What Is a Green Bank?

Why this little-known concept could be the key to financing the green future.

Green banks, quasi-public entities meant to sway investment into sustainability initiatives, can lead to new solar panels, energy efficiency, and other sustainable infrastructure. (Photo by U.S. Department of Energy / Public domain)

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If you’ve ever looked at an electrical bill in New York or Connecticut, you may have noticed the vague-sounding “system benefit charge.” Right now in New York, it’s 0.5238 cents per kilowatt-hour — for a $60 electric bill, all other taxes and fees included, the system benefit charge comes out to 77 cents. In Connecticut it hovers between $7-$10 a year per household.

Some, if not most, of those dollars end up in the state’s green bank. Only a few states and localities have a green bank, and not all of them are funded the same way. They’re not banks in the depository sense — they don’t offer checking or savings accounts. Instead, they’re state-sponsored entities that use their dedicated funding sources to make loans, provide credit enhancements or use other financial mechanisms to encourage private investment in clean and renewable energy.

“I think our lessons over time, the challenges we’ve worked through, the opportunities to create markets, have caused other local governments to see a role for a public sector force of some kind,” says Bryan Garcia, CEO of the Connecticut Green Bank, the first green bank in the nation when it was created in 2011.

Green banks are part of a long tradition of using public or collective dollars to sway private investment into serving markets that it hasn’t served, or providing products it hasn’t provided before. Neither they nor the private sector can fund everything that’s needed to address climate change, but green banks exist to bring the private sector’s attention and resources to the issue in ways that it isn’t or can’t otherwise.

It’s worked before. Before federal intervention in the housing market started during the Great Depression, most people couldn’t get a home mortgage, and if they did get one, they typically had huge down payments, often 50 percent or higher, and had to pay off the loan in five or ten years at double-digit interest rates. Most borrowers just took out another mortgage to pay off the previous one.

Federal mortgage insurance and the creation of Fannie Mae turned the 30-year, affordable fixed-rate mortgage into a staple of the housing market in the U.S. — although white families continue to have greater access than Black or other families of color, who were locked out completely at first.

One of the common ways green banks work today is by providing a partial loan guarantee — a kind of insurance to cover part of the debt owed in case a borrower defaults on a loan to install solar panels on the roof of their building. One of the advantages of using loan guarantees is that it costs a relatively small amount relative to the amount of capital that private lenders are willing to move with the guarantee in place. In Connecticut, one of their flagship solar installation financing programs has enabled $80 million in private investment so far, while paying out less than $100,000 to cover loan losses for private lenders.

“When we were created back in July 2011, there was a public act, bipartisan, to take an existing source of funding being given out as grants and use it as a source of funding for a green bank,” says Garcia. “The thinking was, if there’s a way to multiply those public resources, we can get more done.”

In Fiscal Year 2020, the Connecticut Green Bank enabled $8.50 in private investment for every $1 it allocated to guarantee or provide other incentives for those deals.

The New York Green Bank does offer credit enhancements such as guarantees, but its main line of business has been serving as a revolving loan fund to finance construction of renewable energy projects. Unless you have a big well of reserve cash to fall back on, it can be difficult to get construction financing from a bank, especially for a relatively new industry and a new project that isn’t yet generating any income from sales of energy production. The New York Green Bank has found success providing construction financing that borrowers can refinance later into a lower-interest, longer-term loan based on the cash flow from the project after it’s up and running.

“If there is a financing involving clean energy in New York facing a lack of liquidity, we want to know about it,” says Alfred Griffin, former president of the New York Green Bank. (Griffin was president of the New York Green Bank when he spoke to Next City; per a press release obtained prior to this story’s publication, he has since left to pursue other opportunities.) “We’re out constantly talking to developers, energy services companies, law firms, banks, everyone who participates in this market, and probing in terms of where are projects we can get across the line more quickly than they otherwise would.”

