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Kauffman Reflects on Launching Green Bank and Animating Markets in NY

Last Monday, the Clean Energy Finance Forum spoke with Richard Kauffman, chairman of energy and finance for New York and chairman of the New York State Energy Research and Development Authority (NYSERDA). This conversation offers a close-up look at the process of creating the NY Green Bank (NYGB) and the broader initiative to transform energy policy and markets to achieve economic and environmental benefits.

CEFF: What are the critical factors involved in launching a green bank? To what extent do they include political or legislative issues, legal issues, and private-sector relationships with financiers and developers?

Kauffman: First, you need someone in the state, ideally the governor, who says he or she wants a green bank. The setup of the bank may vary, but it needs to have a champion. In New York, Governor Cuomo was that champion.

The funding for the NYGB comes largely from reprogramming ratepayer funds regulated by the New York State Public Service Commission (PSC). The setup for the NYGB required a regulatory process that began with engaging stakeholders and filing a petition to the PSC. Those stakeholders and many others submitted comments on our petition to the PSC. Along the way, we also held conferences and created forums for soliciting comments and testimony.

The actual creation of the NYGB occurred when the PSC issued its order establishing the bank and laid out the terms for its existence within NYSERDA as its parent organization. Those terms included significant flexibility in how the NYGB can use its funds. This flexibility is key for allowing the NYGB to continue to fill financing gaps on an ever-evolving frontier.

We received numerous letters from financial institutions in support of the NYGB. The dominant initial source of financing for the NYGB will come from ratepayers or taxpayers. Some members of the business community feel burdened by the variety of charges they incur. However, they appreciated the strategy of the NYGB because it will better leverage those public funds.

CEFF: To that end, how are you engaging business much earlier in the policy and program design process?

Kauffman: I started in my position as New York’s chairman of energy and finance in in February 2013 and began talking about the NYGB right away. Between then and the filing of our petition to the PSC in the fall of that year, I had many dozens of meetings with stakeholders across the public and private sector about the strategy for the NYGB.

The NYGB is a different kind of entity than the private sector is used to. People asked: would the NYGB be like the United States Department of Energy Loan Program? Or would it be in the subsidy business? It’s neither.

One of the most striking meetings was with a group of bankers—describing the NYGB and bringing them up to date on the latest progress. Although I had previously met with individual members of the group and the whole group, I was still getting questions about what types of programs the NYGB would support. It took many conversations to convince them the NYGB wouldn’t unilaterally dictate the terms of its programs. Instead, private sector entities would have real input on the types of programs and products they need and the NYGB would deliver.

CEFF: Now that the NYGB is up and running, how will you define success for the bank?

Kauffman: One important measure of success will be seeing the private sector step forward and take advantage of our offerings. That will be proof that the bank is filling financing gaps in the market.

We do not yet know how many companies will come forward to be in partnership with us. I know that such partnerships can feel like a dangerous space for some companies. The NYGB is trying to mitigate those concerns by hiring staff with private-sector and banking backgrounds who understand the needs of potential customers extremely well.

In its processes, the NYGB is pushing aside preconceptions about what government proposals and funding applications should be. For example, we wrote our first request for proposals in plain English and in a style akin to the private sector. Proposals can and should be commercial proposals prepared in a commercial way. There is no need for a 250-page binder. Regarding timing, the proposal  does not have a deadline and the NYGB expects to respond to proposals within 30 days.

CEFF: Previous public-sector programs have had a mentality of “if you build it, they will come.” This has had mixed results. How are you ensuring that the NYGB’s products and programs are the right ones for the markets you hope to serve?

Kauffman: The NYGB’s strategy of engaging with the private sector to fill financial gaps and transform markets without crowding out the private sector is an unusual strategy for a public entity. And that’s why we are talking to as many audiences as we can – like the Clean Energy Finance Forum – to reach the right universe of potential customers and make sure they understand what we are trying to do both for and with them.

As a kind of specialized finance company offering a range of products like credit enhancements, senior and mezzanine debt, and warehousing, the NYGB must be vigilant about staying on the frontier in the areas we serve.

Finding space that is close to the market on an evolving frontier is very important space for government to operate. By filling gaps near to where the market is currently operating, we’re looking to animate the market to become self-sustaining, allowing us to harness market forces for achieving economic development and climate benefits. If we do this correctly, eventually we want to step aside and let the market forces lead.

To achieve real market transformation, the NYGB needs to be in the wholesale business. Rather than originating our own loans, we should work through intermediaries. There is very little leverage in the retail model and government is sometimes not so good in retail-type businesses.

CEFF: When reviewing proposals and considering programs, how do you screen for transformational potential?

Kauffman: The NYGB has lots of flexibility in how it can design programs and financial products to be transformational and it can design products for individual companies as well as industries.

