When nearly 2,000 solar panels are installed on top of the Henderson-Hopkins elementary school in east Baltimore next year, they will generate enough carbon-free power for 175 area residents. The project will reduce greenhouse gas emissions and bring the economic benefits of renewable energy to a disadvantaged neighborhood.
Yet traditional finance steers clear of ventures like this one, with lenders often wary of the high credit risks, potentially long payoff periods and uncertainty of investing in low-to-moderate-income communities.
And in dense urban areas, some projects — such as community solar — are too small to be seen as worth the effort, even if they are critically important to decarbonizing the US electric system and ensuring all Americans are part of the clean energy transition.
Enter the green bank. These nonprofit funding institutions, just given a massive boost by the Inflation Reduction Act, are designed to provide innovative financing to renewable power ventures, building retrofits and clean transportation projects typically shunned by investors. With taxpayer dollars and creative deals, they can help recruit private-sector capital off the sidelines and into underserved markets, leveraging as much as $8 in private funding for every $1 that comes from the government.
In the case of the Baltimore project, support is flowing from a mix of state grant money, philanthropic dollars and crowd-funded investments, all organized by the Climate Access Fund, a startup green bank. “We are pushing the envelope on every piece of the capital stack,” said Lynn Heller, the fund’s chief executive officer.
The idea isn’t new: Countries including Rwanda, Australia and Japan already have national green banks. Supporters have spent more than a decade pushing them in the US, even pitching them as a way to help juice the nation’s recovery after the 2008 financial crisis. There are at least 22 green banks around the country now, starting with Connecticut’s, which was set up in 2011. These have so far synced about $2.5 billion of their own capital with some $7 billion in private money to spur green projects that might not get funding otherwise.
The new US climate law plows $27 billion into an Environmental Protection Agency fund for green banks. The EPA has six months to dole the spending to nonprofit organizations to rapidly deploy low- and zero-emissions products, technologies and services.
Some $7 billion is earmarked for states and tribes. That could be seed money for new state green banks, capital for existing green banks or funding for other organizations.
The EPA is tasked with directing the rest, roughly $20 billion, to an eligible organization or organizations to invest in emission-reducing projects, with at least 40% of that put to work in disadvantaged communities.
Lawmakers who successfully championed this provision said the intent is to create an independent national green bank, and environmental groups are pushing the EPA to seed that with the $20 billion. Whatever institution the EPA selects — and it may be a brand-new entity — could ultimately distribute the money to regional and state green banks and other organizations, such as community development finance institutions and minority deposit institutions that have deep roots in disadvantaged communities but scant experience with energy lending.
What green banks can do to speed the energy transition
Green banks could help small businesses invest in electric vehicles for workers who spend a lot of time on the road. And they can use long-term, low-interest loans to help people install heat pumps in their homes.
Green banks could even help finance large-scale transmission projects, including proposed power lines that would cross over state boundaries but have struggled to find support. Utilities and their regulators are often reluctant to sign off on such projects because the costs may fall to their ratepayers even though benefits would flow to customers outside their territory.
“There’s been some real tension there that I think something like a national green bank or just the greenhouse gas fund generally can help solve,” said Sandra Purohit, director of federal advocacy at E2, which represents environmentally minded entrepreneurs.
Green banks have similarities to a 17-year-old Energy Department loan program that uses federal funding to spur projects on technology’s bleeding edge. But where the DOE loan program focuses on the risk in commercializing nascent energy technology, green banks are all about confronting the financial obstacles, using strategies like innovative loan packages and “ liberty bonds” as well as credit enhancements such as loan-loss reserves and loan guarantees.
“You’re finding ways to close the gap on financial loans in a way that advances the economy, grows jobs, creates wealth and addresses the climate all in one,” said Purohit. “You are going where the current financing market isn’t going and you’re going there in new ways.”
One such creative solution could involve overlooking a potential borrower’s lower credit score and underwriting a loan based on that person’s history paying electricity bills that stand to be lowered by the proposed investment — such as rooftop solar panels.
A whole-country approach
While much of the money may be used for loans, supporters of green banks say highly concessional finance and even outright grants will be needed to rapidly deploy clean technology in places where the actual cost of adding insulation, solar panels or a heat pump may be higher than some households’ income. Such communities can’t be left out of the shift to clean energy, advocates say.
“If you want to move from carbon to clean, you have to have the whole country do that,” said Reed Hundt, chief executive officer of the Coalition for Green Capital, a nonprofit that supports green banks. It can’t be just the people who can pay up front for electric cars and heat pumps, he said. “You’ve got to have everybody participate, because that’s the only way to get the emissions down. It has to be all in.”
Heller, of Maryland’s Climate Access Fund, notes that this will require deliberate, sustained effort. “We’re at the beginning of this transition into a new economy,” she said, “and without collectively making a concerted, intentional effort to figure out ways to not leave out huge swaths of lower-income folks, it’s not going to work for everybody.”
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