-02.png){kind=logo}
CARBON REMOVAL
Carbon removal is the process by which humans actively and intentionally remove carbon dioxide (CO2) from the atmosphere and store it in longer-lived reservoirs.
GREEN BANK
A green bank is a financial institution specializing in financing clean energy projects. These public, quasi-public, or nonprofit entities use innovative financing techniques and tools to further clean energy investments.
It is difficult to overlook the clean energy transition as a means of a climate change solution. The clean energy transition refers to the global energy sector’s shift from fossil fuel systems of production and consumption to renewable energy sources like wind and solar. But this transition is not possible without the necessary financing.
The primary mission of green banks is to demonstrate to private markets that these projects are capable of securing financing. Important principles green banks operate by include: (1) offering financing rather than grants; (2) leverage private investment alongside public investment; and (3) recycle public dollars so as to maximize both investment and the efficiency of each public dollar invested. [1]
Source: Coalition for Green Capital
Source: Coalition for Green Capital, 2016. An example of a Green Bank structure.
​
Green banks are institutions geared towards bridging that gap of necessary financing and accelerating sustainable clean energy projects. Green banks do not operate to maximize profit, but maintaining sound financials and ensuring the ability to repay remain crucial aspects. Green banks identify clean energy projects in which they provide ‘catalytic capital’ that is pivotal in making things happen. It is important to note that green banks do not compete with the private financial market.
Associate Director of Innovation & Strategic Advisor to the President at the Connecticut Green Bank
Yale School of the Environment; Yale School of Management
Jenny Liu
Presence
Green banks operate at the city, county, or state-level. Green Banks also exist on the global level. More than two dozen green banks already exist in 12 countries at either the national or regional level. [2]
​
State Level Banks
International Green Banks
Source: Coalition for Green Capital. Green Bank status by state as of November 2024.
Reaching Underserved Communities
While not all Green Banks have this objective, an additional goal can be to consider the different needs of underserved and disadvantaged communities early on. This allows relevant decision makers and stakeholders, including green banks themselves, to create programs that can best serve those communities while incorporating consumer protection. For instance, households may experience significant additional debt for installing solar panels or new electric appliances. Programs that could support the burden of this could include strong tax incentives and rebates while also offering financing to overcome the initial high project costs. [3]
Understanding Green Banks
Green Banks use investments from private capital providers, angel investors, and/or public funds such as ratepayer funds and proceeds from the Regional Greenhouse Gas Initiative to finance projects. This means that capital invested in a project is expected to be returned or repaid. Compared to incentives, which are a one-time use of funds to support the transition, green banking creates a model wherein the capital can be recycled. For instance, as one customer pays back their loan, a green bank can loan it out to another. This maximizes the impact of the money initially invested.
This model ensures the diligence to focus on technology within markets that are feasible and readily deployable (i.e. past the research and development stages). Rather than taking technology risks like only deploying commercially available technology, green banks can take customer (e.g. low-income) or business model (e.g. novel lease product) risks.
A unique aspect of green banks is their goal to exit the market once private lenders step in. For instance, the Connecticut Green Bank initially provided rooftop solar loans until the private sector began offering competitive rates. This transition allows green banks to reallocate capital to underserved areas, maximizing their impact.
Market Advancement
To advance the market, Green banks can provide technical assistance and information sharing for projects in clean energy markets that might be generally more unfamiliar and expensive. Green banks can take on this work to create standardized frameworks (documents, processes, etc).
Market Advancement
Financing Techniques
Financial products Green Banks craft are designed to draw in and leverage private capital into the market. The challenge is twofold: supporting customers in adopting sustainable technology while showing the private sector that these are investable assets.
​​Financial products provided by Green Banks can include warehousing, credit enhancements, and co-investments. These techniques alleviate issues such as short-term contracts, insufficient principal capital, or high interest rates in order to reduce cost of capital for consumers.
1. WAREHOUSING/SECURITIZATION
Clean energy projects, such as residential or small business energy efficiency projects, can be small, geographically dispersed, and more expensive to provide capital for. Green Banks bridge this gap by underwriting loans directly, pooling these loans together, and warehousing (storing) them until a larger scale is reached. Once sufficient scale and legitimacy are achieved, green banks can sell the loans or their associated revenue streams to private investors.
2. CREDIT ENHANCEMENTS
Credit enhancements is a risk-reduction technique that provides financial support such as loan loss reserves or loan guarantees to offset potential losses from investments. Green banks assume a portion of this risk themselves.
​
This technique is suitable for a market where private lenders are interested in entering the market but are hesitant due to perceived risks. A credit enhancement can also be used when private lending is available, but at a reduced rate. [4]
What’s a Loan Loss Reserve (LLR)?
LLRs provide partial risk coverage to lenders - the reserve will cover a pre-specified amount of loan losses.
What’s a Loan Guarantee?
A loan guarantee is different from a LLR because it covers the entire amount of a capital provider's potential losses on a project.
What’s senior debt?
Senior debt is borrowed money that has the most seniority and thus needs to be paid back first and is very secure.
