Gaps linger between clean energy and bond market support -- report

Bonds. Green bonds.

Although the concept is far from sexy, some policy and finance experts argue that traditional bond finance could be the hero that saves the clean energy industry from fickle federal subsidies, low natural gas prices and post-recession banks that balk at issuing commercial loans.

Subsequently, the authors of a new Brookings Institution report say, bond finance could even help avert the worst impacts of climate change by scaling up renewable energy development to the point that it can cut America's total carbon emissions.

"With the IPCC reiterating the urgency of scaling up clean energy solutions, and meanwhile the federal government either adrift or pulling back, we really need to be looking at all kinds of new finance solutions," said Mark Muro, senior fellow and policy director with the Metropolitan Policy Program at the Brookings Institution and one of the report's co-authors.

"The funny thing is that bonding for roads and sewers and stuff is a routine, not-very-glorious activity, and yet its application here really could solve some problems," Muro added.


But the report explains that because so few renewable energy developers have used this financing method, there is still a great deal of groundwork needed before the sector can fully access bond markets, which have been used to pay for a huge percentage of America's roads, bridges, airports and other infrastructure.

Communication problems

Today there is a small sample of clean energy projects financed with bonds, largely in states that already support clean energy. One is in Morris County, N.J., where power purchase agreements were combined with government-issued bonds to help fund solar energy projects on schools and other public buildings.

According to Stephen Pearlman, an attorney with Pearlman & Miranda LLC who helped Morris County develop this program, a combination of renewable-friendly state laws and a "deep pocket" (Morris County has a AAA credit rating) were behind the program's success.

One of the main hurdles in replicating the "Morris Model" and other avant-garde bond finance systems has to do with the lack of communication between the clean energy industry and development finance agencies, Muro said.

Clean energy developers have traditionally relied on federal subsidies like the wind energy production tax credit to support new projects. Meanwhile, bond agencies are used to run-of-the-mill projects like airports and bridges and aren't familiar with the risks associated with energy development.

"For bond agencies, the clean energy sector can seem volatile, complex, and full of uncertain regulatory and financial risks that these agencies have not previously encountered," the report states.

Contributing to this perception is the dearth of information on recent clean energy deals and the lack of standardized documentation used in these deals. This is partly due to the relative newness of the clean energy industry, Muro explained.

Also, "it's been financed in different ways that didn't necessarily require that kind of documentation and data," Muro added, calling collaboration between decentralized markets, which is needed to fix this problem, "an authentic challenge."

Lack of historical data for rating

The report notes that credit rating agencies often don't have enough historical data to provide clean energy bonds with a rating, making it impossible for some investors to buy them under their guidelines.

Despite this data gap, Lew Milford, president of the Montpelier, Vt.-based Clean Energy Group and another of the report's co-authors, argues that there's "more perceived risk than actual risk" in the renewables sector, giving SolarCity's early success in selling solar-backed bonds as evidence (Greenwire, Nov. 15, 2013).

"Five years ago, capital markets probably perceived solar as being financially risky because they didn't understand it," Milford said. "Now they've had experience with it, they understand that it's no more risky than a water heater."

The Brookings report isn't the first to raise bonds as a viable option for spurring renewable energy growth -- a bill recently introduced by a group of House Democrats aims to offer $50 billion in Treasury Department financing modeled after World War II-era "victory bonds" (Greenwire, April 9).

Milford said there is a lot of progress to be made before some renewable energy industry players, like wind energy developers, transition from a focus on subsidies to bonds. But he also believes that other financing options need to be explored if clean energy is going to take off.

"Bonding finance makes a great deal of sense if we need to raise hundreds of billions of dollars to finance clean energy infrastructure," Milford said, noting that using this method of financing doesn't require congressional approval.

"Nothing's inevitable, but I think this is the way we're likely to go if we're going to succeed," Milford added. "We think it's perfectly doable; there's nothing standing in the way of making this happen except for a lot of hard work and will."

Twitter: @ElizHarball | Email:

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