The Role of State Green Banks

Washington, D.C.

202.777.7700

The Role of State Green Banks

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Kenneth Berlin Senior Vice President

(202) [email protected]

www.coalitionforgreencapital.com

Reed HundtCEO


Washington, D.C.

202.777.7700The Coalition for Green Capital

Nonprofit 501(c)(3) organization

Established in 2012 Based in Washington D.C. Full time staff in DC, NY, CA

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CGC’s mission is to create demand for clean energy and energy efficiency and reduce carbon emissions by establishing green banks at the state, federal, and international levels.

Consulting

Modeling

Advocacy

Policy

Networking

Washington, D.C.

202.777.7700

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• Low-cost financing for clean energy projects

• 100% financing for residential and small business energy efficiency programs

• Greater liquidity for clean energy instruments

• Solutions that address market failures

The Coalition for Green Capital develops Green Banks that provide:

Washington, D.C.

202.777.7700Coalition for Green Capital works at the national level

• American Clean Energy and Security Act: Green Bank (H.R. 2454) - $7.5 billion

• Senate Energy Committee Bill - 2010 - $10 billion

• Developing new draft federal green bank legislation– Federal Green Bank would be funded either by bonds or

borrowing from Treasury

– 75% of funds would be lent to state green banks

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Washington, D.C.

202.777.7700And the Coalition is leading the green bank movement at the state level

• January 2011 – CT Passes CEFIA legislation.

• Early 2013 – Hawaii establishes green bank-type entity with $100-$200 million in bonding authority.

• February 2013 – Senator De Leon of California introduces SB798–Green Infrastructure Bank.

• September 2013 – Governor Cuomo of NY files for utility commission approval of green bank with goal of $1 billion in capital.

• CGC is currently working in 4-7 additional states.

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Washington, D.C.

202.777.7700The Green Bank Approach

• Repurpose existing state funds into a new entity or within an existing finance authority so they are:

– Matched with private funds from investors with patient long-term capital who are seeking a conservative rate of return

• Use bonding authority to raise additional funds

• Lower the cost of clean energy solutions and address market failures

• Push programs away from rebates, grants, loan write-downs and subsidies and into revolving loan programs

– In revolving funds same dollar can be used multiple times

• Finance both EE and RE deployment with no tech risks

• Develop different structures for higher risk projects

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Washington, D.C.

202.777.7700The Coalition for Green Capital wants to establish Green Banks, design products, lead interstate collaboration

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• To pass green banks, building coalitions in states and analyzing each state’s legal and energy landscape

• Developing innovative products to stimulate demand for green bank financing

– Products for solar PV market such as Connecticut Solar Lease Program 2

– Design green bank product to finance EV charging stations

– Build 100% financing products for EE, paid back through savings

• Planning Green Bank Academy to facilitate collaboration between Green Banks

– Two-day workshop in D.C. for state energy leaders to learn green bank building tools

– Will identify ways in which green banks can develop products together and standardize practices

Washington, D.C.

202.777.7700Green Banks can pull several levers to make clean energy cheaper

1) Cheap and Available Financing

2) Securitization

3) Scale

4) Technology Advances

5) Subsidies & Tax Policy

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Washington, D.C.

202.777.7700Green banks can reduce financing costs across clean energy markets with many financial tools

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Green Bank Products

Direct Debt

Wholesale Debt

Subordinated Debt

Loan Loss Reserves

Credit Enhancements

Warehousing

Markets

DG Solar

Residential EE

Commercial EE

Low-Income

Utility-Scale Generation

Apply Any Product to Any Market

Washington, D.C.

202.777.7700

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Because Green Banks are nonprofit, financing costs for clean energy are lower

Investor Group Required Return

Commercial Debt 6%

Tax Equity 12%

Developer Equity 15%

Green Bank Debt 2%

Expected Returns of Typical Clean Energy Investors

Rather than maximizing return, Green Banks offer cheap capital in order to lower consumer payments for clean energy

Washington, D.C.

202.777.7700The Brattle Group “Rooftop Solar PV Green Bank Financing Model”

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Specifications including:

•Installed costs

•Regional capacity factors1

•State policies and incentives1

•Capital structure including Green Bank Debt

1. Initially shown for Connecticut

Key metrics:

•Retail cost2

•Equity returns

•Installed capacity per dollar of Green Bank Debt

2. In the form of a 2013 levelized cost of electricity, net of state incentives and RECs.

• Focused on incremental benefits of Green Bank funding at project level

• Based on illustrative specifications provided by CT Clean Energy Finance and Investment Authority (CEFIA) and the Coalition for Green Capital (CGC)

• Model derives key metrics for behind-the-meter solar:

Washington, D.C.

202.777.7700Illustrative Base Case

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Under above assumptions, reliance on:

•Tax equity

•State incentives

•RECs

Would hold retail costs at $0.210/kWh (without Green Bank Debt)

Washington, D.C.