What is subordinated debt?
Subordinated debt is any debt that falls below senior debt and is less secure.
3. CO-INVESTMENTS
Green banks can also directly invest in projects in partnership with private investors and provide the gap financing needed to close a deal. This can be through methods such as senior debt or subordinated debt. Because of its flexibility and objective of getting clean energy projects onto the market rather than maximizing profit, green banks can form different kinds of investment structures to fill the needs of a project or fund. [5]
Financing Structures
Green Banks can use the described financing techniques through different structures that the industry has developed as delivery mechanisms. These mechanisms increase the security for a lender. Green Banks have been a suitable manager and implementer of these structures.
1. Property Assessed Clean Energy (PACE) Financing
PACE Financing is a structure through which a building owner repays an energy upgrade loan through property taxes via a new lien on a building. This significantly reduces repayment risk. A lender provides a loan to a building owner for energy efficiency improvements, with a tax-collecting agency placing a lien on the building for loan repayment, which it collects and forwards to the lender. Green banks have offered credit enhancements to entice private lenders into the PACE market.
On-bill financing is a structure in which an energy upgrade loan is repaid through the customer directly, often through their utility bill. This structure creates greater security for the lender because utility bills historically have a very high rate of repayment. Additionally, there is an incentive between building owners. A tenant would repay only the portion of the loan due as during their time as a tenant, not the full loan. [6]
Source: U.S. Department of Energy. A diagram showing the PACE model, a mechanism for financing energy efficiency and renewable energy upgrades on private property.
Ways of Adminstration
Local or state agencies
They typically use legislative authorities and public or private funding to set up green banks. The funding can be sourced from federal, state, or private grants and bonds. Local governments can consider if they have the authority to establish a green bank or if they can partner with an existing state-administered green bank.
Nonprofit organizations
They may be established as green banks on their own. In this sense, they do not need the legislation and authorization needed to establish a green bank as a government entity. In recent years, the number of nonprofit green banks has increased. They, as well as state green banks, can work with both public and private funders, thus tapping into new centralized pools of capital, which increases the operational flexibility to reach more participants.
The primary distinction between state/local green banks and nonprofit green banks is that the former are limited in operational scope but gain credibility through their civic association, fostering greater public trust.
“End of the Beginning” for U.S. Green Banks
The United States currently has a number of successful state and local green banks. This has leveraged about $2.5 billion in public and philanthropic funding into $9 billion for green projects nationwide. But there is no national U.S. green bank operating at the same level like those in Australia, Japan, and elsewhere.
The Inflation Reduction Act has the ability to change that. It has created a $27 billion federal climate fund called the Greenhouse Gas Reduction Fund (GGRF)–like a national green bank–to help finance projects that promote:
-
clean energy
-
reduce carbon emissions
-
protect communities [7]
​
As of April 2024, the EPA had allocated $20 billion of its $27 billion fund to various entities--states, municipalities, lenders, etc--aiming to accelerate investments in renewable energy, energy efficiency, and clean transportation. [8]
At least 70% of these funds are designated for low-income and disadvantaged communities, 20% for rural areas, and over 5% for tribal communities. This allocation aims to address longstanding inequities and barriers to capital access in the communities that need it most. Additionally, it seeks to support the adoption of emerging clean technologies and advance clean energy financing nationwide. [9]
Footnotes
Footnotes
[1] Coalition for Green Capital. "What is a Green Bank?". https://coalitionforgreencapital.com/what-is-a-green-bank/.
[2] NRDC. “Green Bank Network.” Be a Force for the Future. https://www.nrdc.org/greenbanknetwork.
[3] Environmental Protection Agency. "Green banks." Resources for State and Local Governments. https://www.epa.gov/statelocalenergy/green-banks#:~:text=Green%20banks1%20are%20public,energy%20projects%20that%20reduce%20emissions.
[4] U.S Department of Energy. "Credit Enhancements." State and Local Solution Center. https://www.energy.gov/scep/slsc/credit-enhancements-0#:~:text=Loan%20loss%20reserves%20(LLRs)%20provide,principal%20of%20a%20loan%20portfolio.
[5] Coalition for Green Capital. "Green Bank Techniques." https://coalitionforgreencapital.com/what-is-a-green-bank/green-bank-techniques/.
[6] Coalition for Green Capital. "Green Bank and Product Overview." https://coalitionforgreencapital.com/wp-content/uploads/2016/06/CGC-Green-Bank-Product-Activity-Overview.pdf.
[7] NRDC. "How Green Banks are Financing the Fight Against Climate Change." https://www.nrdc.org/stories/how-green-banks-are-financing-fight-against-climate-change.
[8] Roosevelt Institute. "The End of the Beginning for US Green Banks." https://rooseveltinstitute.org/blog/the-end-of-the-beginning-for-us-green-banks/.
[9] Inside Climate News. "White House Awards $20 Billion to Nation’s First ‘Green Bank’ Network." https://insideclimatenews.org/news/04042024/biden-administration-green-bank-network-disadvantaged-communities/.