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Clean Energy Finance: Green Banking Strategies for Local Governments

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Clean Energy Finance: Green Banking Strategies for Local Governments Clean Energy Finance: Green Banking Strategies for Local Governments GREEN BANKING OVERVIEW This paper provides a basic explanation of green banks, the benefits they offer, issues local Green banks are financial institutions that can governments might consider when deciding whether leverage public funding to attract private capital for to create a green bank, and several case studies. It clean energy projects (including energy efficiency, also provides information on other green banking renewable energy, and other distributed energy opportunities for local governments. resources), as well as other “green” investments. They can assist states and communities in WHAT ARE GREEN BANKS? partnering with private lenders and investors to Although there is no single green bank model, a mobilize capital, alleviate perceived risks, and green bank is generally defined as an institution that design attractive financial instruments to support leverages limited public dollars to attract additional these investments. private investment in clean energy or other “green” While several states have established green banks, investments, such as green infrastructure projects. local governments are also exploring this innovative Green banks typically use their funds to support clean energy financing opportunity. The New York energy efficiency upgrades, renewable energy City Energy Efficiency Corporation (NYCEEC) and projects, and other proven clean energy the Montgomery County Green Bank in technologies. The types of projects that they support Montgomery County, Maryland, were the first local vary depending on the local context (see the green banks in the United States, established in examples provided at the end of this document).i, ii 2010 and 2016, respectively. Washington, DC, To date, more than 75 percent of all green bank passed legislation in July 2018 to create the third investments in the United States have been for local U.S. green bank. renewable energy projects.iii Green banking can In addition to Depending on state and local priorities and establishing their financing needs, green banks typically support help local governments own green banks, projects in targeted sectors or with specific pursue their there are multiple customer profiles, such as commercial property and environmental, ways in which business owners, residential homeowners, energy, and local governments nonprofits, rental property owners, institutions, and economic priorities. can support “green government agencies. banking.” Examples include working with state green banks or WHAT ARE THE BENEFITS OF GREEN local finance agencies to help residents and BANKING? businesses access financing, or establishing local Local business owners and residents are nonprofit entities that attract private capital for increasingly interested in clean energy as a means to clean energy investments by providing services reduce energy consumption and costs, increase similar to those offered by green banks. As such, comfort, and protect the environment. While clean local governments can pursue green banking energy technologies are becoming more opportunities that align with their own needs, economically viable, the growing demand for these abilities, resources, and operating contexts. technologies has not always aligned with access to reasonably priced, appropriately targeted, and EPA-430-F-18-004 October 2018 1 GREEN BANKING STRATEGIES FOR LOCAL GOVERNMENTS sustainable financing. Private investors often would otherwise be technologically and perceive this market segment as risky. In addition, economically viable. external funds that are sometimes used to Green banks can help raise customers’ awareness of supplement local budgets, such as funds from the financing opportunities available for clean energy state or federal government or charitable projects, thus increasing the overall demand for foundations, may not always be available. As a financing. Green banks can also aggregate this result, local governments are interested in attracting demand for local clean energy project financing, more capital to this market to support clean energy and use various techniques to reduce administrative investments in their communities and to help costs, such as warehousing and securitization advance their environmental, energy, and economic (described on page 4), making projects more priorities. attractive to lenders. Green banks can help address this financing gap since they use their funds to reduce the risks and Addressing Knowledge Gaps to Reduce administrative burdens for private investors, making Perceived Risks it easier for the private market to finance clean Although many clean energy technologies are well- energy projects. By established, there may be instances where they are Green banks can help attracting more used in new configurations or locations, often mobilize private capital private investment referred to as “first of its kind” applications. by increasing demand into the market, Financial institutions might view these projects as for clean energy green banks can too risky to finance, especially without a payback financing and help local history for similar projects. Green banks can help reducing perceived governments address this challenge by sharing information about risks for investors. increase the the energy savings potential and other data accessibility of associated with similar projects, and by raising affordable financing for clean energy projects that is financial institutions’ awareness of clean energy iv independent of external sources of funding. This technologies and benefits generally. They can also support can help local governments achieve other support demonstration projects that substantiate economic objectives, such as enabling the growth of claims of the viability of clean energy projects, thus local businesses that provide clean energy products mitigating investors’ perceived risks. and services. This section describes several of the primary benefits that green banks and other green Mobilizing Private Capital to Meet banking opportunities offer. Demand Generating and Aggregating Demand for Green banks can be effective at mobilizing private capital in several ways. As described above, they Financing help reduce administrative and transactional costs Some clean energy projects, such as home energy associated with small, decentralized projects that efficiency upgrades or residential rooftop solar, are are otherwise viable; and they help address typically small and decentralized. Financing many knowledge gaps about the benefits of financing small and decentralized projects individually these projects. In addition, green banks can provide involves higher administrative and transactional institutional backing that mitigates the risk of costs than financing a few larger, utility-scale investing in energy technologies outside of a private projects. As a result, financial institutions may be investor’s typical purview, such as projects that less likely to underwrite loans or provide other involve large capital expenditures and long payback financial instruments for these projects, which periods. For example, green banks can include loan Learn more about EPA’s energy resources for state, local, and tribal governments: www.epa.gov/statelocalenergy 2 GREEN BANKING STRATEGIES FOR LOCAL GOVERNMENTS loss reserves or loan guarantees. Loan loss reserves Addressing Specific Financing Needs can be used to cover losses incurred by a financial Green banks can also fill sector- or market-specific institution on clean energy loans up to a gaps in local clean energy project financing and predetermined amount. In this way, these reserves access. For example, private financing options for can reduce financial risks, such as those associated residential rooftop solar installations often involve with potential loan payment default. In the case of higher interest rates and credit measurement loan guarantees, the green bank assumes the requirements that make them inaccessible to lower- borrower’s debt if the borrower defaults, again income households. In such instances, a green bank reducing the financial risks for private investors. could offer low-interest loans or lease financing for rooftop solar installations that are targeted at low- Mobilizing Capital income households, alongside energy efficiency Through 2017, U.S. green banks had mobilized upgrades financed through energy savings more than $2.6 billion of clean energy investments.a agreements. Other options might include allowing This is enough capital to install a 5-kW photovoltaic customers to use their bill repayment history as system (the most common size for residential b proof of creditworthiness, rather than more projects) on approximately 230,000 roofs. ® a traditional measures like FICO scores. Based on an EPA review of green bank financial data. b Based on information available from the Solar Action Alliance: www.solaractionalliance.org/residential-solar-panel-cost. WHAT FINANCING MECHANISMS DO GREEN BANKS OFFER? Using Public Funds Efficiently Green banks can use an array of financing mechanisms to support clean energy investments for Green banks leverage limited public funds to attract a variety of customers, including businesses, private investments to address financing gaps. This homeowners, institutions, and others. These approach allows public dollars to be recycled mechanisms include:vi through financing with repayment structures, and lessens total public expenditures over time. In • Loans: Green banks can facilitate
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