Cleaner AND Cheaper Energy with Green Banks

Editor's note: This is the first of a two-part series by the author focused on the use of limited public dollars to leverage large private investments that accelerate growth of clean energy markets. Up next: "SCOTUS can't stop states from growing clean energy markets."

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For decades the climate change debate has been framed as a tradeoff between saving the planet and continued economic growth. Underlying the resistance to a clean energy transition is the assumption that if we switch from fossil fuels to renewable energy, we will sacrifice economic growth because the price of renewable energy is higher.

This economic calculus is changing, and in many cases has already changed.

Now that clean energy can actually drive sustained growth, Green Banks are needed to attract and deploy the capital necessary for the massive energy infrastructure investment opportunity in front of us.

In many parts of the United States and around the world the price of electricity from renewable sources is cheaper than the price of electricity from coal or natural gas. Energy efficiency technologies that reduce energy consumption are broadly cost effective, saving more money than the required investment.

The basic tradeoff— economic growth versus a healthy planet—is one that no society should have to make, and one that no society will have to make going forward.

The Paris COP21 commitments and President Obama’s Clean Power Plan are achievable without economic harm, and, in fact, offer great investment opportunity.

The cost of clean energy technologies has fallen rapidly. Whole industries have quickly grown that deliver clean energy solutions to consumers and businesses. And these industries succeed not because there is huge demand for “going green.” They succeed because they offer something irresistible—less expensive energy with no upfront costs.

Rooftop solar for many households can provide electricity at a far less expensive price than what is offered by the grid. Wind power in the Midwest is typically less expensive than electricity from natural gas. Energy efficiency can reduce energy consumption in a building by upwards of 30 percent, providing significant financial savings.

To achieve global, national, and state clean energy goals, policymakers and businesses must tap into the infinite demand for cleaner and less expensive energy solutions.

Green Banks are designed to do just that.

Green Banks are quasi-public financing authorities that use public dollars to offer capital for clean energy projects in partnership with private investors, with a goal of rapidly growing clean energy markets. Green Banks work with the private sector to target the greatest barrier to the spread of inexpensive clean energy technologies—the upfront costs.

Unlike most infrastructure investments, clean energy projects actually pay for themselves over time. By offering patient capital, Green Banks allow energy users to save money on clean energy from day one, while the Green Bank is actually getting repaid on its investment.

Rooftop solar may produce electricity at a price below the grid, however, the upfront costs of installing the panels may still exceed $20,000 USD. If this were a home or a car, the cost would easily be financed with a loan from any number of banks. The problem is that financing is not readily available at reasonable rates and/or long terms from most banks for this kind of project.

How many people would have cars or homes if financing wasn’t readily available? 86 percent of car purchases are made with financing. 88 percent of homes are purchased with mortgages. There would be no market for either without a robust finance and policy ecosystem; and the same is true for clean energy.

Green Banks use their public capital to provide financing—not subsidies—and do it in partnership with private investors. There are numerous benefits to this approach.

1. The first is that public money is preserved, as loans are repaid and can be recycled.
2. The second is that Green Banks leverage private capital, drawing in up 10 private dollars for each public dollar invested.
3. And, finally, through these partnerships, private investors become more familiar with lending into clean energy markets. Green Banks lead private lenders into the market, where they soon discover for themselves that this is a lucrative and low-risk investment opportunity.

There are a number of state Green Banks in the U.S. and national Green Banks abroad. They may go by different names but their principles are the same. Connecticut created the first state Green Bank in the United States. New York soon followed, with a $1 billion USD capitalization. Hawaii, California, and Rhode Island have their own institutions. Maryland and Nevada have also launched formal studies. And Montgomery County, Maryland has the first local Green Bank.

The United Kingdom Green Investment Bank and the Australia Clean Energy Finance Center are multi-billion dollar institutions. The UK’s Green Bank is the largest investor in offshore wind in the world. Japan and Malaysia have national Green Banks, as well.

Each institution is different, addressing their specific needs and market gaps. Some Green Banks act as retail lenders, directly lending to end-customers, while some operate at the wholesale level. Some focus on a specific sector, while others define their focus by technology. The OECD in Paris has been a global leader in organizing and researching the Green Banks around the world, cataloging all the ways that Green Banks are working to grow clean energy markets.

Green Banks have achieved tremendous success, deploying billions of dollars in public capital and leveraging three or four times that much in private co-investment. Markets are growing quickly as a result.

Under the prior subsidy-based structure, the state of Connecticut was stimulating $30 million USD per year in clean energy investment. Half of the money was public, half private.

Last year, in its fourth year the Green Bank sparked $365 million USD in clean energy investment, with 5 private dollars invested per one public dollar used. Next year, the amount of investment is expected to double.

This is the kind of market growth possible with financially cheaper clean energy solutions and abundant financing to eliminate barriers to entry. And the Green Bank solution cannot be deployed quickly enough. Estimates show that in the U.S. $200 billion USD in clean energy investment is needed per year for the next 40 years to avoid climate disaster. Globally, the figure is $1 trillion —the same amount that is currently invested in fossil fuels every year.

To spur the development of Green Banks, the Coalition for Green Capital is joining with the Natural Resources Defense Counsel and six Green Banks to form the Global Green Bank Network. It will be the global hub for Green Bank data and best practices, and support nations and states seeking to create their own Green Banks. And, the White House stands behind this effort.

As governments feel the combined push (Paris and CPP) and pull (economic opportunity) toward a clean energy future, Green Banks can animate private investment and spark demand to deliver cleaner and cheaper energy solutions.

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Jeffrey Schub is the executive director of the Coalition for Green Capital (CGC), a 501(c)(3) nonprofit based in Washington, D.C. that works at the state, federal and international levels to create clean energy finance initiatives, or “green banks,” that accelerate the growth of clean energy markets. CGC is the nation’s leading consultant on green banks, which use limited public dollars to leverage large private investments in clean energy. Prior to his work at CGC, Schub was an economic consultant at Analysis Group, focused on technology and innovation. Schub holds an MBA from the Yale School of Management and BAs in economics and public policy from Brown University. For additional information, contact him at jeff@coalitionforgreencapital.com or follow Twitter @CGreenCapital.  

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The views expressed by contributors to the Cynthia and George Mitchell Foundation's blogging initiative, "The Economic Argument for Environmental Protection," are those of the authors and do not necessarily represent the views of the foundation.

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