202.777.7700Green Banks can make residential solar cost competitive in Connecticut with a 20% investment

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Retail Price in CT

Green Bank Makes Clean Energy Cost Competitive

• In Connecticut, for example, Green Bank debt brings price of solar electricity below retail

• Highlights significant impact financing cost has on clean energy price

• Assumes only 20% Green Bank debt investment

• Inclusive of current Connecticut subsidies

1) Capital structure is 20% Green Bank Debt, 20% Commercial Debt, 48% Tax Equity and 12% Developer Equity. Assuming Green Bank debt offered at 2% for 15 years, Commercial debt is at 6% for 6 years, developer equity return is 15%, tax equity return is 12%, 15-Yr REC price is 3 cents/kwh and 6-Yr State Incentives are 22.5 cents/kwh.Source) Rooftop Solar PV “Green Bank” Financing Model, Sponsored by The Connecticut Clean Energy Finance and Investment Authority and the Coalition for Green Capital, Developed by the Brattle Group. Available for download from: http://www.coalitionforgreencapital.com/the-model.html

Washington, D.C.

202.777.7700Potential Impact of Green Bank Debt

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Green Bank Scenarios1 defined per capital structure scenarios shown below:

1Green Bank scenarios for illustration purposes.

Washington, D.C.

202.777.7700If Green Banks provide enough investment and solar install costs come down, prices will drop dramatically

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0% 10% 20% 30%

$4.5 21.0 18.7 16.3 14.0

$4.0 17.4 15.4 13.3 11.2

$3.5 13.9 12.1 10.3 8.5

$3.0 10.3 8.8 7.2 5.7

Price of Electricity from Solar (cents/kWh) in CT as a Function of Green Bank Debt and Installed Cost

Pink-highlighted prices are below current retail electricity price in Connecticut

% of GB Capital in Structure

So

lar

Inst

all

Co

st

($/W

att

)

If solar installed costs drop to $3.5/watt and 30% of investment comes from Green Bank, the consumer needs to pay only 8.5 cents/kWh to pay back investors with adequate profit.

Source: Rooftop Solar PV “Green Bank” Financing Model, Sponsored by The Connecticut Clean Energy Finance and Investment Authority and the Coalition for Green Capital, Developed by the Brattle Group. Available for download from: http://www.coalitionforgreencapital.com/the-model.html

Other Assumptions•Developer Equity Return: 15%•Tax Equity Return: 12%•Total Leverage: 40%•Commercial Debt Interest: 6% for 6 years•Green Bank Interest: 2% for 15 years•15-year RECs: $0.03/ kWh•6-year State Incentives: $0.225/ kWh

Capital Structure is 20% Green Bank Debt, 20% Commercial Debt, 48% Tax Equity, and 12% Developer Equity.

Washington, D.C.

202.777.7700Green Bank investment + Private investment leads to more clean energy projects

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Typical Capital Structure

Economical Projects

High Capital Costs Push Consumer Payments Above Retail

Electricity Price

Green Bank Capital Structure

Lower Capital Costs Reduce Consumer Payments To or

Below Retail Rates

Technically Feasible Projects

Green Bank investment attracts private investors andincreases size of clean energy market.

Washington, D.C.

202.777.7700As Green Banks get paid back, they re-use money and leverage private capital to expand clean energy investing

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Year 0: Initial investment

attracts private capital

Original Investment

First Recycling

Second Recycling

Year 6: Funds are recycled into a new

investment, attracting more private capital

Year 6: Investment

is fully repaid

Public funds are lent

Public funds are repaid

Year 12: Investment is fully repaid

Year 18: Investment is fully repaid

Year 12: Funds are recycled into a new

investment, attracting more private capital

Illustrative Example of Green Bank Recycling and Leverage

Source) Based on CGC research in New York for the New York Green Bank in conjunction with Booz & Co.

• Same Green Bank dollars invested multiple times, re-leveraging private dollars

• Recycling multiplies total clean energy investment

• Illustration is conservative, as loan repayments occur constantly and cash can be redeployed throughout period

Washington, D.C.

202.777.7700Green Bank Models

We have found that there are three leading models for state green banks:

Connecticut Model

State Clean Energy Financing Authority Model

Infrastructure Bank Model

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1

2

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Washington, D.C.

202.777.7700 The Connecticut Model

• Established Clean Energy Finance and Investment Authority (CEFIA): a quasi-public corporation that consolidated several existing funding sources

• Given the power to issue bonds

• Authorized to raise funds from private sources of capital capped at an average rate of return set by the board

• Permitted to finance up to 80% of the cost to develop and deploy a clean energy project and up to 100% of the cost of financing an energy efficiency project

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1

Washington, D.C.

202.777.7700 The State Clean Energy Financing Authority Model

• Part of the state government, not a quasi-independent governmental entity

• Separate entity would need to be established to raise private funds and partner with the state financing authority under a formal partnership agreement

• As in the Connecticut model, a state would determine whether it could consolidate other funds into the green bank authority

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2

Washington, D.C.

202.777.7700 The Infrastructure Bank Model

• Clean energy projects and general infrastructure projects to be financed by a combined state energy and infrastructure authority or bank

• Because of differences between infrastructure and clean energy finance, we recommend that the bank create separate “windows” for each

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Washington, D.C.

202.777.7700

The Role of State Green Banks

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Kenneth Berlin Senior Vice President


www.coalitionforgreencapital.com

Reed HundtCEO


Documents

The Role of State Green Banks