The rise of clean energy can progress only with more rapid and cost-effective deployment.
The author discusses green banks, which offer an innovative financing solution.
Global warming is increasingly motivating people to find clean energy solutions. Although
clean energy solutions are rapidly growing and gaining acceptance, continued proliferation
of commercially viable technologies will require more efficient access to capital. To fill
this void, “green banks” represent a collaboration between private investment
and public financing.
How Is This Research Useful to Practitioners?
New low-risk technologies are being deployed around the world to tackle global warming but
not quickly enough. Investment in renewable resources must maintain a fivefold increase for
at least 25 years. The world’s outsized reliance on the mature fossil fuels industry
to supply power, fuel transportation, and run industry has increased energy-related
CO2 emissions by more than 50% in the past 25 years.
The US federal government and state governments have used subsidies to increase investment
in renewable technologies to bring down costs through improved scalability and deal
economics. But subsidies are an expensive use of taxpayer dollars, and failing to bring
renewable technology markets to scale results in a failure to cover project costs. Rapid,
efficient, and cost-effective implementation of clean energy alternatives is necessary to
address global warming.
Green banks are a promising financing alternative and represent a form of public/private
partnership to drive or “crowd in” additional private investment. An array of
financing tools and structured alliances can help attract private investment at a lower cost
to preserve public money because the project represents investment in proven and
economically viable endeavors. The private and public sectors, as well as consumers, could
benefit from the myriad of product choices and financing options that are currently
available in some states.
Regulators and students of public policy will find the green banking solution a welcome
means to address the funding challenges that clean energy technologies face. Securities
analysts and portfolio managers may acquire fodder for idea generation.
How Did the Author Conduct This Research?
The author reviews data and findings from the International Energy Agency. Unlike the
fossil fuels industry, which tends to have access to cheap capital, clean energy projects
often lack access to much-needed financing— partly because of lack of familiarity with
the technology and a dearth of institutions focused on clean technology.
Although it has made substantial progress in the past 10 years, clean energy technology is
still new, and so are the means to finance it. The introduction of green banks, which
function as a public/private partnership that facilitates the involvement of private money
while conserving public dollars, can serve a developing sector in search of scalability.
Created through legislation and funded with public money, a green bank can be a public or
quasi-public institution that is either directly part of or an instrument of government.
Unlike a governmental entity that receives annual appropriations, a green bank places funds
on the balance sheet for lending and does not accept deposits like a traditional bank. Green
banks’ loan rates need to cover only operating expenses and investment risk because
they receive public money with no need to pay interest to the state. These banks form public
and private alliances to fund specific projects rather than commingling funds at the
Green banks use a variety of financing techniques, such as credit enhancements (to attract
private investors through loan guarantees), co-investment (types of bank loans made
alongside forms of private investment), and warehousing/securitization (underwriting,
pooling, and holding loans until scale is attained, at which point the bank sells them
through private placement or securitization). Green banks also use different types of
delivery structures to increase a lender’s security, including property assessed clean
energy (PACE) financing and on-bill financing/repayment. PACE financing enables repayment of
an energy upgrade loan through property taxes from a new lien on a building in the same
amount as the loan repayment; the tax agency remits payments to the lender. On-bill
financing/repayment allows for repayment of an energy upgrade loan through a
customer’s utility bill, splitting incentives between a building owner and its
The Connecticut Green Bank, as an example from the United States, has the most experience
using the aforementioned financing alternatives and delivery mechanisms. It has grown clean
energy markets substantially, reducing costly grants in the process. The bank also
successfully built a scalable PACE loan portfolio and commercially securitized it, marking a
first step in developing a secondary market for clean energy.
Green technology is a promising and necessary endeavor that needs to experience exponential
growth to meaningfully combat global warming. Existing financing methods have been costly,
inefficient, and insufficient. Green banks, which are gaining acceptance as a financing
expedient in the United States and abroad, meld public and private money through innovative
funding options and delivery methods to increase flows to the renewable energy sector at a
low cost. Further investigation into structured financing methods as they develop around the
world could be the object of future research. Investors who ignore the renewable energy
sector do so at their own peril.