And when it gets its money back from a refinancing, the New York Green Bank can recycle those funds into new loans. That’s how, with $903 million in startup funds from ratepayers, the New York Green Bank has already provided more than $1 billion in project financing across nearly 70 transactions since inception — and it’s already funding all of its operations out of its own income generated from its investments.

Green banks can be found across the globe, in Australia, Malaysia, Japan, India, and the United Kingdom. Latin American countries are also starting to get into the green bank game. They take different legal forms and have different funding structures, depending on their context on the ground.

In the U.S., the Connecticut Green Bank as well as the newer D.C. Green Bank are state-chartered quasi-public development authorities, like local transit authorities or public housing authorities. It means they have boards of directors consisting mainly of public officials or people appointed by public officials. The Connecticut Green Bank’s eleven voting board members include three ex officio seats and eight appointed seats, with the appointments split between the governor and members of both major parties in the state legislature.

But being a quasi-public entity means each entity can move more quickly than a typical state or local agency moves when doing business with the private sector. For example, in Connecticut, green bank staff can approve project financing for transactions up to $500,000, the deployment committee of the bank’s board can approve transactions from $500,000 to $2.5 million, and the full board only has to approve transactions involving more than $2.5 million in green bank funds.

“When you’re trying to partner with the private sector, you really have to operate at their speed,” says Garcia. “Quasi-public entities allow that, but you’re an entity of the state, so you’re linked to the policy objectives of the state.”

The New York Green Bank is a little bit different. It’s part of a larger quasi-public entity, the New York State Energy Research and Development Authority — known by its acronym, NYSERDA.

Created in 1975, during a global oil crisis, NYSERDA’s mission has historically been to invest in the diversification of New York’s energy production to shield it from future energy crises. But when it was created, it was funded out of general budget dollars from the state. That changed in 1996, when the New York State Public Service Commission, which regulates utilities in the state, approved the system benefits charge and made NYSERDA the administrator of that new funding stream. The state established the New York Green Bank in 2014 as part of a raft of new initiatives to accelerate the push toward renewable energy production — with the goal now set for carbon-free energy in New York by 2040.

Michigan’s state green bank, known as Michigan Saves, was the first green bank incorporated as a 501(c)(3) nonprofit — though it received most of its startup funding through an initial allocation of ratepayer funds from the Michigan Public Services Commission, which regulates utilities in that state. Michigan Saves works primarily through private lenders, including credit unions as well as banks. It functions mainly as a loan loss reserve, providing lenders insurance against losses for loans to install solar panels on homes and commercial properties. The bank also got a key allocation of Michigan’s recovery funds from the 2009 federal stimulus package passed during the Great Recession.

The loan loss reserve that Michigan Saves provides isn’t necessarily needed for every solar panel installation loan that lenders are willing to make, but in exchange for the loan loss reserve, participating lenders offer loans on terms that are more accessible than they would otherwise — 4-5 percent fixed interest rates, credit score minimums of just 600, debt-to-income ratio maximums of 50 percent, and zero collateral required. As a result, Michigan Saves says 56 percent of its residential solar panel installation loans have gone to borrowers located in low-to-moderate income census tracts.

“Our purpose is to serve gaps in the marketplace,” says Michigan Saves CEO Mary Templeton. “We’ve had very few defaults — less than two percent of loans we’ve supported have defaulted over ten years.”

The green banks also learn from each other. The Connecticut Green Bank modeled its main solar installation loan program after Michigan’s. But a few years ago, a study of the Connecticut Green Bank’s activity found that it was underperforming when it came to reaching low-to-moderate income households across Connecticut, even though the state had mandated that its green bank prioritize low-to-moderate income households.

So the Green Bank tweaked its programs, providing greater cash incentives for households that could verify need, for example if they were part of a rental assistance voucher program or free school lunch program. The bank also looked into market research and found that in Connecticut, being a low-income household does not correlate with having worse credit than higher-income households — and promoted the findings of that research among private lenders.

