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CBEYond the Moment: State Banks Outline A National Climate-Bank Path

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In Brief

With millions of Americans needing jobs, state-level green banks show hints at how to serve low-income and moderate-income communities while fostering renewable and efficiency businesses. 

Advocates say these states could do more with a national climate bank pushing capital to feasible projects. Such a bank, as outlined in current national legislation, would operate independently. 

Case studies from across the nation show what state-level green banks have done to connect with underprivileged households- and suggest what a national analogue could do to lead out of this crisis. 

Some 20 million Americans will start May without jobs. Unable to even stand in unemployment lines, these people include PhDs and former retail clerks. America will need to produce millions of jobs in hundreds of days for these people, which means some catalysts for financial leverage need to emerge. One catalyst, advocates say, sits in a year-old Congressional bill. 

The National Climate Bank Act came together last year when Senators Edward J. Markey (D-MA) and Chris Van Hollen (D-MD), sought to stake a nonprofit federal institution to scale up capital in current state-based green banks. When the East Coast Democrats floated the bill, they looked back to a similar proposal that earned bipartisan respect in 2009. In the midst of the COVID-19 crisis, advocates offer it as a measure to help restore the virus-stricken economy. Here, we sketch the bill’s strategy and document existing state-level green banks’ work to sketch what kinds of projects a national financing source would make possible. 

The National Climate Bank aims to advance clean energy deployment, retire coal-fired power plants and reduce greenhouse gas emissions. The model would stand up a nonprofit organization to allocate capital to state and municipal green banks, helping establish new green banks and directly investing in hairier projects. It could also fuse clean-energy capital with measures to stabilize low-and-moderate income communities after the disaster’s cascading effects. 

If passed, a National Climate Bank will be capitalized with $10 billion initially and an additional $5 billion every year for five years, amounting to $35 billion. Its advocates, like Coalition for Green Capital Executive Director Jeffrey Schub, stress how this capital could leverage up to ten times its value in job creation. In another CEFF article, Schub suggests that Congress push for a National Climate Bank to spur job creation as part of a federal relief package. The Bank would prioritize projects that create jobs in a time of spiraling unemployment - including in neighborhoods where adults often have to share the first news of layoff waves with those they love. 

The current health crisis brought on by the outbreak of COVID-19 will likely lead to a recession, according to industry analysts at Greentech Media, high levels of unemployment and less circulating capital. As a result, the stagnant economy--due to workforce shortage and supply chain pressure--would retain less capital for infrastructure projects and clean energy investment. With higher health risks and financial instability, LMI areas will remain in precarious situations for an extended period. Financing organizations will also experience restricted capabilities to cater to the LMI population due to increased delinquencies and risk of lending at this time, says Doug Coward, Executive Director of Florida Solar Energy Loan Fund.

A National Climate Bank can add resources to current state green banks’ operational programs. Its management can also learn from the successes of green banks, especially those with innovative structures that appeal to LMI communities. 

Here is a look at four green banks that serve LMI households. 

Florida Solar Energy Loan Fund is a national leader with a deep commitment to serve LMI households. 

Operational since 2011 with $11.5 million in financing, Florida Solar Energy Loan Fund (SELF) was created with $2.9 million seed funding from the Department of Energy’s Better Buildings Neighborhood Program to kickstart local clean energy financing programs. Currently, SELF raises capital through 23 investors, including governments and funds and impact investors. 

Its Green Community Development Financial Institution model provides low-cost loans based on a formula that goes beyond standard credit scores. The customized underwriting evaluation process takes into account customers’ actual ability to repay by finding borrowers who are not behind on current financial liabilities. The flexible criteria allow LMI households to invest in home improvement projects such as weatherization and solar PV installation, with an average loan size of $8,500 per project.

SELF also brings project management by actively pre-screening contractors, using third-party tested technologies and reviewing quotes for customers. This allows SELF to provide safe and responsible investment opportunities.

Currently, 65-70% of its total lending goes to LMI households. Most green banks’ LMI clients take up about 3-5% of total customer profile. SELF also offers programs for veterans and military families, female heads of households, and people with disabilities. For the bank’s staff, this focus also works as a marketing strategy. 

“It would be a huge missed opportunity not to focus on LMI customers,” said Duanne Andrade, CFO of SELF. Duanne adds that SELF sees great value in removing barriers of large upfront costs and providing energy expertise to find projects that make both financial and environmental sense to customers. As of now, SELF has $10 million in total loans with less than 1.5% default rate, and projects have resulted in 1,100 metric tons of carbon emissions reduction.

Hawaii Green Energy Money $aver innovates on-bill repayment to ease the burden for LMI households.  

In another sun-soaked state, a green bank with government support chases a broader customer base. Initially capitalized with a $150 million Green Energy Market Securitization (GEMS) Bond, Hawaii Green Infrastructure Authority (HGIA) was established in 2014 and has financed up to $30 million in the state. It aims to democratize clean energy by making financing more affordable and accessible and to reach the state’s ambitious “100% renewable by 2045” goal. 

The GEMS program helps finance a variety of projects, mainly ones in which borrowers repay loans through savings on their monthly electric utility bills. This prospective repayment source means loan officers needn’t take credit scores or income ratios into account. To qualify for GEMS, potential customers must not have had a disconnection notice over the past 12 months. For those who do not qualify, GEMS offers alternative options such as solar water heaters and heat pump financing that are less costly.

