Can Green Banks Fast-Track the Switch to Clean Energy?
A historic federal investment is allowing mission-driven lenders to leverage public funds to lower costs for residents.
Green banks are a relative newcomer to the green-money market. But, with a recent $20 billion infusion from the Inflation Reduction Act, they’re poised to accelerate the clean energy transition.
Operated by state and local government agencies or nonprofits, these financial institutions leverage public funds to catalyze private investment in clean energy projects. Since the first green bank was established in 2011, green banks have become a major part of sustainable financing options for commercial property owners and are now helping them achieve their ESG targets.
According to the Coalition for Green Capital, U.S. green bank institutions have mobilized more than $9 billion in public and private capital into clean energy projects. As of January 2023, there were 23 green banks operating nationwide, but, due to the federal funding boost, many more are in development, according to the National Caucus of Environmental Legislators, including a national green ban
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In April, the U.S. Environmental Protection agency announced $20 billion in awards for funding green banks and financial intermediaries to speed up direct investments that reduce GHG emissions. The funds will flow from the $27 billion IRA-established Greenhouse Gas Reduction Fund.
Three nonprofits will manage the distribution of the $14 billion National Clean Investment Fund, which was authorized in the IRA, to establish a national green bank. The Coalition for Green Capital was awarded $5 billion, Climate United Fund $7 billion, and Power Forward Communities $2 billion.
Meanwhile, the $6 billion Clean Communities Accelerator awarded grants to five nonprofit Community Development Financial Institutions to establish hubs for funding and technical assistance for community lenders (up to $10 million per lender) working in low-income and disadvantaged communities.
“GGRF is a historic opportunity to deploy financing to achieve a clean-energy future, lower energy costs and invest in underserved communities” said Trisha Miller, CEO of DC Green Bank, noting that it provides a foundation for ensuring sustainable and inclusive development are one in the same and will support millions of jobs nationwide.
Green banks differ in how they are structured and operated, as well as in priorities, but all of them are on a mission to make the transition to advance deployment of clean energy, with an emphasis on disadvantaged communities and small businesses, by leveraging public funds to stimulate private capital investment and bridge financing gaps.
How they do what they do
Green banks use a variety of financial tools to make sustainable projects attractive to the private sector, according to the CGC, such as:
- Credit enhancements, like loan loss reserves or loan guarantees, to lower investment risk;
- Aggregation, or pooling, of small, geographically diverse debt into financial instruments;
- Technical assistance to reduce underwriting uncertainty by developing scalable, standardized lending documents and processes for innovative energy projects.
Typically, they use their own capital to provide energy efficiency upgrades and renewable energy projects, demonstrate innovative clean-energy technology, or fill funding gaps that may be stalling projects.
MHN looked inside three U.S. green banks to get a sense of their structures and how they leverage public funds to stimulate private investment in clean-energy technology and projects across all income groups and property types.
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NY Green Bank
New York’s green bank, a division of the New York State Energy Research and Development Authority, structures financings that “catalyze” more ambitious scopes in both new and existing buildings, according to Andrew Kessler, the bank’s president. Owners can supplement senior financing with a subordinated loan from the bank to cover, for example, putting solar panels on a roof that’s being replaced.
Launched in 2013 as a $1 billion fund, NY Green Bank—the largest in the nation—has committed $2.3 billion in cumulative commitments across 133 transactions as of yearend 2023, resulting in up to $7 billion in total capital mobilized into New York’s clean energy economy. From Jan. 1, 2020, through the end of 2023, 33 percent of NY Green Bank’s total investments, or $361 million, have been committed to projects benefitting disadvantaged communities. “From an emissions perspective, that’s resulted in a reduction of nearly 45 million metric tons of GHG emissions,” Kessler said
With the state’s Climate Act as its North Star, NY Green Bank has prioritized three areas: clean-energy production and storage, building energy performance, and clean-energy transportation.
The bank focuses on filling gaps at the pre-development, construction or refinancing stage. Last year, for example, it provided $25 million in financing to NineDot Energy, an urban, clean-energy provider, to connect its energy storage and solar facility in the Bronx to the local power grid. “They had construction term financing, but in this case, the funding gap was for the substantial interconnection deposit that was holding back the project,” Kessler explained.
But the overarching mandate is to activate investment of private capital in clean-energy projects through collaboration with other lenders or capital sources. Therefore, the NY Green Bank focuses on expanding financing markets where there is limited competition, low technology risk, high liquidity premiums, and where it can demonstrate a viable track record for other lenders.
Recognizing that $1 billion is not an adequate amount of capital to fund the comprehensive energy transition in the state of New York, Kessler said, “What we really want to do is identify funding gaps and prove out, through precedent setting, that transactions in targeted areas are profitable, attractive, and thereby encourage the private sector to crowd into those areas and fund future projects.”
Kessler explained how that works: “Let’s say a developer wants to develop a community solar project. Back in 2018, that was a relatively new area, and developers were struggling to find private-sector interest in a community solar model that was new, unproven, untested,” Kessler continued, noting that the New York Green Bank built-out these structures and shared them with marketplace lenders. “We closed some of the earliest (community solar) transactions, and over time started pulling in other lenders, as they got comfortable with it,” he said. noting that these lenders eventually began doing their own transactions,” Kessler said. “Now we have the most vibrant, robust community solar market in the United States.”