Garcia says they also created a new third-party leasing program to make solar installation more accessible for low-income homeowners. Under a third-party leasing arrangement, the lessee pays $70-$80 a month to the leasing company while getting $100-$120 in credits on their electric bills as a result of the solar panel power production.

As a result, Garcia says, Black and Latino households are now accessing the bank’s solar panel installation financing programs at higher rates than white households.

“You’ll see whole blocks of homes with solar panels in Black and Latino neighborhoods, because once one family does it and sees the savings they get as a result, they tell everyone else on the block,” says Garcia.

Meanwhile in New York, the landmark statewide Green New Deal legislation passed in 2019 directed the New York Green Bank to expand its reach into low-and-moderate income communities. But at this time, CEO Griffin says the New York Green Bank is not equipped to provide the broad support for direct consumer financing that the Connecticut or Michigan green banks provide. So instead, in 2020 the New York Green Bank provided a $25 million line of credit to Inclusive Prosperity Capital, a nonprofit affiliated with Connecticut Green Bank.

Inclusive Prosperity Capital plans to use the financing from New York Green Bank as working capital “to finance energy efficiency, solar, and other sustainable infrastructure transactions that will benefit low- and moderate-income communities and other underserved markets” across New York.

Funding sources will always seem smaller than the planetary challenge of shifting humanity into carbon-free, renewable energy. So far only the Connecticut and New York green banks have ongoing dedicated funding sources. The Connecticut Green Bank gets $25 million a year from Connecticut ratepayers via their system benefits charge. With its revolving loan fund model, the New York Green Bank is coming to rely less on funding from the system benefits charge, instead relying more on income from its loans being repaid.

The D.C. Green Bank and Michigan Saves were both funded initially by a one-time allocation of funding. Michigan recently went back to the state legislature for more funding — not because it’s losing money, but because it was receiving more demand than it could handle with its existing capital base. D.C.’s green bank just started making its first deals in 2020, and has $105 million in startup funding for the first five years committed from the District government.

Existing green banks say funding constraints are the main reason why there aren’t yet more of them around. It takes approval from state utilities commissions to add an extra fee on top of existing rates, and commission members may be expected to hew closely to the political party of the governor who appoints them. State or local legislatures can also create and fund these entities, but that can require even more political will — just outside of D.C., Montgomery County, Maryland, also created its own green bank in 2018.

Some of the green banks we spoke to are also hopeful that any federal Green New Deal legislation might set aside some seed capital to create more green banks or maybe a federal green bank. There’s also the Green Bank Network, which formed after the COP21 conference in 2015, which is working globally to advocate for the creation of new green banks.

The Connecticut Green Bank became first again in 2020 — the first green bank to tap into the bond market, raising $16.8 million in its first ever bond sale. Of that, it sold $9 million in bonds directly to individuals as opposed to institutional investors like banks or insurance companies. The minimum investment amount was $1,000, typical for a bond offering — but Connecticut residents were given priority in the sale, and they ultimately bought the first $5 million in bonds sold before any investors from out of state.

Garcia says Connecticut Green Bank is already planning for another bond sale this year, hopefully with a lower minimum investment size.

“Looking at the level of investment required to confront climate, it’s an order of magnitude greater than what we’ve already been able to move,” Garcia says. “That means going out to the bond market, but we said let’s make these bonds available to citizens first as opposed to institutional investors — like the war bonds from the 1940s. We believe people, consumers, families, businesses, want to put their money to work to confront climate.”

This article is part of Financing Our Green Future, a mini-series examining the behind-the-scenes roles green banks play in making a more sustainable world. This series is generously supported by the Solutions Journalism Network. We’ve corrected the details of CT Green Bank’s leasing program for solar panels, and corrected a typo that implied that the U.S. sold war bonds in the 1930s. We have also corrected the amount of funding for D.C.’s green bank.

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Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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Tags: solar powergreen banksfinancing our green future

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