A green bank is a financial institution, typically public or quasi-public, that uses innovative financing techniques and market development tools in partnership with the private sector. to accelerate deployment of clean energy technologies. Green banks use public funds to leverage private investment in clean energy technologies that, despite being commercially viable, have struggled to establish a widespread presence in consumer markets. Green banks seek to reduce energy costs, private sector and economic activity, and the transition to a low-carbon economy. In the United States, green banks have been created at the state and local levels. The United Kingdom, Australia, Japan, and Malaysia have created national banks dedicated to private investment in clean energy technologies. Together, green banks around the world have driven approximately $ 30 billion of clean energy investment.
In the US, the green bank concept was originally developed by Reed Hundt and Ken Berlin, as part of the 2008 Obama-Biden Transition Team’s efforts to facilitate clean energy development. A similar concept was adopted as an amendment to the federal cap and trade bill, called the American Clean Energy and Security Act, introduced in May 2009. A companion piece of federal green financing legislation was coined in the Senate, where it received broad bipartisan support. When the 2009 cap and trade legislation finally passed to the Senate, Green Bank advocates in the US focused on the state level. Connecticut established the first state green bank in 2011, followed by New York in 2013. By the end of fiscal year 2015, the Connecticut Green Bank had $ 663 million in project investments. In the UK in 2009, two reports were published advocating the creation of a state-backed infrastructure bank to provide financing to green projects. The first, entitled “Accelerating Green Infrastructure Financing: Outline proposals for UK green bonds and infrastructure bank” was published in March 2009 by Climate Change Capital and E3G. The second, entitled “Delivering a 21st Century Infrastructure for Britain” was published by Policy Exchange in September 2009 and was written by Dieter Helm, James Wardlaw and Ben Caldecott.
There are many types and styles of institutions that finance clean energy and green infrastructure projects. There are several key elements that have distinguished green banks from other financing institutions: a focus on commercially viable technologies, a dedicated source of capital, a focus on leveraging private investment, and a relationship with government. Green banks focus on commercially viable technologies, as opposed to early-stage innovative technologies, because they have been tested, have less associated “technology risk” and can reliably produce revenue for project owners. Green banks are publicly-owned entities with some manner of a relationship to government, and are usually capitalized by public dollars. Just like a commercial bank, it is important that they have their own balance sheet.
For consumers, high upfront costs often make clean energy technology unattractive to adopt despite declines in clean energy technology costs. Historically, the clean energy sector has depended on taxpayer-funded grants, rebates, tax credits, and other subsidies to drive market development. Ideally, private lenders would provide financing to build-owners to cover the cost of clean energy adoption (beyond what is covered by rebates). However, there are some market inefficiencies and inherent challenges to financing the environment. Some private lenders do offer for clean energy projects, but typically they are relatively expensive. Such terms make financing a clean energy project unattractive from the end-user’s perspective. To be attractive from the end-user’s perspective, would be such that the monthly payments for clean energy projects would be greater than the monthly payments for the cost of financing. This kind of cash flow structure is only possible with the expectation of success, and is expected to increase. Therefore, private equity is available at all under the economic potential of the project. A shortfall of private financing exists for several reasons. One reason is that it is a relatively short track record for clean energy financing, and therefore there is little data for the future. Without data, and observable pipeline of similar projects, banks are left with high levels of debt and other debtors. This uncertainty leads to a decline in the market, and a high rate of diligence and / or unfavorable lending terms. Another reason for the financing gap is that many clean energy projects are small and distributed. Building efficiency upgrades and rooftop solar projects are inherently small investments that are geographically dispersed, with varying amounts of credit. Heterogeneity in clean energy projects is more expensive for a private lender to scale, making loans for clean energy projects potentially uneconomical from the perspective of the lender. A third reason for financing gap is the lack of capital market liquidity and maturity. If a commercial bank provides an energy efficiency loan, it is not possible to make it to the other side of the world. Mortgage and auto lenders do not have this difficulty, which means that it is highly liquid. These kinds