Closing a financing gap for a particular company might require a lot of time, effort and money to create that product that the company might not want to invest in if it were immediately made available to competitors. An additional question is: how transformational can a product be for just one company?

Conversely, a product for an industry might be more transformational, but some industry participants might prefer a more closed architecture. To lower costs and achieve scale, we need an open architecture system rather than a closed architecture system. Bringing about open architecture is key.

Another issue is working with the private sector and being close to the frontier. Government is safer when far away from markets… for things that are not economic. This is an argument for such R&D or technology investments. People understand why the government would be in that role.

As we get closer and closer to market, concerns about government potentially being too close to the private sector arise. Shouldn’t government be adversarial? We want to avoid government picking winners and losers. Or crony capitalism. We want to avoid crowding out the private sector.

CEFF: How do you balance the need for early wins and quick results with transformational vision and lofty goals related to state policy?

Kauffman: We want to demonstrate from a branding standpoint that the NYGB is quickly filling a market gap and therefore expect to announce a first deal in the first half of 2014. We are confident that we  can. 2014 announcements will show  we are doing things that are innovative and transformational. It works in areas where lack of availability of financing, rather than cost, is the limiting factor.

CEFF: How does the NYGB fit into overall New York energy policy?

Kauffman: In New York, we put financing in the context of overall demand for energy efficiency and renewable energy. It is too often assumed that financing drives demand, but that isn’t true. No one wakes up saying they want to borrow more money. We need to look at other policies that will stimulate market demand for energy efficiency and renewable energy.

Incentives for distribution utilities to have better economic incentives for energy efficiency are a priority. These incentives would create more end demand for lower-cost solutions such as efficiency and distributed generation rather than traditional and more expensive infrastructure.

The second thing is looking at the grant programs that we have, to be sure that the grant programs are animating markets as opposed to just being the market.

We really need to look at the NYGB itself as the same idea of using money that would have otherwise been used for giving grants. It’s a mechanism that we hope will provide more leverage on ratepayer dollars because it is working with private sector entities that are operating in the market whose activities are constrained by lack of financing, so if we provide a financing solution they will do more and we will make the markets move faster. We get leverage for several reasons: first, we have private-sector funds that are being engaged; second, in contrast to a grant, we get paid back for the credit we provide; third, as we are successful in demonstrating that this is working and moving the markets, we can look to stepping out of the market and having markets operating on their own.

We can see a similar kind of notion in grant programs for the stimulation of energy efficiency or for renewable energy. A great example would be our solar fund, where we change the program so that the industry knows that it’s going to get long-term support, because the industry needs scale to reduce costs.

By providing long-term support to the industry — not talking about financing, just talking about various grants — what’s achieved is that the industry can come into the market and the support steps in based on the volume of installations. That’s an example of where the support program is being used to get more leverage on ratepayer dollars, trying to animate markets, and those are the underlying principles of what we’re trying to do.

CEFF: What do you think about the fact that the NYGB makes a profit?

Kauffman: It’s not a profit-making entity, but I think that if we make a profit it shows that we are operating in a commercial market where there is a financing gap.  And we get to redeploy those profits back into the markets we are trying to serve.

If somebody is willing to pay us for our capital, it means that what we’re offering is valuable and that we have the potential to demonstrate that we have a commercial market with a financing gap, and once the financing gap is closed, the market can carry on. That’s all that matters.

CEFF: What private-sector lessons from the financial industry and other industries are guiding the green bank model?

Kauffman: This may go back to the earlier question that you asked. The end-game for financing energy efficiency and renewable energy is the stock and bond markets. Too much of the current financing in this sector is based on anachronistic forms of financing.

When we’re talking about small efficiency projects and long-dated renewable energy projects, these are not financing opportunities that fit banks. Long-dated assets are typically funded in the bond markets, and smaller projects are typically securitized and also sold in the bond markets.

So we view the NYGB as helping to facilitate the creation of bond markets by working with other entities and establishing standards, collecting data, and acting as a warehouse facility to create scale so that securitization can take place.

CEFF: On the question of scale, we’re seeing the NYGB innovation happening at the state level. Are there aspects of sharing or collaboration to help achieve that scale?

Kauffman: A lot of innovation is occurring in the states. Building codes and projects are at the local level. There are a lot of reasons why it makes sense to have financing entities at the state level.

I think that it would be best not to have 50 different state banks with different procedures and different documents, so I think it is incumbent upon those of us at the state level to try to work through collaboration with others, because it’s in all our interests to create opportunities that are going to lower costs for deployment of renewable energy and energy efficiency, because it’s all about the upfront cost.

It doesn’t matter if we’re talking about technology cost or financing cost: if you find ways to lower cost, you’re going to achieve more benefits.

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