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The fight against climate change will need big investments in infrastructure like solar and wind farms, transmission grids and low-carbon industry. But it also needs many more small-scale investments for hundreds of millions of homes and businesses — and that kind of work is best done locally.
So say green-bank proponents like Reed Hundt, the former U.S. Federal Communications Commission chair under the Clinton administration. As co-founder and CEO of the Coalition for Green Capital, Hundt has spent the past 13 years working to expand the role of green banks, entities that use public funds to supply low-cost, long-term financing for projects that would otherwise struggle to get it.
Since the first green bank was launched in Connecticut in 2011, 23 have sprung up across 17 states, drawing in further private-sector lending for carbon-reducing projects such as rooftop solar, efficiency retrofits and electric heat-pump installations. Last week’s passage of the Inflation Reduction Act brought the next step in that campaign: the creation of a $27 billion Greenhouse Gas Reduction Fund, or in other words, a national green bank.
The fund will be set up by the U.S. Environmental Protection Agency as a stand-alone entity; it’s required to begin disbursing funds within 180 days of the law’s passage. It will primarily work through state and local green banks, directing $20 billion to fund ongoing lending, loan-loss reserves and other activities. Of that amount, $8 billion is set aside for low-income and disadvantaged communities. These communities will also be the focus of the fund’s remaining $7 billion in financial assistance available for states, municipalities and tribal governments.
The Coalition for Green Capital has identified what it describes as a $21-billion-and-growing backlog of projects at state and local green banks. “The network is fired up and ready to go” to put the new federal funding to use, said Hundt in an interview.
The country’s green banks have raised and spent a total of $2.5 billion, combining that with about $6.5 billion in private-sector money so far, he said. These loans are paid back over time, returning more capital that green banks can use to make more loans.
New York state’s NY Green Bank, the largest of its kind in the U.S., has been able to make $1.7 billion in cumulative investments through March 2022 from its initial $1 billion capitalization, according to its latest report. It’s also brought in about $3.6 billion in private-sector lending for community solar, energy efficiency and other efforts.
“Green banks don’t want to be doing this kind of financing without the commercial sector,” Hundt said. “We want to be doing it in partnership with the commercial sector, but bringing their money in to have a combined public-private lending rate that’s affordable.”
And while private-sector lenders tend to see these small-scale projects as credit risks, data from the Coalition for Green Capital shows that more than 99 percent of green bank loans that have come due to date have been repaid.
That kind of track record could allow a national green bank to spur private-sector lending for investments seen as key to reducing carbon emissions fast enough to combat the worst harms of climate change, according to U.S. Senator Ed Markey, who co-sponsored the first (and ultimately unsuccessful) bill to create a national green bank in 2009 and reintroduced legislation last year that was incorporated into the Inflation Reduction Act and laid the groundwork for the new fund.
During an early August press conference, the Massachusetts Democrat cited research from consultancy McKinsey that found every dollar in green-bank lending could unleash $7 to $10 in private investment. With an initial capitalization of $27 billion, “we’re talking something like another $250 billion in private investment” for everything from retrofitting public housing to putting solar panels on municipal landfills, he said. “We’ll help you finance it so it’s affordable for the private sector to come in and do it.”
Filling the gaps in private-sector lending
What’s keeping the private sector from lending to the kinds of projects that green banks support? Hundt listed a number of factors.
“First, a commercial bank is not in the business of meeting with the carpenters and electricians and installers” who need to be involved in more labor-intensive projects like retrofitting lots of homes, he said. “The role of green banks is to be in communities, to know the contractors, the people who go up on the roof to install things, to know if the local Home Depot carries the heat pumps.”
“Number two, commercial banks generally…are reluctant to make loans in the tens of thousands, or even the low hundreds of thousands of dollars,” which typifies the amounts of the residential solar, efficiency and electrification loans that green banks regularly make, he said. Every loan comes with “transaction costs” — evaluating a borrower’s creditworthiness, processing the paperwork, and managing disbursement and collections over its lifespan — which makes it more lucrative to approve a few larger loans than lots of smaller ones.
Richard Kauffman, the former New York “energy czar” who’s now chair of Generate Capital and the New York State Energy Research and Development Authority, agreed that “because of regulatory and cost issues, it is difficult for traditional private-sector banks to lend to small projects that typically have long — sometimes 15– to 20-year — lives.” Green banks can build portfolios of smaller loans to “create enough scale to attract a private-sector lender.”
Eli Hopson, CEO of the DC Green Bank in Washington, D.C. — the first city-based entity of its kind in the U.S. — added that green banks can lower the risk profile of relatively novel forms of lending for private-sector banks, as entities like NY Green Bank have done for community-solar projects and affordable-housing efficiency and electrification projects.
“For a commercial banker, these projects take as much work as a $10 million project or a $100 million project,” he said. “For them to learn the new market of solar credits, get comfortable with the technology — that’s a big investment of time and resources.”
Jessica Pitts, co-founder and principal of Flywheel Development, a Washington, D.C.–based sustainable development company that’s working with DC Green Bank on installing community solar in the Fairfax Village community, noted that “the challenge with financing is the relative newness of the solar market compared to other business ventures, like restaurants or apartment buildings, that traditional banks are comfortable with financing.”
“One of the roles the green bank has served in working with us is legitimizing solar as an asset class or business enterprise that can be financed and should be financed, that it’s viable and makes sense,” she said.
Breaking ground in low-income clean finance
Making loans to back novel clean-energy investments is particularly challenging when the target customers are in lower-income or disadvantaged communities that have been largely shunned by commercial lenders, said Bryan Garcia, president and CEO of the Connecticut Green Bank. Green banks can make those loans where private-sector lenders won’t, he said — but they can also do research into whether or not that lack of private-sector lending is based on sound economics.