of secondary markets are just now forming for clean energy technologies. The final cause of private underinvestment is related to human and organizational behavior. To begin with a new market, they need to learn more about the risks and processes of a new market. This process can be time-consuming. it is unknown to the bank if it will be able to Mortgage and auto lenders do not have this difficulty, which means that it is highly liquid. These kinds of secondary markets are just now forming for clean energy technologies. The final cause of private underinvestment is related to human and organizational behavior. To begin with a new market, they need to learn more about the risks and processes of a new market. This process can be time-consuming. it is unknown to the bank if it will be able to Mortgage and auto lenders do not have this difficulty, which means that it is highly liquid. These kinds of secondary markets are just now forming for clean energy technologies. The final cause of private underinvestment is related to human and organizational behavior. To begin with a new market, they need to learn more about the risks and processes of a new market. This process can be time-consuming. Mortgage and auto lenders do not have this difficulty, which means that it is highly liquid. These kinds of secondary markets are just now forming for clean energy technologies. The final cause of private underinvestment is related to human and organizational behavior. To begin with a new market, they need to learn more about the risks and processes of a new market. This process can be time-consuming. Mortgage and auto lenders do not have this difficulty, which means that it is highly liquid. These kinds of secondary markets are just now forming for clean energy technologies. The final cause of private underinvestment is related to human and organizational behavior. To begin with a new market, they need to learn more about the risks and processes of a new market. This process can be time-consuming. The final cause of private underinvestment is related to human and organizational behavior. To begin with a new market, they need to learn more about the risks and processes of a new market. This process can be time-consuming. The final cause of private underinvestment is related to human and organizational behavior. To begin with a new market, they need to learn more about the risks and processes of a new market. This process can be time-consuming.
To fight these barriers to clean energy market development, green banks help consumers secure long-term, low-interest loans. Green banks harness has various set of financing techniques, including credit enhancements, co-investment, and securitization.
Green banks frequently uses credit enhancements to leverage private investment. Loan loss reserves, overcollateralization and subordinated debt can help to determine who is interested in entering into the market, but concerns the risks associated with developers. Credit enhancements also help lower the cost of debt and credit ratings.
Sometimes green banks invest directly in clean energy projects to facilitate additional private investment or improve the financial terms by private lenders.
Securitizing clean energy loans makes lending far more attractive for private investors. Individual clean energy projects, which vary in credit, rental, and technology, may be expensive for a bank to underwrite, and may not achieve the desired scale of investment. Bundling these loans and portfolios and selling them (or shares of them) spreads risk and creates scale, attracting a group of private investors. A green bank can create and securitize portfolios of loans, allowing investors to purchase some portion of the green bank’s debt on the secondary market. Green banks can also add credit enhancements, such as overcollateralization or loan loss reserves, to lower the risk of credit risk. Securitization provides greater liquidity in the market for clean energy project financing, which helps lower the cost of capital for borrowers. The Connecticut Green Bank is one of the first and second largest security companies in the world, selling 75% of its $ 40 million PACE Portfolio to the Clean Fund, a specialty finance company.
Green banks’ innovative financing techniques are more effective if they can operate through robust delivery mechanisms. Green banks can use these structures to increase the availability of energy.
Property assessed clean energy (PACE). The process places a link on the property, and the property owner then repays the financing through PACE assessments on the property tax bill. This reduces the risk associated with a loan and incentivizes private investment. Because of the PACE structure, it makes it easy for consumers to obtain loans. Because the loans are attached to the property when the property is sold.
On-Bill Financing. Similar to PACE financing, on-bill repayment affords lenders security in a developing market. Because electricity is a necessity, utility bills have a very high rate of repayment nationwide. Placing Loans and Payments on the Future of the United States. Also, the on-bill structure enables the benefits of added energy efficiency. Furthermore, the simplicity of on-bill financing is attractive-it is logical that the payers for the good they consume.
