Green banks have worked with developers and financiers of renewable and energy storage projects to accelerate bringing such technologies to market. Green banks in six states are emerging as valuable and distinct financial partners for developers and lenders seeking to lower their costs of capital.
With their deep understanding of regulatory regimes in their own states, green banks provide due diligence and technical services such as sharing forward curves in utility service areas and advising on regulatory shifts. They use unique investment criteria, allowing sponsors to make more efficient use of capital, allocating funds toward novel financial instruments and adding subordinated debt to projects in order to increase liquidity and tenors and lower interest rates.
Recognized issues in newer energy technologies, like residential solar, microgrids and energy storage, include a lack of precedent, standardization and scale. Green banks have worked with developers and financiers to solve these issues and accelerate bringing these technologies into the resource mix.
This article focuses on how two green banks — NY Green Bank and the Connecticut Green Bank — have used their positions within their respective states to bring clean energy to the grid. Six U.S. states have green banks currently: New York, Connecticut, California, Hawaii, Nevada, and Rhode Island.
NY Green Bank was funded initially from repurposed allocations of ongoing surcharges collected from utility ratepayers. The funds were allocated to the bank by the Public Service Commission. The Connecticut Green Bank was similarly funded through ratepayer benefit charges. As they have grown, both green banks have begun moving away from relying on ratepayer charges for funding.
NY Green Bank is a division of the New York State Energy and Research Development Authority (NYSERDA) and one pillar of the state’s $5 billion Clean Energy Fund (CEF).
In late 2017, the bank issued a request for proposals from firms interested in helping the bank evaluate strategies for raising at least $1 billion in third-party capital to leverage the funding from utility ratepayers. Alfred Griffin, the bank president, announced in June 2017 that the bank generated positive net income a full year ahead of schedule by generating enough revenue to more than cover expenses.
Leveraging green banks with private capital reduces the burden on electricity ratepayers. To date, NY Green Bank’s cumulative revenues exceed cumulative expenses. The Connecticut bank has been able to leverage more than six dollars of private investment for every one public dollar.
To date, the Connecticut bank has approximately $130 million in non-cash invested assets, which include solar lease investments (residential and commercial), solar loan investments, commercial PACE, wind, hydro, anaerobic digesters and fuel cells. Green banks can serve as useful partners in ways different from private equity.
NY Green Bank’s investment criteria are built specifically around transforming financial markets and focusing on areas lacking liquidity. This means engaging with the private sector to explore novel financing structures where the scale and standardization issues are recognized. NY Green Bank has contributed to several credit facilities in order to create larger-term securitizations for residential solar. Griffin said there is no reason why NY Green Bank cannot use its lessons learned from securitizing residential solar to securitize revenue streams from microgrids and commercial and industrial solar projects as a way to reduce capital costs.
The mandate of green banks is to attract private capital, transition away from ratepayer support and create thriving clean energy markets. The Connecticut bank has worked at its mandate through a number of partnerships that helped move novel financial instruments into the mainstream.
Where large commercial institutions may take a pass on individual projects because of high diligence costs, green banks can step in.
For example, some types of projects are done without fixed-price offtake contracts, which means it is hard to predict the revenue that will be generated. In traditional project finance, there are fixed contractual offtake prices over a 10- to 25-year period. To make financiers comfortable financing projects without fixed offtakes, forward curves are used to measure the value of transmission, congestion and supply.
New York is in the process of moving away from a traditional net metering program for community solar projects that supply their electricity to the local utility in exchange for bill credits that are then transferred to subscribers. In the future, the amount of bill credits will be tied to the value of the excess electricity to the grid, taking into account, among other things, the demands on, or benefits to, transmission infrastructure. New York calls this a “VDER” model. (The acronym stands for value of distributed energy.) Under traditional net metering, someone supplying excess electricity to the grid is paid a retail rate for his or her electricity. NY Green Bank is helping to facilitate financing for community solar projects under the new VDER model.
Green banks can also help free up sponsor equity for other uses. For example, NY Green Bank provided support to Cypress Creek Renewables in a manner that increased a bridge loan to the company to finance 72 community solar installations. In New York, developers seeking interconnection are required to deposit 25% of the interconnection upgrade estimates followed by full payment 120 days later. NY Green Bank closed a bridge loan with Cypress Creek for up to $25 million in order to pay for interconnection. Alfred Griffin said these types of products create precedent and allow the private sector to become comfortable in offering similar products.
Read more at Norton Rose Fulbright