National Climate Bank initiative could be a boon for solar

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By Jean Haggerty, pv magazine USA 

A companion bill to the US Senate’s National Climate Bank Act is expected to be introduced in the House of Representatives this week. If enacted, the boost for the solar and the solar plus storage markets would be enormous. Because the National Climate Bank’s aim is to support the electrification of the power grid, its creation would also bring in new utility customers, notably expanding utilities’ footprint in areas such as transportation.

Like the Senate bill, the House bill will aim to achieve maximum level greenhouse gas (GHG) emission reductions per pubic dollar deployed by facilitating large infrastructure projects and by assisting households and businesses interested in financing clean energy improvements, including broader solar use.

“The common thinking is that once the price of clean power is lower than dirty – whether because of a carbon tax or otherwise – then everybody will just switch. But that’s not reality… There are massive switching costs and complexities. Upfront costs being one of them, and leaving it to end customers to navigate this is unwise at best. It has to be an institution’s job to solve these switching problems, or [what will happen is that] either everyone pays more or nobody switches,” said Jeffrey Schub, the executive director of the Coalition for Green Capital, a nonprofit that incubates and supports local clean energy finance institutions – Green Banks – to drive greater clean energy investment into existing and new markets.

The arrival of a National Climate Bank (NCB) would be a boon for developers, installers, contractors and panel manufacturers because it would pry open business opportunities in new markets and geographies. Essentially, the NCB would be a capital provider that exists for the express purpose of supporting their growth and helping them find new customers, Schub explained.

For a utility under pressure to be cleaner, the NCB can make it easier to procure clean power at lower prices, meaning that there is no rate impact on customers. “And because the NCB [plan] includes a cash-for-carbon program that is meant to help utilities solve their stranded asset costs from retiring coal plants, it makes the decision to go clean that much easier,” he added

According to Schub, the perception that only distributed generation companies would benefit from the arrival of a NCB is flawed and reflective of the current situation.

To date, at the state level, green banks have mainly supported distributed generation because of the scale of the green banks themselves.

In the US, Green Banks are local, often state-level entities. “The energy economy is [also] localized in so many areas – in distributed energy, clear transportation and building efficiency. You need to know the local contractors, the local policies and regulations, but you also need scale to be able to do a deal that involves long distributions,” Schub said. Green Banks operate at the state level in about a dozen US states, including California, Connecticut, Hawaii, New Jersey, New York and Rhode Island.

Green Banks are public or quasi-public non-profit entities that are established to facilitate private investment into domestic low-carbon, climate resilient infrastructure. To overcome investment barriers and leverage the impact of available public resources, over a dozen national and sub-national governments have created Green Banks and Green Bank-like entities in recent years. Green Banks have been created at the national level in the UK, Australia, Switzerland, Malaysia and Japan.

 

How it would operate

Representative Debbie Dingell’s (D-MI) bill is expected to closely resemble the Senate’s National Climate Bank Act, which calls for creating a federal NCB that can capitalize regional, state and local Green Banks that in turn can provide unsecured capital to homeowners and local businesses to finance clean energy improvements. The Act would require investments in clean energy projects in traditionally underserved communities, and it would also provide technical assistance for the start-up of new Green Banks in the US.

“Because of our involvement, there is more capital flowing to the market to address clean energy [in Connecticut]. We help reduce the perceived risk for private investors,” Bryan Garcia, president and CEO of Connecticut Green Bank.

Back in 2011, when Connecticut Green Bank was introducing itself in the state’s banking circle, state-chartered banks balked at the notion of Green Banks, mistakenly thinking that they were essentially government-backed institutions that would get in their way.

“I had to explain that my job is to encourage your private investment to help the State of Connecticut achieve its climate and energy public policy goals. That [Connecticut Green Bank] is coming in to solve Connecticut’s energy problems… If you ask these same state-chartered banks today, most of them would tell you that they have partnered with us and that it has been worth it. We have enabled them to make investments in their commercial and residential customers” Garcia said.

In the Senate National Climate Bank Act, which was introduced by Senators Edward Markey (D-MA) and Christopher Van Hollen (D-MD) in July, the US Treasury would provide US$10bn in initial capital for the NCB and it would then provide US$5bn a year for the first five years. The hope is that limiting the NCB’s ties to the Treasury in this way would help the NCB develop as a self-sustaining entity that sticks to its mission and operates free from partisan politics.

Whereas the Senate National Climate Bank Act is broadly written, the House’s bill is expected to provide more detailed definitions of qualifying technologies.

As currently envisioned, the NCB would be established as a private not-for-profit institution that is run by a board of directors, and its board of directors would have the authority to expand the list of clean energy technologies that are eligible for financing as markets require.

Because creating a NCB along these lines requires a great deal of coordination and buy-in, a longer lead time is being baked into the effort; the hope is that the effort to launch the NCB will bear fruit in 2021.

 

Growing the pie

The NCB can open investment opportunities that investors have not been able to fully tap into because the clean energy markets often cannot sustain investors’ return requirements while simultaneously delivering clean power at a low enough price, Schub said.

“There are now hundreds if not thousands of private finance institutions who already have a big business, or want one, financing clean energy… If this was all brand new and unfamiliar, pulling the private co-investment along would be much harder,” Schub said.

When it comes to utility scale solar, very little has to be invented in terms of financing structures; capital markets already are adept at financing big solar projects. Instead, the challenge is that utility scale projects are extremely concentrated by state, Schub added, noting that the concentration doesn’t necessarily align with where the GHG emissions are.

“Just look at Ohio and Indiana, for example. The barrier in those states, broadly speaking, is project economics. For investors to get their required return, the solar power would have to be sold at a price that is too high to compete. So, the projects aren’t built, and the private capital doesn’t flow,” Schub explained. “But if the NCB can provide a portion of the project financing at a lower cost, then the economics will work. The private capital [can] flow alongside National Climate Bank capital, earning [investors] their required return, and a project [can be] built,” he said.

“A National Climate Bank [can] play a critical role in developing whole financing structures, in addition to providing flexible capital,” Schub said. Behind the meter, a lot of these projects are hard to finance because of their small scale or because of their complex underwriting needs.

In the solar plus storage space, entirely new financing structures are required to address valuation, to incorporate the attributes of solar plus storage in underwriting and to consider battery lifespan and the associated technology risks. These are challenges that are solved only when an investor is willing to assume the risks that most private investors won’t, Schub said, noting that taking on this role would be the NCB’s primary job as a mission-driven entity.