Sometimes the availability of clean energy financing is not enough to stimulate the desire for a different level of energy efficiency, and various non-finance market development activities are necessary. A green bank can design and execute various market development activities to build the market for clean energy. Market development activities can not directly involve lending, and a green bank may hire an outside organization to design and perform these activities.
Green banks or their partners can aggregate consumer demand for clean energy projects One means by which a green bank is a neighborhood-wide group-buying deal. The Connecticut Green Bank and Solarize have used this technique throughout Connecticut.
A green bank can organize contractor trainings in which local clean energy technology installers, contractors, and developers. Contractor trainings allow contractors to use their knowledge of green banking products as a sales tool, increasing the size and volume of the projects they do. Ensuring that contractors is a leader in the financing of finance.
Innovative renewable energy credit (REC) financing plans have also helped green banks lower energy costs for consumers. Green banks can agree to monetize the RECs that will be produced by a given clean energy project. After gaining ownership of the RECs through the financing agreement, a green bank can then sell them to utilities. As a result of this activity, green banks can offer more favorable terms and conditions and can obtain RECs in large volumes, and reduce their cost of compliance and allow them to save on their ratepayers.
Green banks also operate as an interface between lenders and borrowers. Green banks can offer a central clearinghouse for the world of energy, including technical support for investors, and project coordination services for contractors. By facilitating transparency and accessibility of resources, the green banks bridge the gap between supply and demand for capital for clean energy projects.
A green bank can take many forms. Green banks can be newly created entities, or it can be created by repurposing an existing entity. A green bank may be a direct share of government, such as a subdivision of an existing agency. The New York Green Bank, for example, is a division of the New York State Energy Research and Development Authority (NYSERDA). A green bank can also be a quasi-public instrumentality, such as a wholly owned non-profit public corporation. The Connecticut Green Bank, for example, is a quasi-public entity with both government and independent directors serving on its board. A green bank can also be an independent non-profit entity by the government, or through a contract, or by purpose-building an entity to serve as a green bank. Montgomery County Green Bank, for example,
Green banks are usually seeded with public capital, and that capital can come from a wide variety of channels. The green bank finance model preserves limited supplies of public capital.
A state or local government may place a small surcharge on energy bills within its jurisdiction, and may require that the funds raised by this charge be disbursed to a green bank. Or the government may repurpose an existing surcharge and direct the revenue to a green bank. The overload can provide green banks with a yearly influx of capital. The Connecticut Green Bank and New York Green Bank are capitalized in part by a systems benefit charge.
Green banks can also issue bonds to obtain capital. Public sector bonds have the benefit of being tax free, A green bank ‘s bonding authority allows debtors to secure a steady stream of payments from an institution with a low risk of default. In exchange, the green bank receives capital that it can immediately invest in clean energy deployment.
Green banks can also be partially capitalized by various taxes, fees, and cap-and-trade systems. For example, both the NYGB and the CGB are capitalized by the regional Greenhouse Gas Initiative (RGGI).
A government can allocate dollars to a green bank as part of its regular budget and appropriations process.
Sometimes an existing investment fund will be underused or completely unused. It may be possible to re-allocate some such funds and put the dollars to work in a green bank.
Pension funds can invest in deals or portfolios of deals.
Foundations can make grants to green banks to fund startups, or they can make program-related investments in green banks and earn a return on their money in a way that is aligned with their mission.
Community Development Financial Institutions (CDFIs) can co-invest or provide startup capital for green banks. CDFIs can also provide important technical expertise in certain areas of green bank activity.
The Connecticut Green Bank (CGB) was established in 2011 and was the first green bank in the United States. It is the most advanced green bank in the nation in terms of deal volume. Connecticut’s legislature converted the Connecticut Clean Energy Fund, a grant-focused promoter of clean energy investment. The CGB is quasi-public and its board of directors is composed of both government and independent directors. The CGB is continually capitalized by Connecticut’s participation in the Regional Greenhouse Gas Initiative (RGGI) trading program. The bank also possesses the ability to issue its own bonds based on its balance sheet. In the first years of existence, the CGB has stimulated $ 663.2 million of investment in clean energy projects, three-fourths from which came from the private sector. The growth in clean energy investment coincides with a huge decline in the taxpayer-funded clean energy grants. In effect, the CGB has increased the level of net income while reducing taxpayers’ financial burden.
