Green Banks Can Multiply the Impact of Clean Energy Financing

Last Friday, the Clean Energy Finance Forum spoke with Reed Hundt, CEO of the Coalition for Green Capital, which has led the movement to create green banks in the United States during the last several years. Green banks are financial institutions that use public funding to leverage private financing of clean energy.

Hundt said it is urgent for states to start green banks to finance clean energy as they move away from coal and toward meeting their renewable energy standards. He said green banks can multiply financing resources by a factor of 10.

To build momentum for the creation of green banks, the Coalition for Green Capital is hosting the Green Bank Academy in Washington, DC on Feb. 6 and 7. The academy is a program that invites selected state energy and finance officials to learn how to establish and manage green banks.

CEFF: How does the green bank model work?

Hundt: We’ve got two good examples in Connecticut and New York. The state government authorizes the creation of a corporation. It can be a subsidiary of some government agency or a renaming of an existing agency. They capitalize it by collecting funds. And they give it the mission of providing financing—loans, guarantees, or credit buy-downs—for clean energy projects. The goal is to provide financing with low interest rates and long payback times. These terms permit the installation of solar or efficiency measures in buildings where the owner doesn’t pay any money upfront. The payback comes from the owner’s energy cost savings over time.

CEFF: What are some of the main factors that a state should consider in designing a green bank program?

Hundt: That’s a great question.

The first thing that you need to have is adequate expertise among the employees. There are a lot of bankers who want to do good for the world and would be happy to participate. States should hire these types of people to run their green banks.

Second, it’s very important for state green banks to put all their money to work. A bank can have cash sitting in drawers and it’s not very effective. It’s really important to get the money out, get it to work. That means that you need to offer the rates that the market will snap up.

Third, it’s really important to have metrics that tell you how many clean energy and energy efficiency projects are getting installed.

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CEFF: Have there been any obstacles to adoption that states have faced in adopting green banks?

Hundt: I would say that in every state it is necessary to have a conversation with the commercial banks so that they understand that you’re not competing with them. In fact, you don’t want to compete with them—you want them to engage in the same activity and to provide their own capital. They don’t really know what a green bank is—so you have to have that conversation in every state. And you have to have it early.

The second thing you have to do in every state is focus on the end user and make sure that the end user is truly going to be better off. You’re not just counting on the end user to want to be green. They need to want to get cheaper energy. And that focus is important. Sometimes, the local utility won’t share that goal—sometimes, the local utility will think, “I don’t really want the price of energy to go down.” So the governor or the legislature has to decide if they want the price of energy to go down. Those are the main threshold issues.

CEFF: There was an interesting exchange over the last couple of weeks in the DC publication The Hill, where Phil Hall wrote a scathing editorial about New York’s green bank and Richard Kauffman responded. There was a point in the article suggesting that very well-funded financial institutions should be the ones undertaking the kind of catalyzing work we’ve been talking about. So, should we be starting green banks?

Hundt: In Connecticut, which is a state of only 3 million people, we are adding $40 million of capital to the state green bank every year. We are finding so far that—hold on to your hat—about 10 times as much capital comes in from the private sector whenever we put a dollar in.

That means that if we can continue at this pace, we would be catalyzing—not just with our money but with the private money too—catalyzing about half a billion dollars of clean energy investment every single year. This is a state of only 3 million people.

In New York, the governor is planning to put in a billion dollars of capital. If he gets, not even a ten-to-one, but a five-to-one ratio in terms of the private capital, then he’ll be putting $5 billion in investment for a state of 19 million people.

And we’ve also discovered that the money that goes out in the financing comes back in about six years, because people are paying us back, so you get to recycle the money. Over the course of the decade, roughly speaking, you’ve doubled all of the numbers that you’re stating.

If every state, or even half the states, had green banks that were as active as Connecticut and New York, you would be seeing several hundred billion dollars being invested in clean energy and you would see that the prices delivered to the consumers are lower than existing electricity grid prices.