After the Connecticut Green Bank’s first foray into financing residential rooftop solar yielded less-than-stellar results in directing loans to low-income customers, for example, it doubled incentives for low-income families and contracted with PosiGen, a company that specializes in clean energy projects in disadvantaged communities. The bank also commissioned “a study that helped us see that just because you’re low-income doesn’t mean you have poor credit,” he said.
That research, conducted by the Department of Energy’s Lawrence Berkeley National Laboratory, found that PosiGen’s loans had “higher delinquency rates but comparable gross loss rates,” or total losses over time, compared with market-rate solar loans. In other words, “low-income folks are very good at paying their loans,” Garcia said. “That’s sending a signal to the market that your perception of risk is greater than what we’re seeing on the ground.”
Connecticut Green Bank’s Smart-E Loan program is taking a similar private-sector partnership approach to holistic energy-efficiency retrofits. These low-interest, no-money-down loans are originated by 11 partner community banks and credit unions, backed by a commitment from the Connecticut Green Bank to cover excessive losses from loans that aren’t paid back. So far, with about $100 million in private loans made, “we’ve only had to pay $200,000 in losses,” Garcia said.
DC Green Bank is also working with PosiGen on its low-income solar programs, which have already landed enough customers to exhaust its existing $7 million loan facility, CEO Hopson said. While these loans are still in their early days, other green banks with longer track records “report back to us that they have fewer challenges with loans in low-income communities than they do with more mainline business projects they fund,” he said. One potential reason is that, while businesses may “use bankruptcy as a tool that can be deployed from time to time,” low-income community residents and groups “are just committed to making it work.”
DC Green Bank is seeking additional funding from the national green bank to double the size of its low-income solar program to $15 million, Hopson said. That’s one of a host of projects that are part of the Coalition for Green Capital’s $21 billion backlog estimate.
“From a national perspective, $27 billion invested in sustainable finance goes a long way toward drawing in the leverage from private institutions to say, ‘This is a real commitment,’” he said.
Standardizing the process and securitizing the loans
Most of the projects on this backlog list expect to bring in several times their initial funding in the form of follow-on investment. The Florida-based Solar and Energy Loan Fund plans to offer $4 million to $6 million in subordinate debt to enable a $28 million affordable-housing solar and battery project, for example.
The Philadelphia Green Capital Corp., the green-bank affiliate of the city’s energy authority, plans to offer $495,000 to pre-purchase solar renewable energy credits to unlock $2.5 million in financing for installing rooftop solar systems at five schools. And a program run by the California Treasurer’s Office using utility ratepayer funds plans to expand its loan-loss reserve offerings for energy-efficiency projects to broader markets.
Not all green-bank loans are aimed at residential improvements. Many lend money to help businesses and nonprofit groups retrofit their buildings. A few are supporting citywide climate resiliency infrastructure projects like stormwater management. And a handful are expanding beyond state borders, as with Connecticut Green Bank’s support of nonprofit investment fund Inclusive Prosperity Capital’s plan to bring community and distributed solar projects to underserved communities across the country.
Beyond filling backlogs, a national green bank could also help launch new green banks in the 25 states now exploring the concept, Hundt said. “We have to scale out this network so that it reaches everywhere in the country and no one is left out.”
Kauffman highlighted how a national green bank could also work with local green banks to “help standardize a range of documents and procedures, as well as provide asset management and back-office services. These activities would significantly reduce the soft costs of financing,” which can be overwhelming for smaller projects.
That standardization would serve another valuable purpose, he said: making it possible for green banks to package their portfolios of loans to sell to other financial institutions, a process known as securitization. “Providing a national warehouse for loans originated by smaller green banks will permit securitization, allowing for recycling of funds back to green banks as loans are packaged and sold to bond investors,” he said.
Only the largest of the state green banks have been able to securitize a portion of their portfolios thus far. NY Green Bank raised $314 million last year by selling a portion of its portfolio to Bank of America, for example, and Connecticut Green Bank has raised more than $80 million through the issuance of “green liberty bonds” backed by its solar loans.
Standardization and securitization are seen as key steps for the kinds of loans backed by green banks to become broadly adopted by private-sector lenders, much as loans for market-rate residential solar installations have over the past decade. As Pitts of Flywheel Development noted, “Everybody’s home loan is not held on the bank’s balance sheets — and that’s why they can continue to make loans. Our solar loans are held on the bank’s balance sheets. They only have a certain amount of lending capacity.”
Other federal agencies are exploring ways to galvanize lower-cost private debt financing for these kinds of small-scale improvements. Jigar Shah, head of the Energy Department’s Loan Programs Office, has discussed using the office’s lending authority to support businesses that offer lower-cost rooftop solar, batteries and electric heating and appliances that could be used as virtual power plants to help balance the power grid.
DOE’s lending authority is geared toward loans in the hundreds of millions of dollars, while green banks “can go below those levels,” Hundt said. “What we’re talking about is providing financing to households and small businesses and communities.”
Hundt offered the ideal scenario of these kinds of clean energy loans becoming more like home mortgages. Some green banks are pursuing this model, as with Finance New Orleans’ plan to originate 150 “green mortgages” — the minimum number needed to bundle for sale in secondary markets — that cover the cost of efficiency upgrades, electrification and solar-battery systems for homebuyers.
“Over the course of decades, the government and the commercial sector built up a system where you can get mortgages of pretty much any size pretty efficiently,” Hundt said. “But that doesn’t happen on the energy side.” Scaling up models like Finance New Orleans’ will take a lot of work, he said, but with this new federal funding, the work can begin in earnest.