States Explore Energy Banks as a Financing Tool
By Jocelyn Durkay | Vol . 23, No. 02 / January 2015
Did you know?
- State energy banks are public-private partnerships that seek to lower the cost of investing in renewable, resilient and efficient energy projects.
- Energy banks allow states to coordinate a variety of existing financing tools and programs in one place.
- Three states have energy banks and a fourth enacted legislation in 2014 to study establishing one.
As state policymakers continue to look for ways to boost efficient and renewable energy—as well as to increase resiliency by making systems less vulnerable to weather-related power outages—some are turning to energy banks. Such banks combine public-sector funds with private-sector financing to lower the cost of investing in renewable or energy-efficient technology.
State energy banks (also known as “green” or “resilience” banks) are public-private partnerships that combine public funding with private capital and expertise to support technologies that advance renewable, efficient and resilient energy projects. These public or quasi-public banks provide an array of financing tools, including loans, co-investing, Property Assessed Clean Energy (PACE) financing, on-bill financing or on-bill repayment, credit enhancements and bonds. An energy bank also can arrange financing that may be deemed too risky for the traditional banking industry to assume without public support. Further, such banks can consolidate and coordinate existing programs that may be housed across various departments, programs or authorities, allowing a state to deploy a cohesive, clean-energy financing strategy.
Energy banks require initial public funds—such as state funds, federal grants, utility bill surcharges, foundation grants, private investments or bonds—that are managed separately from state budgets. Energy banks can efficiently leverage these funds with the multiplying effect of private sector investments. Advantages of the statewide scale of investments include making technology more competitive, driving down project costs and overcoming market barriers. Typically, the goal of a state energy bank is to become financially self-sustaining, providing long-lasting support for renewable energy and energy-efficient investments.
Energy banks can be tailored to meet states’ specific energy or environmental goals. State legislation can determine eligible projects and sectors; financing tools; project guidelines; sources of capital; and the bank’s goals, such as increased energy security, energy resilience, use of domestic energy resources, low-carbon energy or support for local economic development. Eligible customers - ranging from state governments to commercial building owners - must apply for loans for projects. Qualified projects, which vary from state to state, could include updating insulation in an older building, adding solar panels to a retail center or equipping a public building with technology to generate power during outages. The customer makes payments on low-interest loans while realizing the benefits of the project as soon as it is complete. The loan payments then are used by the bank for future project loans.
State legislatures have increased their focus on energy security and resiliency, especially after the extensive damage to electrical transmission and distribution caused by Hurricane Irene and Superstorm Sandy. In addition to the millions of utility customers who lost power in each weather event, hundreds of energy and public facilities were affected. State governments and energy banks can identify potential projects that will mitigate these vulnerabilities by increasing the use of on-site power generation, or microgrids. For example, New Jersey’s Energy Resilience Bank has directed financing to support microgrid “islanding” during outages. This technology would allow solar customers—whose panels typically provide no benefit during a power outage—to temporarily disconnect from the electric grid, independently generating electricity without harming utility crews who are repairing damaged equipment on the same grid.
Connecticut, New Jersey and New York have established energy banks in recent years, while Hawaii passed legislation to lay the foundation for a state energy bank. Maryland enacted legislation to study the issue during its 2014 session, and Arizona and California introduced legislation related to energy banks.
Connecticut created the first energy bank in the nation when the legislature established the quasi-public Connecticut Energy Finance and Investment Authority (CEFIA). CEFIA is funded with proceeds from the Regional Greenhouse Gas Initiative, commercial electric bills, federal funds and grants, and private capital. The goals of the bank are broad—they include achieving energy security and reliability, creating jobs and enhancing local economic development. CEFIA’s 2013 annual report states the authority has invested more than $220 million in a variety of projects, creating 1,200 jobs and avoiding 250,000 tons of greenhouse gas emissions. The bank has a leverage ratio of 10:1, in which every public dollar allocated corresponds with $10 in private investments. In May 2014, the bank achieved a new level of financial sustainability through partial securitization.
The New Jersey Board of Public Utilities announced the launch of an Energy Resilience Bank in October 2014. The bank—managed jointly by the board and the New Jersey Economic Development Authority - currently is funded with $200 million in public capital from the state’s Community Development Block Grant Disaster Recovery allocation. The bank will focus on projects that have both economic and resiliency benefits, starting with making upgrades to water and wastewater treatment plants in areas that were affected by Superstorm Sandy. The bank is supporting installation of new systems, such as combined heat and power and fuel cells, which will allow the plants to operate during power outages.
Also in 2014, the Maryland General Assembly enacted legislation requiring the Maryland Clean Energy Center and the Maryland Energy Administration to conduct a study of “green banks and clean bank financing initiatives.” The legislation requires state entities to consult with specific organizations and industries to determine implementation and funding strategies.
Congressional members have attempted to create a federal energy bank for renewable energy or energy efficiency financing, most recently through the Green Bank Act of 2014 and the Clean Energy Projects Green Bank.