Energy Policy:

Brookings' Muro pitches plan to finance clean energy projects through bond market

In the absence of federal action, could the future of clean energy finance be in state and local bond markets? During today's OnPoint, Mark Muro, a senior fellow at the Brookings Institution and the policy director of the Metropolitan Policy Program, discusses a new paper on state and local capabilities to finance clean energy development through the use of public finance bonds.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Mark Muro, senior fellow at the Brookings Institution and the policy director of the Metropolitan Policy Program. Mark, thank you for coming on the show.

Mark Muro: Great -- great to be here, Monica.

Monica Trauzzi: Mark, you're one of the authors of a new report focused on state and local capabilities to finance clean energy development in the absence of any federal action on this front. What's the concept you're pitching surrounding the use of public finance bonds?

Mark Muro: Yeah, well, as you say, Washington has somewhat left the building on direct finance and subsidies. Those aren't really options. Broadly we're saying we have a lot of tools that are sort of hidden in plain sight. You know, we're thinking here in this case about just bonding, the way we tend to bond roads and sewers and hospitals. You know, this is a routine way of financing all kinds of infrastructure, and we're saying why not energy infrastructure?

Monica Trauzzi: So what are you suggesting that state and local bonding authorities should be doing right now, and what does the model look like?

Mark Muro: Well, the first thing is the clean energy community needs to get together with the bonding community. There's a sophisticated, competent, routinized community that is doing these routine bonding of roads and sewers and so on. The two communities need to get together. They just -- they don't talk to each other much. You know, the energy world has been its own sphere and bonding roads has been a different one, so they need to get together. We think to make it -- to accelerate it, though, there's got to be efforts to standardize the documentation. Each side needs to get comfortable with the asset classes involved and then, you know, scale up. So standardize -- standardize the documents, standardize the whole process.

Monica Trauzzi: So I guess the obvious question: Why hasn't this happened yet? Is there resistance?

Mark Muro: No, it's a great point. It hasn't happened because it really hasn't needed to in many respects. There's been a significant direct subsidy and policy effort on the road -- coming down from both Washington and the states. So the energy finance world has sort of been on its own, using its own tools. Meanwhile the bonding community hasn't really needed to look for new business. Now the incentives are different. I mean, I think the development finance crew is eager to find new business and thinks maybe energy projects might be interesting. The clean energy community is looking for any way to finance this stuff with pull-back at the policy level, federal and state direct subsidies not an option.

Monica Trauzzi: So what do you see as the greatest challenges to promoting this concept?

Mark Muro: I mean, first we've got a lot of inertia. You know, neither community is particularly familiar or comfortable with the other one. In that sense I think there's a readiness to work together, but it does require understanding what the projects are, understanding the needs of projects and understanding the professionals on both sides. So that's one. And then we don't have, as I was saying, consistent documents, contracts, performance data -- all the things you need to allow the financial community to be comfortable with the project and realize that risk is limited.

Monica Trauzzi: So if the bonding community were to take this approach and use this money on clean energy projects, could then there be an argument to use it on other types of energy projects as well that are not considered clean energy?

Mark Muro: Yeah, I mean, I think the -- and frankly there are lots of projects that are funded. So I think there's a lot of financial acumen and readiness to take on new projects. Our suggestion is that the clean energy set of projects is a good adjacent area for using these new tools.

Monica Trauzzi: So there's a set of tax extenders that are being considered in the Senate right now on clean energy. Why won't that be enough to continue the momentum in that sector?

Mark Muro: Well, the extenders basically would apply to a limited number of project types. And meanwhile we're talking here about tools that can applied to all kinds of projects. So I think -- and meanwhile, you know, I think we've seen that waiting around -- holding our breath for legislative action and then the reauthorization brings a lot of uncertainty into the equation. You know, we think long term, or even medium term, there's a very credible way to proceed here that can draw on a lot of existing knowledge and generate a steady pipeline of projects.

Monica Trauzzi: The Department of Energy just released a draft renewable energy solicitation, a total of about $4 billion in loan guarantees, that they're hoping will get technologies that are unable to get full commercial financing off the ground. What role do you think those loan guarantees can play into this conversation?

Mark Muro: The loan guarantees -- first, it's good to see the loan guarantee process being rehabilitated. It was successful, notwithstanding Solyndra. It's helped take, say, large-scale solar across the Valley of Death. These are valuable tools, and it's great to see the loan guarantees being applied to especially the kind of more sophisticated energy technology issues in EE, in energy efficiency. You know, it's not just standard scale-up; there are plenty of new technologies in that area that could use this impetus.

But that's a slightly different realm than we're proposing for bonding. We think bonding -- you know, there are many extremely safe, financeable projects that really don't need a loan guarantee. They just need standard road and bridge financing. So I think this is a good week in that sense, that we're looking at two different portions of the continuum of scaling up clean energy.

Monica Trauzzi: All right, we'll end it there on that note. Thank you for coming on the show.

Mark Muro: Great. Thanks, Monica.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

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