Equilibrium & Sustainability

Democrats look to establish green bank for clean energy projects

Democrats are returning to an idea from the New Deal era intended to rapidly construct the green infrastructure needed for the energy transition: a green domestic development bank, which proponents say would unleash public and private money to build projects that the market currently isn’t funding and help make green projects cheaper than fossil-fuel ones. 

Last week, Democrats included the Clean Energy and Sustainability Accelerator proposal in the Build Back Better plan, marking a significant step forward for the longtime project of Sen. Chris Van Hollen (D-Md.), Sen. Ed Markey (D-Mass.) and Rep. Debbie Dingell (D-Mich.) and a bid to bring state-level projects like the New York or California Green Banks to a national scale.

The proposal would establish a $29 billion development fund — functionally a public bank — that would directly finance green projects. 

Over the next 10 years, the bill’s authors say, that investment will mobilize another $232 billion in community investment.

By establishing a local green development bank, the bill seeks to bring to the United States something that the U.S. once brought to Europe — and that has since been instrumental in the E.U. energy transition.

In 1948, a victorious United States established a development bank, the KfW, to rebuild a devastated West Germany as part of the Marshall Plan. Today, that bank is a linchpin of Germany’s energy transition, said Stephany Griffith-Jones, Financial Markets Director at the Initiative for Policy Dialogue at Columbia University. 

Meanwhile the United States is the only member of the Group of Seven countries, and one of the only Group of 20 countries, that doesn’t have a development bank, said Griffith-Jones. 

The plan for a green bank — which has passed the House three times since 2009 without passing the Senate — “isn’t unique,” said Reed Hundt, CEO of the Coalition for Green Capital (GCG), noting that a British green development bank, for example, helped secure the financing that built up that country’s wind power in the North Sea.

But the current U.S. proposal is “the biggest and most well-conceived version,” Hundt said.

It’s an idea that has been floating around Washington for more than a decade: variants of a green bank have passed the House three times since 2009 without passing the Senate. It passed the House this June with the support of only two Republican representatives — Don Young (R-Alaska) and Brian Fitzpatrick (R-Pa.).

Sen. Pat Toomey (R-Pa.), ranking member of the Senate Banking Committee, argued in April that the bank’s loans risked being politically motivated and therefore financially unsound, pointing to the Obama-era meltdown of solar panel manufacturer Solyndra.

“We know that when the government substitutes its judgment for that of the market, it picks winners and losers based on political favoritism, not business fundamentals,” Toomey wrote in an April statement.

“Just look at the 2009 Obama-Biden spending bill. That bill included over $80 billion in spending, loan guarantees, and tax credits for green energy projects. What were the results of this massive government program? Waste, fraud, and abuse.”

But proponents argue that green banks are a proven model, having been test-driven since the Obama-era through 22 state-level green banks, which the GCG helped set up in states like New York, Maryland, California and Connecticut. The Accelerator would bring this network to cover the entire country.

That would make it possible for small businesses, nonprofits, neighborhoods and individual families to get capital for the kind of small-scale projects that will be essential to achieving the transition off fossil fuels — and that current systems of private capital aren’t set up to finance, Hundt said.

The goal of green banks is to bridge a difficult gap in the energy transition, Hundt said: the fact that much of the necessary adaptation to a low-carbon economy has to happen at the level of $100,000 to $10 million projects that are too big for small entities to easily afford, and too small for commercial banks to easily make a loan for. 

For example, when Hundt was on the board of the Connecticut Green Bank, it provided a church with a loan to rip out their fuel oil heater and replace it with an all-electric one. Other state green banks have made loans to community-scale solar — which might link 50-70 families with a network of rooftop photovoltaic panels. Or they might help a small shipping or construction business replace a fleet of a half-dozen heavy fossil fuel trucks with electric alternatives.

Businesses and nonprofits like these “don’t usually have access to capital,” Hundt said, and they also aren’t set up to apply for the tax credits that are intended to help persuade utility-scale customers to switch from coal plants to large-scale solar.

What the proposed national green bank does do — and what it would do particularly in low- and medium-income neighborhoods — is help make sure there is a market for those large-scale electrification initiatives by paying for the small-scale, “end-user” conversions, like at that Connecticut church, that the new electric grid will power. 

The BBB plan is “meant to be complementary,” Hundt said, and the integration of tax credits with small-scale public finance makes the Democrats’ $1.75 trillion reconciliation package “the most comprehensive and coherent approach [to climate finance] that any nation in the world has undertaken.”

Because it is potentially so useful to so many sectors — and has the ability to open up new lucrative markets that are currently not lucrative enough to attract private capital — it’s “actually one of the hardest elements of BBB to score in terms of value for money,” said Ilmi Granoff, director of the sustainable finance program at ClimateWorks.

In addition to the direct benefit — the grants and loans given out — there is the structural role that a public development bank can play in mobilizing private capital behind loans it would otherwise ignore, in part because green development banks’ loans are repaid 99.62 percent of the time, according to the American Green Bank Consortium.

That allows development banks to mobilize an average of $8 in private funding for every $1 they invest, Hundt said.

But their ability to develop new markets may be even more valuable, Granoff said. 

The United Kingdom is a prime example of this. Virtually all of the initial investment in Britain’s North Sea wind farms came from the U.K. Green Investment Bank, “because the market wasn’t ready to get into offshore wind,” Granoff said.

“Their ability to prove that out created the whole offshore wind market in the UK — and now it’s one of the cheapest forms of electricity in the U.K.”

On a smaller scale, the Connecticut Green Bank helped solar panel installation contractors create financing products they could offer consumers — helping open up a new market for distributed solar energy. 

“That’s the kind of thing these institutions can do,” Granoff said. “Once they standardize the model with contractors, all your commercial banks in the state go, ‘I can do that, and I can outprice you.’ ” 

“And that’s great!” he added. “You want that.”

Tags Brian Fitzpatrick Build Back Better plan Chris Van Hollen Debbie Dingell Don Young Ed Markey green bank Green infrastructure Infrastructure Pat Toomey

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