Alaska is strongly affected by climate change volatility – and extensively engaged in fossil fuel extraction. And now it’s considering becoming one of the first states in the nation to have a green bank.
Between 2008 and 2015, the Alaska legislature appropriated more than $900 million of state funding for home energy efficiency and renewable energy, according to a report from Renewable Energy Alaska Project (REAP). The renewable energy investments, in particular, have assisted with greening the power grid in Alaska, which once ran entirely on diesel.
Alaska’s recent fiscal environment, however, has prevented further state funding for clean energy investments. Climate advocates have now turned to the idea of establishing a green bank. They have looked toward successful programs that have enabled and scaled clean energy investments in other states such as Connecticut, New York, Hawaii, and Rhode Island.
Introducing a Green Bank to Alaska
What is a green bank? Green banks are public financing authorities that help leverage private investments in clean energy with limited state funding. The investments play a crucial role in expanding the clean energy market and lowering renewable energy prices. The growth of the market simultaneously benefits job seekers in the area and investors with specific capital-allocation objectives.
The ability of a green bank to leverage private capital and generate additional public revenue is especially desirable for Alaska. The state does not impose any income or sales tax. Instead, it has relied heavily on oil and gas revenues. Since the 2014 oil-price shock, finding a sustainable revenue source for the state government has become increasingly challenging.
The idea of creating a green bank for Alaska has gradually gained support and interest. REAP, a key clean energy advocacy organization in Alaska, has established itself as a leader. REAP has consulted with policymakers, including the Chief Investment Officer of the Connecticut Green Bank, to understand how green banks work. The advocates have also testified in front of the state legislature. The former Governor included the idea in a 2018 climate-policy proposal.
Creating a Green Bank
Given the current political environment in Alaska, establishing a green bank through the state legislature might not be the most promising approach. Jeff Schub, executive director of Coalition for Green Capital, said that Colorado and Nevada have created green banks using a nonprofit model. A few other states are also exploring this option.
A nonprofit green bank does not rely financially on the state government. It does not require the strong political will that is necessary to pass a state-level bill either. In Nevada’s case, even though the state government supported the creation of a green bank, it made more sense legally and politically for the legislature to direct the state energy office to establish a nonprofit organization.
Additionally, a nonprofit green bank requires a slightly different business model than a state-led one. Specifically, Schub said that lean structure and market acumen are key to the success of a nonprofit green bank. While state-led green banks earn interests from their investments, a nonprofit green bank can consider acting as a broker that brings projects to capital providers.
Such a broker model can achieve the same objective of channeling investments into clean energy. But at the same time, it allows the green bank to maintain a lean balance sheet. The lower expenses for staffing and underwriting are also desirable.
Designing the Potential Green Bank
The potential Alaskan green bank cannot fully depend on the state government for baseline funding. It is worth noting that the state's permanent fund has recently lowered its dividends provided to the state population while starting to invest modestly in the state’s public projects.
“If there were to be a green bank, an obvious discussion would be whether it’s legal and appropriate to channel investments from the permanent fund into the green bank,” said Chris Rose, founder and director of REAP. He also said that the continuity and predictability of public funding are key to attracting private investors.
As previously discussed, the state had success with energy efficiency and renewable energy projects before the fiscal crisis. It would be natural for the potential green bank to pick up the torch and continue investing in similar projects. Logical project types include property-assessed clean energy, clean energy smart-e loans, and remote rural power generation.
Furthermore, Alaska could become the next frontier for implementing new and complex technologies. Since the demand and costs of energy are so high in the state, many projects that are cost-prohibitive elsewhere could become viable in Alaska. A green bank can be a great enabler of new experiments such as battery energy storage, advanced grid management, rural microgrid development, and so on.
There is also room for innovation on the finance side, considering that remote populations may have limited economic resources or use barter. Therefore, deep knowledge of the local energy market is critical to the success of the potential green bank.
Looking into the Future
Beside Alaska, many other states are exploring the concept of a green bank, such as Maryland, the District of Columbia, Delaware and Virginia. Coalition for Green Capital has been building a green bank consortium in the United States. Within this organization, states, investors, developers and others can gather and share knowledge. In the meantime, capital can also be connected with the right projects.
One example of a potential collaboration between green banks is that the New York and Connecticut green banks have taken steps to collectively fund out-of-state projects with spin-off capital in order to reach a larger economy of scale.
The potential green bank for Alaska, as part of this consortium, could expect to learn valuable lessons from the other states’ endeavors as well as access coalition-member capital.
Despite these uncertainties, the potential for an Alaskan green bank to accelerate the state’s clean energy market is very exciting. The rapid warming of Alaska may motivate the state to support an increasing amount of capital for climate actions. Innovative clean energy financing mechanisms are urgently needed.
Note: Jeff Schub is affiliated with multiple projects at Yale Center for Business and the Environment.