The green bank value proposition
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 US 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.
Several avenues are being explored to mitigate the issues of precedent, standardization and scale.
For instance, Dynamic Energy Networks, a creation of the Carlyle Group, will deploy Carlyle capital to create microgrids, and then operate them in an energy-as-a-service model using long-term contracts. The goal is to eliminate upfront capital requirements and engage in enterprise-wide contracts using Carlyle’s large balance sheet.
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.
For instance, in 2012, the Connecticut bank partnered with Sungage Financial to create the CT Solar Loan Pilot. This was the solar industry’s first dedicated residential solar loan product that did not require any home equity or a lien on the home. The Connecticut bank provided a $300,000 loan loss reserve, $1 million of subordinated debt and a $5 million warehouse for this facility. The residential solar loan sector and the no-money-down model have grown significantly since.
In 2014, the Connecticut bank partnered with Mosaic, a solar lender, to create the country’s first crowdfunding platform to raise private capital that Mosaic lends to homeowners to help them buy rooftop solar systems. Both examples highlight the Connecticut bank’s risk appetite and its willingness to experiment with novel financial mechanisms to harness more private capital for the clean energy sector, according to Brian Farnen, general counsel and chief legal officer of the Connecticut bank.
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. NY Green Bank has engaged third-party engineers to create forward curves for the energy value stack over a 20-year period, breaking down each utility and customer class in the state. These forward curves help banks determine how much to lend and how to set debt-service coverage ratios. The forward curves are made available to private financiers engaging with NY Green bank. They also help reduce diligence costs for lenders and investors interested in financing projects in the state.
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.
The bank also helps lenders and investors with technical support as they navigate the regulatory regime in New York. The goal is to bring more private capital into the clean energy sector in New York.
The commercial and industrial solar market remains fragmented. NY Green Bank recently put out an RFP (RFP 7: Construction & Back Leveraged-Financing for Ground Mounted Solar) aimed at C&I solar developers who plan to use third-party tax equity and seek back-levered debt for projects in New York. The RFP describes the due diligence, credit approach and basic set of documents necessary for financing. The bank hopes this will help the market move toward standardization in financing terms and documents. Standardization has the potential to reduce financing costs.
Beyond diligence and regulatory acumen, green banks can perform roles similar to insurance companies on large project financings where they take on risks that allow lenders to increase advance rates or improve debt-service coverage ratios.
Green banks are often willing to subordinate their debt to commercial lenders. This is useful when attempting to create scale. To entice local banks and credit unions to lend more in the residential energy sector at lower rates and longer terms, the Connecticut bank currently offers loan loss reserves to these institutions without charging a fee.
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.
On the horizon
Griffin said NY Green Bank is focused next on community solar, storage and energy savings performance arrangements. He expects to see loan products in the residential solar sector that take no security interest in the home.
Brian Farnen said the Connecticut bank is moving in the same direction and is also interested in facilitating the ability of mid-market companies to enter into corporate PPAs. The Connecticut bank is also exploring performance and energy savings products for use by low- and moderate-income customers.
Griffin says the ideal is not necessarily to have 50 individual green banks at the state level. He would prefer a focus on a national platform, complemented by a few players with regional focuses.
As the New York bank continues working to raise $1 billion in private capital, it is looking for opportunities to support transactions outside New York.