So this is a very proactive, very effective way to make the transition to cheaper and cleaner power. But I have to tell you, that’s why you’re going to see criticism, like in the letter you were just talking about.

CEFF: Which states do you foresee adopting green banks?

Hundt: That depends on how successful we are with the Green Bank Academy. There should be about 13 states represented. Hopefully, all of the attendees will come away with a renewed desire to create green banks.

Generally, I would say this: each state that’s going to see its coal plants being phased out because of EPA regulations is going to want to create a green bank in order to deliver cheaper clean energy as a substitute for the coal energy.

Otherwise, if they don’t think of a way to provide low-cost financing to lower the price to the consumer, then there’s going to be rate shock. There’s going to be a tremendous amount of consumer push-back. Politicians will be very unhappy. Green banks lower the prices to the consumer as the green transition from carbon to clean energy occurs.

The European countries are backing off of their mandates for clean energy. That’s because they did not provide green bank financing to the clean energy substitutes. As a result, what was going on was that the European countries were causing tremendous price increases for electricity in the middle of this terrible, five-year-long recession, and the European people were getting angry. But this was a big mistake by the Europeans. They should have provided financing support for the clean energy that they were mandating under their regulations.

CEFF: In addition to states that have coal plants that are going to be shut down under the new EPA regulations, are there any other states where this model might be particularly successful?

Hundt: Yes. Maybe a state that has a renewable portfolio standard (RPS) or renewable energy standard (RES)—a standard that is compelling a shift in generation from carbon to clean energy. And if that occurs, if you want to lower the price to consumers, you’ve got to provide the upfront financing to new projects that are demanded by the RES. Otherwise, an RES will raise prices.

CEFF: And would there be possibilities for states to finance regional projects?

Hundt: Yes. Let’s say you wanted to finance a wind project where the wind on the grid was going to end up serving four or five states. Why not co-finance it?

CEFF: Are there federal policies that you see as important to facilitate the success of green banks at the state level?

Hundt: Yes, there are a number of them.

First, it’s essential that the EPA be rigorous and prompt in laying out the new regulatory framework to protect us from these dangerous emissions.

Second, it’s very important that Congress maintain the critical tax credits for solar and wind, because even with green banks, states don’t have enough capital to make up for the beneficial impact of the tax credits.

Third, it’s very important that the Department of Energy consider making grants to nonprofits that will help states set up green banks—we’re talking about small amounts of money that are very, very critical. And frankly, the Department of Energy has not made a thorough commitment to help states with the work of setting up green banks. It would be good if the Department of Energy got religion in this respect.

CEFF: What are the Coalition for Green Capital’s goals for the Green Bank Academy program?

Hundt: We know that there’s strength in numbers. If many states have green banks, and they’re all following the same processes, then private investors will be more and more interested because they won’t have to look at energy projects on a state-by-state basis. They’ll see that 10 or 15 or 20 states are providing essentially identical financing practices.

This will take everyone a long way down the road of standardization, and standardized forms in financing mean that the cost of capital goes down. That’s good, because the lower the cost of capital, the more solar, the more efficiency, the more wind. So it’s all about lowering the cost of capital through providing increased state financing, much greater standardization, and a much bigger awareness in the private sector about doing the right thing for the climate, at the same time.

CEFF: It’s interesting that you mention standardization, because it seems that there are a few different ways that a state can go about designing a green bank program.

Hundt: I think you put your finger right on it. You can have more than one method of organization, more than one capitalization, but you really don’t want to have a lot of variation in the financing methods. You want standardization.

CEFF: So one of the major takeaways for attendees of the academy is that standardizing these loans is critical to the whole green bank concept.

Hundt: Absolutely, and in fact, that’s one of the primary missions of New York’s bank, because of course New York is the financial capital of the world, and the people who are in the New York green bank are very knowledgeable about standardization. I think your readers should know that New York will have a lot to say on that.

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