In September 2019, HGIA made a commitment to only finance underserved communities. Remaining loan funds will flow to LMI single family residential homeowners and renters (20%), nonprofits (30%), small businesses (15%), and multi-family rental projects (35%). This distribution, say leaders, creates highest odds for connecting with climate-vulnerable residents. 

Michigan Saves establishes accessible loan programs for Michigan residents 

Up in a battleground state, Michigan Saves came online in 2009 as the first nonprofit green bank in the U.S. It leveraged an initial grant from the Michigan Public Service Commission to operationalize the bank and to create a loan loss reserve for financing affordable projects. 

By 2018, Michigan Saves had provided over $170 million in financing to residential and commercial customers. Approximately 56% of residential loans occurred  in LMI census tracts.To illustrate how the bank secures loans, consider an on-bill program in the City of Holland, which allows customers to pay through their utility bills. As in Hawaii, customers who are unable to demonstrate credit criteria qualification are not excluded from energy efficiency improvements.

The bank also partners with DTE Energy, a utility in Michigan, to further increase accessibility for LMI communities. DTE Energy provides a revolving loan program to LMI residents within its service territory.

As in Florida, the bank sees this as a growing market. In an interview with CEO Mary Templeton, she mentions that there are many residents who have not implemented energy efficiency improvements yet. Technology can spark more opportunities to invest in underserved markets and new technologies such as battery storage for renewables and electric vehicle charging. Pursuing these leads, the bank hopes to provide $1 billion in financing by 2023. 

New York Green Bank promotes Inclusive Community Distributed Generation across the state

That $1 billion marks the capital that a state-sponsored fund created for the NY Green Bank. The Bank receives capital contributions through New York State Public Service Commission authorization and from the New York State Energy Research and Development Authority. In 2019 alone, it committed $276.1 million to new investments, growing its total portfolio to $909 million.

Unlike many existing green banks, NY Green Bank operates as a wholesale clean energy finance lender by providing capital to commercial and industrial customers. Most recently, NY Green Bank has shown strong commitment to expand its LMI-inclusive capital projects. That work focuses mainly on Community Distributed Generation projects to increase LMI participation and encourage developers to deploy LMI-inclusive business models in those communities. The bank’s LMI-inclusive financing model features flexible contract duration, low or no early termination fee, indexed or fixed price structures.

“NY Green Bank continues to support community solar projects where a portion of the customer pool does not have a FICO score. Industry analysis has shown that people generally pay their energy bills—therefore, if a person has a good payment history track record, having a FICO score should not be a threshold requirement to participate in community solar projects,” remarked the NY Green Bank team. Cell phone and utility bills are other ways the industry measures payment performance history.

But can this go national? 

Where would a national climate bank augment these efforts? For one thing, it would increase collaboration. Green banks already can join various stakeholder meetings to share visions and best practices to learn from each other and combine strengths. The Green Bank Network and American Green Bank Consortium, initiated by the Coalition for Green Capital, a non-profit geared towards incubating and creating green banks and building a cohesive green bank landscape, provide vehicles for this.

More concretely, a National Climate Bank could enhance existing green banks’ LMI efforts. Discussions with SELF suggest that flexible and low-cost capital is necessary to extend services to LMI communities. With the additional capital, green banks can spend less effort on fundraising and can focus more on strengthening their LMI programs.

Templeton, from Michigan Saves, mentions that the “ability to scale up”, with help from a National Climate Bank, can be extremely impactful for LMI investments. For example, their on-bill program could spread across the state to cover more LMI areas. She also raises the point that the current health crisis might lead to higher energy use and utility bills, making it important to provide affordable energy improvements to those who need it. Similarly, HGIA expressed interest in growing their projects through support from a National Climate Bank. Reliable and accessible sources of funding will allow them to invest in costly projects such as anaerobic digesters, electric vehicle charging stations and community solar projects. 

To be sure, a National Climate Bank could cause inefficiencies and confusion about how to spread relatively sparse capital. A bank of this scale could be redundant as certain functions are already under the jurisdiction of state green banks. Creating an umbrella organization in this context may bring down efficiency in logistics and capital deployment. 

And to overcome inertia and lobbying from fossil fuel interests, a National Climate Bank will need to be capitalized with much more than is currently on the table to accelerate an energy paradigm shift.

It is undeniable that national legislation is not necessary for green bank growth. Many green banks started with limited funding and used it to leverage private capital in a cost-effective way. In as little as ten years, green banks have been an integral part of deploying clean energy projects in their home states. With more states taking action to mitigate these effects, green banks are expected to increase in number and impact. 

Even so, many green banks have expressed interest and support for a National Climate Bank. Federal money can catalyze and mobilize private capital and actualize sizable clean energy infrastructure for everyone. 

The chance of enacting the bill has now reduced to 4% from 50% when it was first introduced last summer, according to the Skopos Labs. This outlook, combined with a dearth of private investment in clean energy financing, illustrates the importance of state and municipal green banks in stimulating healthy investment and development. If traditional models are not contributing the capital and jobs needed to revitalize the economy, green banks could represent the soundest pathway for clean energy and economic resilience at the present.