Globally, Green Banks Strive to Grow Clean Energy Markets

The second annual International Green Bank Summit took place in Manhattan last week, bringing together public and private sector financial leaders from all over the world to discuss a mutual goal: leveraging private sector capital with public funds in order to foster clean energy and energy efficiency projects with an eye to developing these embryonic sectors into self-sustaining markets.  

Green banks are government-backed financial entities that aim to solve society’s energy problems—ramping up clean alternatives to fossil fuels, for example—without resorting to the grants and subsidies that governments traditionally resort to.

“The classic government response to provide subsidies and grants? That’s just not going to work,” said Marshal Salant, head of Citi’s Alternative Energy Finance group. “There isn’t enough money, certainly not in North America, and I don’t suspect around the world—what with budget deficits—to do this purely with subsidies and grants. We have to get private capital into this market to get it done.”

The idea is to find gaps in the market where financing for a given technology or technique is not yet available: traditional banks, for example, cannot responsibly make loans on smaller energy projects in fledgling sectors where the chances of a return on investment are highly uncertain or the maturation rate of a loan is so slow that the bank has to preserve an unrealistic amount of capital against it. Instead, green banks partner with traditional banks to create certainty and provide businesses and homeowners with the loans they need. 

“It’s the ability to bring in private capital, to get paid back with taxpayer dollars, bring about economic development, and rebuild the energy system, because that’s what we need to do,” said Richard Kauffman, chairman of energy and finance for New York.

Attending the summit were state-sponsored clean energy finance organizations from Australia, Japan, the United Kingdom and Malaysia, along with green banks in New Jersey, Hawaii and Connecticut and a number of other states who are considering developing green banks of their own. Private financial intuitions like Citi and Kohlberg Kravis Roberts & Co. (KKR), a multinational private equity firm, were also represented, along with other non-profit and non-governmental organizations. (KKR Capital Markets recently entered into a £200 million investment partnership with the UK Green Investment Bank and specialist investment manager Temporis Capital LLP for small-scale hydro-electric and onshore wind projects in England.)

“We … are focused on a sustainable use of the taxpayers money,” said Oliver Yates, CEO of Australia’s Clean Energy Finance Corporation, which has been active since 2011 and is considered a pioneer in the field. “That’s the difference between a grants culture and a loan culture, because a grant is a 100 percent immediate write-off loan and it is an incredibly expensive way to try and drive change.”

Proponents of green banks say that they differ from grant and subsidy programs, which disburse regular servings of cash for the program’s duration that do not need to be repaid, are subject to changes in the tax structure from year to year and, critics argue, often amount to a welfare state for corporations. By contrast, green banks aim to make a return on investment—and reinvest that return in new clean projects—leading to sustainable growth in the industry. The hope is that one day, financing will be conducted in the traditional bond market and the green banks will no longer be needed for these sectors to function.

“I think … [this] is the reason why energy efficiency hasn’t yet built up an industry,” Yates said. “There will be a program and then it will stop, and then there will be another program, and then it will stop. Who is going to set up an industry around a stop-and-start budgetary process? Whereas now if we can get lending institutions in there, you can prove to people that you can have money lending in these sectors.”

New York’s Green Bank—announced by Gov. Andrew Cuomo in January 2013—introduced its first round of transactions in October, involving the deployment of $200 million in capital to catalyze the financing of seven separate projects that are expected to leverage some $600 million in private–sector funds. Ventures include a partnership with Bank of America Merrill Lynch to help the latter expand its ability to finance clean energy projects and an agreement with Citi and West Coast-based Renewable Funding, a company that provides financing for people to take out loans to retrofit their homes to maximize energy efficiency. The state boasts that the projects are expected to mitigate 575,000 airborne tons of carbon dioxide annually, similar to removing 120,000 cars from the roads. 

Alfred Griffin, president of New York’s Green Bank, emphasized residential energy efficiency programs in particular as being a tricky market to break open, and said that unlike in the solar industry, there is no established, standard financing mechanism that can help fund efficiency retrofits in homes on a mass scale. 

“I think standardization is very necessary for all of these smaller types of transactions where it’s difficult to tailor-make a financing solution for each one,” said Griffin, noting that for larger, utility-scale projects, a custom-designed financing solution is worth a bank’s time. “With solar … it’s a pretty seamless process for a contractor to come out and say, ‘We can do these things,’ and then right away there’s an option—‘Rather than paying $15,000 in cash today, we can actually finance this for you and your savings will be greater.’ … It’s structured in such a way that it can be an at-the-kitchen-table decision.”

“Energy efficiency is hard to convince people to do in the first place,” Citi's Salant said. “You pay $1 million today, and you’ll save $250,000 a year for twenty years—well there is no doubt that a corporation or small business should do that. But the problem is that in the first year you’ve spent $1 million and you’re only going to get $250,000 in savings and your out $750,000. The solution is to finance the project … if you spread the million out over 20 years you’re only paying $50K a year.”

Salant also pointed to financing gaps, even for the relatively mature solar industry, in the middle area between utility-scale development at one extreme and tiny residential projects at the other: so-called “distributed generation,” or the small-scale, decentralized power production or storage that is still connected to the grid. (A big part of Cuomo’s Reforming the Energy Vision initiative involves the incorporation of distributed generation power sources throughout the grid, which should improve the power system’s efficiency and resiliency, and broaden customer choice.)

“There is plenty of room still for innovation, even in solar,” Salant said. “One size does not fit all. The way we work with green banks and with private capital will differ by size.”

Yates said the summit had been valuable as a platform to discuss the hurdles facing the industry and the advantaged green banks have in surmounting them.

“One of the big steps forward that is presented by this network of green banks is the rapid ability for us to share financing knowledge between us, because we’re not competitive institutions,” Yates said. “We’re actually all focused on achieving a very similar outcome.”

Australia’s green bank, for example, recently committed to financing waste-to-energy technology for the first time.

“There had been no experience of this in Australia, but the U.K. Green Bank had done three waste-to-energy transactions and it was particularly useful for us to go and talk to their credit committee and understand how they became comfortable with this information technology and then drag it back into our own system,” Yates said.

At the summit’s conclusion, representatives of the green banks announced they expect to collectively deploy some $15 billion in clean energy and energy efficiency projects, which could be grown to over $40 billion in total investment over the next five years. The participants also agreed to reconvene in 2015.