Green Bank Techniques - Coalition for Green Capital (2024)

Barrier:

Perceived project risk.

Solution:

Credit enhancement.

Green Banks can attract more private capital at affordable rates through credit enhancements. Financing structures, such as loan loss reserves or loan guarantees, help de-risk investments for private investors, enabling more capital to flow to clean energy projects. If a private investor is hesitant to enter a new market, or is only willing to offer unfeasibly high interest rates, a credit enhancement can provide security to a lender and improve deal economics for the borrower. And because these tools are only used to support mature, low-risk technologies, the credit enhancements allow investors to become familiar with viable markets while minimizing public sector expenditure.

Barrier:

Inefficiencies of scale.

Solution:

Aggregation and warehousing.

Inefficiencies of scale represent a significant barrier to private investment in small and geographically dispersed projects, like residential or small business energy efficiency projects. By their nature, the projects are relatively low-cost and may differ in terms of credit, technology and location. This makes the projects relatively expensive to underwrite for a bank. However, if a pool of these kinds of loans were bundled together to diversify risk and achieve scale, the projects then become far more attractive to lenders. A green bank can accomplish this by underwriting loans directly and warehousing them until scale is reached. The green bank can later sell the loans to private investors through securitization or private placement, replacing public dollars with private capital.

Barrier:

First-in-kind transactions.

Solution:

Technical assistance.

When a technology or transaction type is unfamiliar, it requires more work to complete the deal and costs end up higher. The cost of capital in clean energy markets can be reduced by creating more standardized lending documents and processes. Larger capital markets, like those for homes and cars, have broadly standardized their underwriting process and contract language, thus reducing cost and uncertainty in the lending process. Green banks can take on some of this labor and work towards the establishment of scalable, standardized frameworks to reduce these costs.

Barrier:

Marginal economics.

Solution:

Co-investment.

Green banks can directly invest in a clean energy project—through senior debt, subordinated debt, or other mechanisms—in partnership with private investors. If a project is only able to secure financing for a portion of the costs, Green banks can provide the gap financing needed to close a deal. Green banks can form many kinds of investment structures to fill the needs of a given project or fund, with varying levels of public-to-private leverage.

Barrier:

Customer credit score or homeownership status.

Solution:

On-bill financing.

On-bill financing (or on-bill repayment) is a structure through which an energy upgrade loan is repaid through the customer’s utility bill. This structure creates greater security for the lender because utility bills have historically had a very high rate of repayment. On-bill financing has additional benefits too, because it addresses the split incentive between building owners and tenants. By attaching a loan to a utility meter, rather than the customer, a tenant can reap the benefits of efficiency, repay only the portion of the loan that is due while still a tenant, and then hand the remaining payments to the next tenant who continues to benefit from the efficiency. This model has the power to open up many new markets for efficiency financing. Like PACE, a Green Bank could act as a program administrator and/or lender for on-bill programs. (Note: On-bill financing typically refers to programs where the utility itself uses its own capital to issue the loans. On-bill repayment refers to the programs that allow non-utility lenders to issue loans, where the utility merely acts as a collection platform.)

Barrier:

Customer knowledge.

Solution:

Information sharing and coordination.

A critical barrier to customer adoption of clean energy solutions is lack of clear information on the value, the process and the options for purchase. Many governments now offer multiple programs to support clean energy deployment, which may include subsidies, rebates, loans technical assistance, REC procurement and others. Yet this support and information is often scattered across multiple agencies and utilities, making it difficult for consumers to understand their options use all tools that are available. A green bank can help coordinate the use of these resources by serving as a single point of contact for consumers seeking multiple forms of support.