Green bank proposals probe the hostile frontier of politics and finance

Of all the pieces of the climate legislation before Congress this year, the most popular may well be proposals to create a federal bank to channel loans, loan guarantees and other financing to clean energy projects.

In a year of often bitter partisan warfare, its appeal is not surprising, advocates say.

Depending on its final structure, the proposed Clean Energy Deployment Administration (CEDA) could be funded with up to $10 billion from the Treasury. That capital, in turn, could guarantee $100 billion in revolving loans. CEDA advocates say the $100 billion in federally backed loans could bring in another $100 billion in private capital, vastly accelerating deployment of smart grid technologies, renewable generation, carbon abatement programs and nuclear power.

The argument has political traction. The House-passed climate bill, sponsored by Democrats Henry Waxman (Calif.) and Edward Markey (D-Mass.), includes a CEDA provision. So does the energy bill approved in August by the Senate Energy and Natural Resources Committee. Although the House and Senate versions differ in places, both have bipartisan support from lawmakers frustrated by slow pace of the Energy Department's current energy loan guarantee program.

The future design of a green bank is in play now as senators consider climate and energy bills. The question about CEDA being asked in Senate offices currently is not whether to create it, but how far it might range in supporting clean energy.

"It could have a much broader mandate" than the current Energy Department energy loan guarantee program, said Swami Venkataraman, a group director at the Standard & Poor's credit rating service. "It could make loan guarantees, direct loans, or provide insurance, for example, to cover the risk of carbon dioxide leaks from underground storage."

Loans for great big, sooty clunkers

Other roles for the bank are under discussion on Capitol Hill. Natural gas industry lobbyists say the bank could buy old, dirtier coal plants from power companies at auction. The plants would be shut down, and the utilities would use the money to build new renewable energy generation -- an energy version of the Cash for Clunkers program for automobiles. New gas plants would be the natural backup for increased reliance on renewable energy, according to the industry's pitch.


Or the bank could support large-scale home weatherization and energy conservation programs across the county, guaranteeing homeowner loans that could then be securitized and resold in secondary markets. "The details of how it would function have to be finalized, and these are quite open for discussion and debate," said Venkataraman.

Former Federal Communications Commission Chairman Reed Hundt, who heads a lobbying group called the Coalition for the Green Bank, says federal funding support is essential, given the cost of renewable energy and the still-battered state of the banking sector.

"Everyone recognizes that right now, the cost of raising money to pay for the green revolution is prohibitive," he said. That means that either consumers must pay significantly more for energy or the government must continue up-front subsidies, and neither will work for the long run. "We need a system that is long-term, that is going to work for 20 years, not one that goes from Congress to Congress. Here's what's long term -- a 30-year [guaranteed] bond at 4 1/2 percent with a low risk of default."

Opposition to various versions of the green bank idea comes from several directions.

Cash for new nukes?

Anti-nuclear advocates fear the program would be dominated by huge loan commitments for new nuclear reactors. Critics also oppose a provision in the Senate bill that they say would remove annual congressional oversight of the bank's obligations.

The Union of Concerned Scientists issued a statement last week opposing parts of the Senate committee bill that it said failed to limit costly loan guarantees for new nuclear plants and carbon sequestration projects.

"With no limit on the amount of financial assistance for any one technology, CEDA's project portfolio could disproportionately factor capital intensive, non-renewable energy technologies at the expense of less costly, cleaner technologies," said UCS, pointing a finger at nuclear reactors.

The House-passed bill is far preferable, says Autumn Hanna, senior program director at Taxpayers for Common Sense. The House version says that no single technology -- whether nuclear, wind or any other -- could get more than 30 percent of CEDA's support.

The Senate bill does not set such a limit, on the grounds that the total funding commitments by the bank would depend on the varying level of default risk for various energy projects, which would be lower for established technologies like wind power and higher, say, for advanced storage battery projects. A 30 percent cap doesn't make sense in that context, supporters of the Senate bill say.