There are a variety of ways to animate private capital, Kessler noted, but in most cases, market-based lending has proven to generate the best results. “Closing transactions that are structured and priced attractively to the marketplace is a structure any lender would look at and say, ‘Oh, I get that,’” he explained. “If we can develop that kind of precedent, then we start to get interest from the private sector as they see a market opportunity for profit-maximizing and crowd in.”
In time, Kessler suggested, lenders will compete for projects, resulting in price compression that benefits borrowers.
Hawaii Green Bank
The Hawaii Green Bank operates under auspices of the Hawaii Green Infrastructure Authority, which was established in 2014 by the state legislature with $146 million in Green Energy Market Securitization bonds. This innovative, market-driven financing mechanism provides funding for the Green Energy Money Saver program, which is advancing the goal of achieving 100 percent of the state’s electricity from renewable energy sources by 2045.
HGIA’s green bank financing was initially designed to provide inclusive solar financing for low- and moderate-income ratepayers, but in 2018 a sub-fund was established to finance energy efficiency retrofits for state buildings.
Gwen Yamamoto-Lau, HGIA executive director, told CPE that at yearend 2023, the Hawaii Green Bank still had $14 million available for upgrading energy performance in state buildings and $8 million available to underserved ratepayers.
HGIA and its green bank also were instrumental in enabling green financing legislation, including a bill to authorize the state’s Commercial Property Assessed Clean Energy program, Yamamoto-Lau noted. C-PACE finances a variety of sustainability-related improvements to commercial buildings, including wastewater, drinking water and water conservation projects; clean energy production and energy efficiency; and resiliency against catastrophic events like flooding, earthquake, hurricanes and fires, such as developing microgrids, seismic improvements, and fire suppression systems.
In 2022, HGIA introduced legislation that transitioned the C-PACE program from the county-level to statewide and allowed condominium associations to access PACE financing. “There are a number of shovel-ready commercial projects, including affordable housing and hotels, interested in replacing expensive mezzanine debt with C-PACE financing,” Lau said.
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The Hawaii Green Bank’s clean energy financing program provides loans to low- and moderate-income homeowners for rooftop solar and energy storage and solar hot water systems. It also provides small businesses and nonprofits loans to upgrade their buildings with energy-efficiency measures and solar systems.
The HGIA leverages a risk-mitigating, “on-bill” financing mechanism, which places loan repayment or investors’ solar lease payments on the user’s electricity bill as a tariff. “Our on-bill program was launched in June 2018, and, even through the pandemic, we have not suffered any loan losses to date,” Yamamoto-Lau noted. Similarly, the C-PACE program has approximately $10 billion in financing outstanding with no foreclosures so far.
HGIA also administers the federally funded State Small Business Credit Initiative program that provides credit enhancements to banks, credit unions and private lenders for eligible business purposes, including building construction or renovation.
DC Green Bank
DC Green Bank provides loans for projects that lower energy costs for residents, improve air and water quality across the District, deliver green jobs, increase the amount of affordable housing, and extend equitable development across all eight wards.
It administers the District’s PACE financing and offers shorter-term (two years) loans to fill gaps in construction financing for large projects (over $250,000). It also makes short-term loans (up to two years) for pre-construction services that improve a project’s sustainability, such as design, energy audits and benchmarking, engineering, and green charrettes.
This includes financing projects across all community sectors, including single-family homes; multifamily projects; small-business and nonprofit properties; and community-serving institutions, like schools, childcare centers, faith-based institutions, community centers, homeless shelters and food pantries.
Its PACE Program has financed more than $100 million in projects since its inception in 2018, most recently financing green elements in conversion of an office building to a boutique hotel, the Canal House of Georgetown,.
Financing terms vary depending on the project type, size, and how it’s financed, but loans are fixed rate and provide flexible terms to help projects pencil and achieve critical climate and energy goals, Miller said.
“Our model leverages public dollars and crowds in additional private investment to bring projects to life,” she added, noting that lending partners include small, local financial institutions, as well as other green banks and large private capital providers.
“Last year, for every dollar we invested in a project, more than eight additional dollars flowed in from private and other public partners, unlocking more than $130 million in overall community investment,” she added. Since established, the DC Green Bank has leveraged $50 million in direct public investment to generate $300 million in investment by capital partners.
The DC Green Bank focuses on supporting diversity in green development, which enables it to meet collective climate, energy, and community development goals, Miller said. “We work deliberately to meet communities and borrowers where they are, including supporting emerging developers with technical assistance.”
A recent example of how the green bank’s direct investment supports sustainability, a clean economy, and inclusive prosperity is Cycle House, an all-electric, net-zero, mixed-use property in the Truxton Circle neighborhood (Northwest DC). The green bank supplied $2 million for this public-private project, alongside $15 from other public and private capital sources.
“This groundbreaking project will breathe new life into a long-vacant site along North Capitol Street and adds 18 units of affordable housing and commercial space to the Truxton Circle neighborhood in Ward 5,” Miller said. She noted that the project is targeting both LEED Platinum and Passive House sustainability certification and will utilize solar installations on the roof and parking canopy and a fuel cell to generate as much electricity as it uses and provide electric-vehicle charging stations.
