JUNE 28, 2011
with Devashree Saha
One reason the U.S. clean economy is struggling to get big fast, as we note in our upcoming report “Sizing the Clean Economy,” is the absence of sufficient, affordable capital with the right tolerance for risk to help scale up new technologies. One response to such problems is the creation of “green banks”—emerging technology deployment finance entities aimed at lowering the cost of capital for innovative projects. And so Connecticut has acted.
In yet another example of state leadership on clean energy, the state’s General Assembly recently signed into law Senate bill 1243 establishing the nation’s first fully funded green bank. Aimed at providing low-cost financing for clean energy and efficiency projects the new entity offers Washington and other states a workable model for promoting investment in clean energy at a time of growing concern about the serious finance problems surrounding clean energy deployment.
The problem Connecticut’s innovation addresses is well recognized, and has been well documented in important reports by Clean Energy Group and Bloomberg New Energy Finance, CalCEF, and the Coalition for Green Capital (CGC) and Center for American Progress. Although much attention has focused on the difficulties of financing early-stage R&D and proof-of-concept work, it is increasingly recognized that an arguably larger gap in the funding flows—the “commercialization (or deployment) Valley of Death”—now exists between earlier stage technology proving and full-scale commercial roll-out.
At the earlier stage, government research dollars and VC capital are still managing to generate good ideas and provide entrepreneurial start-up companies with investments ranging from a few million to $20 million. At the latest stages, traditional project finance and bank lending (ranging from perhaps $100 million to billions) is available for building out large, asset-based installations applying proven technology—whether it be a utility-scale solar array or a 50 million gallon cellulosic ethanol plant. However, in the intervening chasm—between the initial proof of concept that a VC can fund and the full-scale commercial roll-out typically financed by banks—few sources of capital exist for building pilot projects, financing the scale-up of relatively new technologies, or developing basic infrastructure or manufacturing facilities. The result has been a significant bottleneck in the scaling up of the new clean economy.
What are some possible solutions to this problem? Several institutional models appear promising, including the proposed Clean Energy Deployment Administration (CEDA), which would provide loans, loan guarantees, and other credit enhancements to facilitate less expensive lending in the private sector and the so called Energy Independence Trust (EIT) which would borrow from the U.S. Treasury to provide loan guarantees that would back private capital. Still other concepts being explored by the CGC and the New England Clean Energy Council would channel stranded off-shore capital into U.S. clean economy scale-up through a qualified tax cut. (I’ll be writing more about this approach soon). However, none of these ideas appears near to implementation.
Which is why it is so auspicious that one small state has taken the lead in moving from concept to design to implementation. In classic federalist fashion, state experimentation is leading the way at a time of federal gridlock.
How will Connecticut’s newly constituted Clean Energy Finance and Investment Authority (CEFIA) work? Basically, the new entity will function like an investment bank or fund that can leverage its capital to provide low-cost financing to clean projects that a commercial bank wouldn’t likely touch. To this end, the bank will be funded by a surcharge on residential and commercial electricity bills, which was previously paid into the state’s Clean Energy Fund, amounting to $30 million a year. CEFIA will also administer the $18 million Green Loan Guaranty Fund. The total $50 million investment by the bank will enable Connecticut to leverage limited state resources with much larger amounts of private capital—and in this way will catalyze a self-sustaining flow of low-cost capital for innovative clean energy deployment projects, whether it be large-scale rooftop solar plants or commercial building retrofits or even high-voltage lines. In this vein, the new Connecticut institution keeps pace with and somewhat “copy cats” the U.K.’s recently announced plan to capitalize a Green Investment Bank with $4.8 billion.
In short, a small northeastern state is embarking on an essential experiment aimed at getting clean energy finance moving. Ideally, this smart experiment will succeed and other states and Washington will follow suit. After all, finding a robust and workable solution to the problem of financing the deployment of innovative, large-scale clean energy projects will be absolutely central to ensuring that the U.S. unleashes a sizable clean energy economy, instead of drifting.