Governor Andrew Cuomo created the largest Green Bank in the nation, NY Green Bank (NYGB), and capitalized it through re-purposed ratepayer surcharges and revenues generated by the issuance of emissions permits. The New York Energy Office designed a 5-year capitalization structure with multiple infusions of capital suming to $ 1 trillion. The NYGB is now fully consolidated and operates as a wholesale energy lender (as opposed to Connecticut, which operates as a retail lender). Rather than design specific financing products and programs, the NYGB links to the market to learn what financing is needed. To date, the NYGB has received over $ 1 billion in proposals and has an active pipeline project of ~ $ 500 million. The first set of NYGB investments were announced in the fall of 2015.
The California Lending for Energy and the Environmental Needs Center operates as the green bank. The CLEEN Center is located within the California Infrastructure and Economic Development Bank. One of the major initiatives-the Statewide Energy Efficiency Program (SWEEP) -finances energy efficiency projects and upgrades for municipalities, universities, schools, and hospitals. Unlike the Connecticut and New York Green Banks, the CLEEN Center exclusively facilitates commercial projects and upgrades. Interested parties offers a project and apply for financial assistance with the CLEEN Center. CLEEN projects receive funding ranging from $ 500,000 to $ 30 million.
The Hawaii Green Infrastructure Authority was created in 2014 to finance clean energy development in Hawaii. The Green Energy Market Securitization Program (GEMS) is one of the most important programs in the world. For geographical reasons, electricity is more expensive in Hawaii than anywhere else in the United States. Hawaiian homeowners to install solar panels, but solar market penetration. The cash flow positive financing generated by GEMS is designed to help low-to-moderate income.
In 2015, State legislators converted the Rhode Island Clean Water Finance Agency (RICWFA) into the Rhode Island Infrastructure Bank (RIIB). The RIIB offers both residential and commercial PACE programs designed to reduce energy costs for consumers. The RIIB also created the Efficient Buildings Fund, a program to provide low-cost financing for energy efficiency and renewable energy projects in public buildings.
Montgomery County, Maryland is the only county in the US that has created a local green bank. The Montgomery County Green Bank (MCGB) was capitalized with $ 20 million from the Pepco and Exelon.
Malaysia’s Green Technology Financing Corporation was launched in 2010 as a component of the National Green Technology Policy. Through the Green Technology Financing Scheme, the company offers 2% interest rate buy-down and 60% guaranteed financing for green technology projects.
In 2012, the UK government created the UK Green Investment Bank (GIB) to attract private funds for the financing of the private sector. It is structured as a public limited company and is owned by the Department for Business, Innovation and Skills (BIS). Its headquarters are in Edinburgh, where it is also registered, and has a secondary office in London. The GIB works with a variety of technologies including energy efficiency, waste and bioenergy, offshore wind, and onshore renewables. UK’s GIB has committed £ 2.6 billion to 76 domestic infrastructure projects, mobilizing over £ 10 billion of private investment. In March 2016, the UK government announced that it is planning to move the GIB to the private sector. The government plans to sell its shares in the GIB,
Australia’s Clean Energy Finance Corporation (CEFC) was founded in 2012 with the purpose of mobilizing investment in renewable energy, energy efficiency, and low emissions technologies. At the beginning of fiscal year 2016, the CEFC had invested $ 1.4 trillion of its own capital and attracted $ 2.2 trillion in private sector investment.
The Green Bank Network is an international membership organization focusing on solutions to clean energy finance. It was launched at the 2015 COP21 meeting in Paris, by state and national Green Banks in Connecticut, Australia, Malaysia, New York, Japan and the United Kingdom, and non-profits the Natural Resources Defense Council (NRDC) and the Coalition for Green Capital (CGC).