green bank may provide debt or equity in a project, which can then be paired with a private investment. For example, a green bank and a private investor could both take a 50 percent debt stake in a specific project or installation.

By the numbers

Overall demand and investments by green banks have increased substantially over the past few years. At the end of 2016, those originating in the United States represented more than $1.6 billion of cumulative clean energy investment — an increase from about $1 billion in 2015.

Connecticut Green Bank, the oldest state-formed U.S. green bank, has created over $1 billion of total clean energy investment in the state, using less than $200 million of public capital for project investment. By the end of the 2016 fiscal year, the green bank had deployed $164.9 million in public capital and leveraged $755 million in private capital.

In New York, NY Green Bank recently recorded $40.6 million in new transactions during the first quarter of 2017, which brought its total amount of committed funds to $346.1 million since 2015. The green bank projects that the funds ultimately will create between $1 billion to $1.4 billion in investment in clean energy projects in New York state.

Griffin, the president of NY Green Bank, said that there is a large untapped opportunity for solar deployment with "unrated commercial counterparties" and that RFP 7 is designed to target this market. An unrated commercial counterparty could include a private business that has not been rated by a rating agency such as Moody’s or Standard & Poor's.

"We have put a lot of time and thought into structuring a package under which we would be able to provide capital to those types of projects," Griffin said. "Just because they are unrated doesn’t mean they are not a good credit."

Green banks under Trump

The underlying question related to anything having to do with green investments or renewable energy is what the demand will look like over time under the presidency of Trump.

The Trump administration has expressed support for fossil fuel projects and previously has said that it intends to undo the Clean Power Plan. Despite that uncertainty, in many cases, investments in renewable energy and energy efficiency are not being affected as negatively as one might expect.

These initiatives instead are being driven at a state and local level. One example is New York’s Clean Energy Standard, which Cuomo established last year. It requires utilities and other energy suppliers to procure and phase in new renewable power resources starting with 26.3 percent of the state's total electricity load in 2017 and growing to 30.5 percent of the statewide total by 2021.

"We have been seeing accelerating demand in New York," Griffin said. "There’s a tremendous amount of activity and, from our perspective, it’s only growing and that’s driven by state and local policy."

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