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25 August 2021

Why governments are turning to green banks to accelerate the energy transition

Governments at all levels are establishing green banks to catalyse investment in carbon-cutting solutions. In the US, Joe Biden and Democrats in Congress want to take the model nationwide.

By Justin Gerdes

Trillions of dollars of public and private money must be mobilised in the coming decades to close the clean energy investment gap. This is the message from the International Energy Agency, which warns existing levels of investment are insufficient to prevent greenhouse gas emissions from surging to new heights in the coming years and to achieve net zero emissions by 2050.

Green banks have emerged as a promising tool to enable governments to grow funding for climate solutions without straining public budgets. Already operating in a dozen countries and 15 US states, green banks use public seed money to leverage private investment for projects that reduce greenhouse gas emissions, such as energy efficiency retrofits or rooftop solar arrays.

Once up and running, green banks typically operate as independent non-profits, without the need for ongoing public support. Like retail banks, green banks lend money to projects. Capital from repaid loans is recycled into new loans and covers the costs of operating the bank.

UK green bank support for offshore wind

Kayakers near Burbo Bank Wind Farm, Liverpool, UK. The UK Green Investment Bank (now Green Investment Group) has supported offshore wind. (Photo by Christopher Furlong/Getty Images)

So far, green banks in the US have been pursued by local and state governments. Three-quarters of the 50 states either operate or are exploring the formation of a green bank. But momentum is building to take the model nationwide.

Three times, the US House of Representatives has passed bills that would establish a federal green bank or a Clean Energy and Sustainability Accelerator. President Joe Biden called for the creation of a $27bn Clean Energy and Sustainability Accelerator in the American Jobs Plan he announced in March 2021. A federal green bank was included in a budget resolution passed by Senate Democrats on 11 August. The resolution initiated a budget reconciliation process under which Democrats plan to approve as much as $3.5trn in new spending this autumn, including for much of Biden’s climate agenda.

Over the last ten years, US green banks have generated $7bn in investment, with a record $1.69bn coming in 2020. A US national green bank stocked with $100bn could create $884bn in public and private investment over ten years, estimates the Coalition for Green Capital, a non-profit organisation. That estimate is validated by the Connecticut Green Bank, the US’s first green bank, where since 2011 every $1 of public money deployed by the bank has resulted in $8 in private investment.

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Technology support

Green banks are especially useful in catalysing investment where a technology is mature, but has not reached its full market potential. Examples include financing for energy-saving upgrades for homes or farms in rural areas, supporting electrification of low and moderate-income homes, and investing in community solar projects.

Incentives and financing targeting low and moderate-income households provided by the Connecticut Green Bank since 2015 have enabled the state to achieve parity in rooftop solar PV adoption across income levels. More than 5,400 Connecticut households have financed energy-saving retrofits worth nearly $100m through the bank’s Smart-E loan programme.

“Most of the investments we have been talking about here are good, return-generating investments,” said Jeffrey Schub, executive director of the Coalition for Green Capital, during a recent briefing on green banks hosted by the non-profit Environmental and Energy Study Institute (EESI). “But they are also complicated, which is why these projects often do not get built; someone has to figure out how these complicated transactions and public-private partnerships work.”

“Many highly effective clean energy technologies exist today (or are close to commercialisation), but we need to deploy them more quickly to obtain the near and long-term benefits of accelerated decarbonisation,” a research team wrote in a report prepared by the Brattle Group, a Boston-based consultancy, for the Coalition for Green Capital. “The Accelerator [or federal green bank] would address remediable situations of under-investment that are due to frictional institutional and financial barriers [emphasis in original].”

Examples of those barriers cited by the researchers include “chicken and egg” situations such as the deployment of electric vehicles and charging infrastructure, and measures that have failed to reach economies of scale such as building retrofits for low-income households.

“By finding such niche opportunities that primarily need ‘debottlenecking’ or are near a tipping point of readiness for wider use, the Accelerator can be used to leverage other private capital that is already available and interested but reluctant to dive in,” the Brattle Group team concludes.

A US national green bank

If funding for a national green bank is included in the final budget reconciliation package Democrats aim to pass this autumn, it would not take long for the first cheques to go out of the door.

“Within one week after there was funding and a management team in place, you could fund the first projects,” says Reed Hundt, Coalition for Green Capital founder and CEO.

Hundt outlines four likely steps in scaling up a US national green bank. Job number one, after authorisation, would be to establish and capitalise green banks in every state. Fifteen US states already host such an institution. The national green bank would assist the rest of the states, including the 22 states exploring green banks, to follow suit.

Implementing capital minimums or floors would ensure all 50 state green banks have money to begin lending. “Although every state will have a different focus and set of objectives, you still have to have money for all the states to execute their transition plans,” says Hundt. “You cannot have any part of the country, or any state, left out.”