Critics aren't persuaded. "We have serious concerns with the proposals and think they will have serious implications for taxpayers," Hanna added. She is particularly vexed at part of the Senate bill and the green bank coalition proposal that removes loan decisions from regular congressional oversight.

The Federal Credit Reform Act requires annual appropriations to cover the estimated cost of loan defaults, but CEDA would be exempt from that in the Senate and coalition plans. "That's one of the biggest issues," Hanna said.

Hundt responded that it makes far more sense to capitalize the bank once and for all, rather than require annual appropriations, which would leave it "totally politicized all the time," he said.

Like TVA with a checkbook?

The House version creates CEDA as a government-owned corporation like the Tennessee Valley Authority. The Senate would make it a corporation within the Energy Department. In either case, the public interest can be protected by government audits and congressional oversight, proponents say. Michele Boyd, director of the Safe Energy Program for Physicians for Social Responsibility, said the critical issue is how well CEDA would measure the risk of default. On this issue, she said, the Senate version offers much less visibility than the House bill

Hanging over the proposal in some minds is the memory of the housing bubble and the toxic spawn of securitized mortgages, no-document loans, credit default swaps and other structured finance vehicles that metastasized into a global financial crisis.

While the differences between the multitrillion-dollar housing bubble and the energy industry are profound, CEDA skeptics worry that CEDA will move guaranteed energy loans into secondary financial markets, creating fee-driven, poorly vetted energy investments backed by taxpayers.

The creation of an effective "green bank" requires a collaboration between Congress and Wall Street, where politics and finance meet, and that boundary has been rubbed raw by the financial crisis and recession. Hundt's coalition includes a strong representation of private equity financiers, venture funders and professionals in that field such as Equilibrium Capital Group, GreenCore Capital, KRM Energy Advisors, Riverstone Holdings and Mesirow Financial Consulting LLC.

"Whenever 100 bankers line up behind 50 senators, you start to wonder what's in the bill," said Kevin Book, a principal at ClearView Energy Partners in Washington. But he added that the collaboration is essential, whether the issue is carbon markets or an energy loan guarantee program. "It is impossible to meet the financing needs for green energy without private capital."

Analogies between the housing bubble and a green energy campaign are off-target, he maintained. "Consumer mortgages can be written in an hour. Even the quickest energy project has permitting requirements that completely identify partners and stakeholders every step of the way."

Hundt said a critical difference is that the implicit government banking behind the mortgage bubble came from Fannie Mae and Freddie Mac, both of them profit-seeking enterprises. The bank must be nonprofit, he said. Concerns about derivative transactions tied to bank financing should be dealt with by overall financial market reform, Hundt added.

Government-backed loans that can be 'stripped'?

An illustration of the financial-political tension involves the issue of "stripping" or separating the guaranteed parts of green bank loans from non-guaranteed parts.

The bank's most common product could be a project loan with a government guarantee covering 80 percent of the total, and the remaining 20 percent borrowed by the project developers from commercial banks or private lenders without a guarantee.

S&P's Venkataraman has advised the Energy Department that if loans cannot be stripped, then the risk of default on the unguaranteed 20 percent portion would lower the credit score -- and raise the borrowing costs -- for the entire project. If, however, the debt is separated into guaranteed and non-guaranteed portions, and then resold separately to investors, the high rating on the government-backed debt could offset the much lower rating on the privately issued debt, potentially lowering the project's overall financing costs.

Doug Koplow, president of Earth Track, a Cambridge, Mass., advocacy group, said the private lenders in the energy deals should stay in the deal, to give them more reason to scrutinize the energy project proposals carefully at the outset. "There's a public benefit in requiring lenders to keep their capital at risk for an extended period of time," he said. "If private lenders weren't able to get out a month later, leaving the feds holding the bag, I'd have a lot more confidence the deal wouldn't blow up."

DOE last month proposed to permit loan stripping in its current loan guarantee program except when the government guarantees more than 90 percent of a loan.

Allowing green energy loans to move into secondary markets replenishes the capital of private lenders so the process can keep going, replies Hundt. "We need to add 25 gigawatts of clean energy capacity every year for 16 straight years, and we need to get started right away," Hundt said.

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