“Green Bank” Could Help Californians Prepare for Climate Change

By Gilee Corral, September 2, 2014
Green Bank article
You are concerned about your company’s carbon footprint and decide it’s time to upgrade your systems to be climate-change ready. Finance has crunched the numbers and you can see how the improvements will accrue long term energy savings. Now, all you need is the capital to kickstart your project... You’re doing the right thing and the project makes fiscal sense – this should be easy, right?
If getting a loan for green projects was easy, more people would do it. Whether it’s a large-scale wind farm or a tankless water heater, financing clean energy projects is challenging, but help may be just around the corner.
A bill to establish a “green bank” for California is currently under review by the Assembly Appropriations Committee. Introduced by State Senator Kevin de León, the SB-1121 California Climate Technology and Infrastructure Financing Act would place California in an elite group of green lending trailblazers. Connecticut launched the first green bank in 2011, New York joined the ranks in December 2013, and Hawaii may be following soon.

Banking for the future: How a Green Bank can support the market

Preparing a home, business, and city for the imminent risks of climate change represents a considerable investment. As the Environmental Protection Agency proposes tougher rules on carbon pollution, compliance costs will only increase in the future. Some argue that the market will pick up as the demand increases for clean energy financing, but the reality has been spotty and slow. Why?
●     The financial market is still risk-averse from the 2008/2009 mortgage crisis and lending restrictions have tightened in general.
●     Mainstream lending criteria do not factor in utility savings associated with green technologies into the pricing of loan products. This creates an artificial barrier to affordability.
●     There are information gaps in the public and banking sector on how and why clean energy technologies work.
In his recent article, Christopher Weber with State and Local Energy Report offers a cogent discussion of the complexities within the clean energy financing market. Government programs such as tax credits, grants, and small-scale loans have enabled new technologies to roll out on a modest scale. But green bank advocates such as Kenneth Berlin of the Climate Reality Project argue that current efforts haven’t bridged the gap between the testing period and widespread adoption in the private sector. State green banks can be this bridge, streamlining the financing process for businesses, scaling up investment, and piquing interest in the private sector. However, as Weber rightly notes, state-run green banks will have to keep up with advances in technologies to prevent information asymmetries from compromising the integrity of their loan portfolio.
Connecticut’s initial success has given advocates reason to hope that a green bank will take off in California. SB1121’s wording is clear that California’s green bank will work in unison with existing financing programs and entities to offer:
●     Loans for clean energy projects
●     Loan guarantees
●     Securitization
●     Loan warehousing

Pick up the PACE on residential lending

A green bank could support the rollout of innovative ideas, such as the Property Assessed Clean Energy program (PACE). First introduced in the City of Berkeley, PACE enables property owners to finance energy retrofits and upgrades via their property tax bill. The program was very popular from the onset, but was dealt a nearly fatal blow when the Federal Housing Administration (FHA) announced that Fannie Mae and Freddie Mac would not finance homes with PACE loans. The FHA considered the risk too great for Fannie and Freddie to take second position behind the PACE loan in the event of default. California’s PACE program – CaliforniaFIRST - had to scrap its residential lending arm as a result.
To ease FHA’s worries and revive the PACE residential program, this March the California State Treasury stepped up to the plate with a $10 million mortgage loss reserve fund, and PACE has announced that it will begin residential lending this summer. It’s possible that a state green bank may have acted earlier to address the controversy surrounding PACE’s rollout.  A state green bank would have the infrastructure already in place to offer loan guarantees early on, possibly cutting years of public debate and legal battles with the FHA that killed the momentum of the residential program.

Boldly go where no bank has gone before

A state-funded green bank can be a game-changer by investing in innovative green technology and projects, paving a safer investment path for the sustainability market. Once the technologies and financial products are picked up in the private sector, the green bank can move on to the next challenges:
●     Leverage private investment with public funds and loan guarantees for large-scale commercial clean energy projects.
●     Develop an “energy efficient” mortgage product that could be replicated in the private sector, working out the lending criteria with risk mitigated by public funds. A recent study by the University of North Carolina in partnership with the Institute for Market Transformation found the risk of mortgage default to be 32% lower for energy-efficient homes. The study advocates that energy savings should be integrated into lending standards when calculating the ratios for loan approval.
●     Partner with state universities to fast-track innovative ideas such as PACE from concept to market immersion.
●     Partner with think tanks to quantify the risks and benefits of energy-efficient mortgage and loan products, bolstering confidence in their performance.
A green bank isn’t going to stop climate change or solve current energy dilemmas on its own. But, it can help Californians prepare their homes and cities and invest in a more sustainable future.
For more on financing your energy efficiency projects, see SSV’s article “Financing for Clean Energy Investments”.
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