Next, a “race to the top” would promote competition among the states. “A state that wants to execute on the transition the quickest would be able to get money the quickest,” says Hundt.

Last, the federal green bank could assume the role of primary lender for interstate or regional projects of national importance such as onshore or offshore high-voltage, long-distance transmission lines.

Green banks everywhere

Outside of the US, green banks have succeeded in driving clean energy investment, despite some political turbulence.

The UK Green Investment Bank, launched in 2012 as the world’s first green bank, played a key role in bankrolling the UK’s world-leading offshore wind sector. Between 2012 and 2017, the bank invested £3.4bn ($4.7bn) in nearly 100 green infrastructure projects.

“But here’s the odd part of the story,” says Coalition for Green Capital’s Hundt. “It was so successful that when the Conservatives came in, they did something straight out of the Maggie Thatcher playbook – they privatised it and sold it to Macquarie [in 2016], the investment firm out of Australia.” Now the Conservatives appear to have developed a case of seller’s remorse. “They are having a do over. They are creating another green bank,” says Hundt. “That story tells you really all you need to know.”

Scotland, meanwhile, launched the Scottish National Investment Bank in November 2020. The government capitalised the bank with £2bn ($2.75bn) and charged it with supporting Scotland’s 2045 net-zero emissions target.

In Africa, the Coalition for Green Capital partnered with the Development Bank of Southern Africa to launch the Climate Finance Facility, the first green bank in an emerging market and is working to develop green banks in Rwanda and Uganda.

Australia’s Clean Energy Finance Corporation (CEFC) was established 2012 and tasked with investing in low-carbon technologies. The bank was capitalised with A$10bn ($7.14bn) and has generated A$33bn ($23.6bn) in total investment. But, like the UK green bank, the CEFC has been buffeted by politics. Swings in governments have shifted the bank’s remit. In 2015, former Prime Minister Tony Abbott announced a ban, later reversed, preventing the CEFC from investing in wind power and rooftop solar. More recently, Prime Minister Scott Morrison’s conservative government has attempted to compel the CEFC to invest in natural gas-fired power plants.

“The most intriguing national green bank but also the most frustrating is Australia because they keep changing governments,” says Hundt. “Every time they change governments, there’s a change in attitude about the Australian green bank. They haven’t solved the political flip-flop problem.”

A $21bn backlog

It is unclear if a US federal green bank would be susceptible to such political meddling. Republican members of the US House have signed on as co-sponsors to legislation to create a national green bank, and green banks operate in states run by Democrats and Republicans. But if a national green bank is authorised this year, the Senate's budget reconciliation package is likely the only way to get it passed, and it will almost certainly attract only Democratic votes.

If Joe Biden signs legislation authorising a US national green bank, state green banks could immediately move to clear an existing backlog of projects valued at $21bn, says the American Green Bank Consortium. That figure likely underestimates the pent-up demand for bankable projects. The states accounting for that $21bn backlog of projects represent about one-third of US GDP. “If you just extrapolate, the [nationwide] backlog would reasonably be about $60bn,” says Hundt.

The potential for positive returns is such that private sector investors are willing to put their money at risk in state green banks. Earlier this month, NY Green Bank, the US’s largest green bank, announced the closing of its first private capital raise, a $314m investment from Bank of America.“This transaction demonstrates we have achieved our goal of increasing private sector activity in clean energy markets and leverages that progress to fuel our focus on new areas where market transformation is still needed,” says Andrew Kessler, president of NY Green Bank.

The Connecticut Green Bank has proven so successful the state's Legislature recently expanded its mission beyond clean energy to include environmental infrastructures, such as facilities and services for water, climate adaptation and resiliency, and agriculture.

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Organisations that specialise in bringing clean energy to low-income communities see a national green bank as a promising source of ongoing funding. “A national climate bank would unlock so much potential to leverage more funds,” Duanne Andrade, CFO of the Solar Energy Loan Fund, a Florida-based non-profit green bank, said during the EESI briefing. “We would have access to the long-term, flexible financing needed to provide solar to our markets.”

Brittany Heller with GRID Alternatives, a national non-profit US solar installer, agrees. “With additional funding, we would be able to scale up existing programmes and offer new programmes. Often, we get projects and then have to figure out how to fund them. It would be great to flip that by having a source of funding first and then go to our partners for projects.”

“The model has been proved,” says Coalition for Green Capital’s Hundt. “To really scale it up – meaning much, much more public-private investment in all 50 states – we need this Accelerator to be funded.” Hundt is convinced green banks will play a key role in generating the trillions of dollars needed to transition to wind and solar power, energy storage and electric vehicles. “The big question is how do we pay for it?” he says. “You’re not going to get China to slow down growth and stop the improvement in the standard of living. You have to have abundant, clean power to drive carbon power out of their economy.

“Abundance is the answer,” he sums up. “And abundance means lots of finance.”

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