BUSINESS:

States explore green banks to reduce risk of clean energy projects

After funding fiascos like Solyndra and facing constant political attacks on government clean energy investments, renewable energy advocates are now zeroing in on so-called green banks to finance clean energy projects and to get states to cut fossil fuel use.

To that end, the Coalition for Green Capital has launched the Green Bank Academy to begin teaching interested states how to move toward a green bank model pioneered by Connecticut and more recently New York.

"There are major financing gaps in almost all clean energy markets, and you know something has to give, since the whole subsidy-based develop-deployment model of the last decade is really probably collapsing, and not only are generous subsidies under widespread threat of attack, but in fact they've already been severely downsized," said Mark Muro, a senior fellow and director of policy for the Metropolitan Policy Program at the Brookings Institution.

Federal support for clean tech is dropping sharply, declining to a projected $11 billion in 2014 compared with $44 billion in 2009, the year of the stimulus package, according to a Brookings paper.

A green bank is essentially a quasi-government agency that uses a small amount of taxpayer or ratepayer dollars and leverages that money to lure in private capital to invest in energy efficiency or clean tech projects; low-cost loans are often used to achieve the banks' objective. The goal is to reduce the risk of these energy projects to encourage private finance to step in.

"The idea here is to really bring a fresh approach, a new approach, to energy that emphasizes not trying to pick a winner but giving the marketplace and the average family and the average business a choice about what their own needs are and then trying to harness competitive market pressures to bring down energy costs," said Daniel Esty, who as commissioner of the Connecticut Department of Energy and Environmental Protection helped develop the nation's first state green bank.

The Green Bank Academy held its first meeting last week, with nine states including California, Illinois and Washington sending officials all eager to get tips from Connecticut and New York, which have led the way.

Federal green bank bill

At the event, Rep. Chris Van Hollen (D-Md.) announced that he would introduce in the next several weeks a new version of a bill to create a federal green bank, after his 2009 proposal that was part of the Waxman-Markey cap-and-trade bill failed in the Senate.

"The green bank that we envision would be an independent, self-sustaining, not-for-profit, wholly owned corporation of the United States," he said, adding it would be capitalized by up to $50 billion of "green bonds" issued by the Treasury.

It would provide financing support including loans, loan guarantees, debt securitization, insurance and other forms of risk management to creditworthy clean energy and energy efficiency projects. Van Hollen said the goal would be to advance "the national objectives of achieving greater energy independence, abating climate change, reducing the delivered costs of clean energy to consumers and stimulating job creation."

In July 2011, Connecticut launched its green bank called the Clean Energy Finance and Investment Authority (CEFIA), which in fiscal 2013 financed 1,160 projects and attracted more than $180 million in private capital, while putting at risk just more than $41 million in CEFIA money, mostly ratepayer funds.

"We've essentially de-risked a product for them, and the more they grow comfortable with the clean energy marketplace, the more we can step back as a public agency and let the markets continue to move forward," said Bryan Garcia, CEFIA's president and CEO. The legislation that authorized CEFIA was passed with broad bipartisan support in the Connecticut Legislature.

The bank estimates that its 2013 projects deployed 26.7 megawatts of energy and will have helped avert 250 million tons of carbon dioxide emissions over the lifetime of the projects.

One way to cut the risk is to provide so-called credit enhancements like arrangements in which CEFIA uses "loss reserves" to take a partial hit of private loans to clean energy projects that default. It also aggregates energy efficiency projects to sell to private investors, which makes such investors more likely to buy in than if it was only a couple of homes trying to get retrofit money.

Such projects have included the deployment of residential and business rooftop solar panels, combined heat and power, and a large-scale fuel cell park of nearly 15 MW.

"The key success here was to bring innovative finance to bear, and to turn that, we needed to find ways to de-risk investments in clean energy so they would be attractive to private capital, and the lower the cost of the capital, the more projects that can get done," said Esty, now an environmental law professor at Yale University.

Improving the optics of risk

Reed Hundt, the former chairman of the Federal Communications Commission and now CEO of the Coalition for Green Capital, said it was important for government to marshal private-sector dollars that are funding new power sources.

"All energy projects ... require pretty high upfront costs, and the payback comes over time and they last for 10 to 20 years, so everybody, whether it's a utility building a coal-fired boiler or it's a homeowner trying to put solar on the roof ... they end up borrowing a lot of it and end up paying it over time," he said. "So lending is the essence of paying the upfront costs in all of energy."

The biggest project that Connecticut's green bank has been involved in is a nearly 15 MW fuel cell park in Bridgeport that the company FuelCell Energy sold to the electricity producer Dominion Resources.

The electricity that's generated will be sold to Connecticut Light & Power and supply the grid with power that's equivalent to how much almost 15,000 homes use. CEFIA gave a loan of around $5 million, or 4 percent of the total $125 million project, which uses natural gas to generate electricity with no emissions of sulfur dioxide, nitrogen oxide or particulate matter.

"At the time, the optics of it was CEFIA is willing to put their money in, these guys believe, they've done due diligence," said Chip Bottone, FuelCell Energy's CEO. "It was very, very helpful ... and it's also a signal that the state's behind" the project, which gave investors more confidence that the park would get the necessary permits.

Other states have started to jump in, and in late December, New York Gov. Andrew Cuomo announced a $210 million initial capitalization to start the New York Green Bank.

"With this funding we will attract greater investment in New York, accelerate clean energy deployment, and modernize our grid," he said in a statement at the time. "Working hand-in-hand with the private sector, the New York Green Bank will also promote job growth, improve air quality, and provide New Yorkers with greater choice and value for their money."

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