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Banking on Clean Energy: State Leadership in Financing a Greener Future

Banking on Clean Energy: State Leadership in Financing a Greener Future

New York is the latest in a growing roster of state and municipal governments to establish green banks to unlock private capital investment in clean energy infrastructure.

 (AP/Robert F. Bukaty)
(AP/Robert F. Bukaty)

“The economy of tomorrow is the clean tech economy. We all know it, it’s a foot race—whatever state, whatever region gets there first wins the prize, and we want it to be New York.”

Gov. Andrew Cuomo (D-NY), January 9, 2013

While crippling paralysis has become standard operating procedure for Congress in the face of mounting climate and energy challenges, state and local leaders don’t have the luxury of standing idle. Around the country, many governors and mayors are finding new ways to respond to the real-world challenges of a changing climate. Chief among these efforts is a growing movement to establish state green banks: innovative new financial institutions that use public debt to leverage new and significant private-sector investment in more modern and less-polluting domestic clean energy infrastructure. Notably, in 2013, the state of New York set the foundation for a $1 billion state green bank to support private investment in New York’s clean energy economy. In December 2013, Gov. Cuomo announced an initial capitalization of $210 million to fund the bank’s launch in early 2014. Launching this bank is an important act of leadership by the governor and the New York state government to provide better tools to build a stronger, more competitive, and more resilient economy.

The New York Green Bank is launching at a time of mounting evidence of the direct negative impacts of climate change on the nation’s environment, economy, and energy infrastructure. Superstorm Sandy exposed this vulnerability with stark urgency and in so doing has underscored the critical investment challenge of rapidly building smart, resilient, and low-carbon energy infrastructure. At the same time, new clean energy technologies are distinctly ready to meet this challenge, but bringing these technologies to scaled deployment across the economy is contingent on having ready access to capital and strong market structures to support new investment.

In recent years, the clean energy sector has demonstrated dynamic growth. U.S. solar power capacity, for instance, recently surpassed 10 gigawatts as the price of solar panels has fallen some 75 percent during the past five years and continues to drop. Furthermore, America’s largest source of new electrical capacity in 2012 came from wind power, lifting the total U.S. wind capacity to more than 60 gigawatts. These successes are spurring new private-sector attention to the opportunities for clean technology. The leadership of individual states to utilize their financing authorities to improve access to credit and better manage financial risk is a bright spot in advancing the development of a clean energy economy powered by a modernized and climate-resilient electricity infrastructure.

Although the cleantech industry continues to grow, one of the primary hurdles to bringing new clean energy technology to market remains the availability of the affordable capital needed to move great ideas from the research and prototype phase to a commercial scale. Advanced energy technologies are forced to compete with well-established and historically government-subsidized conventional energy industries for limited available capital. This competition creates an artificially inflated perception of risk, which can strand innovative business models and new technologies in what is known as the “valley of death,” where efficient, low-cost capital is simply not available from institutional investors and bond markets to finance commercialization at scale.

This is where state green banks come into play. These financial institutions are some of the most powerful tools for mobilizing new sources of public and private capital into emerging and necessary clean energy projects. Independently administered and self-sustaining, green banks offer much-needed certainty and predictability to investors by ensuring reliable access to efficiently priced and long-term sources of credit to finance publically beneficial, clean energy infrastructure. Although green banks are relatively new institutional mechanisms, they have proven to be well-crafted strategies for stimulating robust private- market participation. National green banks have been successfully deployed in the United Kingdom, Germany, and China to harmonize policies and systematically marshal public credit supports to build emerging clean energy markets. In the United States, the Connecticut Clean Energy Finance and Investment Authority is building a strong track record of success, while Hawaii, Massachusetts, and California are also establishing similar clean energy financing entities. These emerging green banks also draw on the experiences of infrastructure banks employed in California, Puerto Rico, British Columbia, and elsewhere to finance the construction of bridges, roads, transit, and other public facilities.

Current state of clean energy financing programs


The New York Green Bank will join the Connecticut Clean Energy Finance and Investment Authority, or CEFIA, in paving the way for the successful implementation of state green banks and public, state-level, clean energy financing. Established in 2011, CEFIA featured an initial capitalization of $48 million to provide broad credit support to Connecticut clean energy projects and companies. CEFIA supports the development of Connecticut’s clean energy industry through a combination of grants, loans, and other credit supports, as well as educational programs for businesses and homeowners. These programs include lending for residential solar electricity and hot-water systems, deep energy efficiency retrofit loans through the Property Assessed Clean Energy, or PACE, program for commercial and multifamily buildings, and a competitive grant program for micro-grids. In 2013, CEFIA used $40 million to attract more than $180 million of private investment –of which $20 million will be recovered. This investment supported almost 30 megawats of new clean energy and savings of 9,000 MMBtu of energy per year.


In June 2013, Hawaii enacted S.B. 1087, which authorized $100 million in bonds to finance a renewable energy loan fund that can provide low-cost financing for homeowners and businesses to invest in solar panels and other clean energy projects. The loans, which are designed to offset the upfront cost of photovoltaic systems, can be paid back through on-bill financing, a payment plan that allows homeowners to pay back the loans through a premium on their utility bills. The program could be especially beneficial for low-income residents and renters, helping them secure the necessary upfront capital and extend payback timeframes.


California currently operates two green financing authorities through the state treasurer’s office: The California Alternative Energy and Advanced Transportation Financing Authority, or CAEATFA, and the California Pollution Control Financing Authority, or CPCFA. These programs have issued more than $13 billion in tax-exempt bonds to finance low-cost loans for energy-efficiency improvements and tax incentives for clean energy manufacturing.

California has recently also seen a renewed push to establish a dedicated green bank. Democratic State Sen. Kevin de Leon of California has proposed a green infrastructure bank that would issue loans and financial assistance to public and private economic development projects. Lieutenant Gov. Gavin Newsom has called for a similar green bank initiative and suggested that proceeds from California’s cap and trade auctions could finance it. Such a bank would further augment California’s ambitious support for a robust clean energy industry and would represent an efficient use of funds already designated to reduce California’s emissions.


In 2009, Massachusetts established the Massachusetts Clean Energy Center, or MassCEC, which invests in early stage clean energy companies and renewable energy projects. MassCEC also provides financing tools to municipalities, homeowners, and businesses in the form of loans, rebates, and grants. MassCEC programs have helped support the growth of Massachusetts’s clean energy industry, with an 11.8 percent increase in clean energy jobs from 2012 to 2013. Unlike a true green bank, however, the program remains focused on early stage markets.

In 2013, Massachusetts began a Green Bond program to attract environmentally conscious investors. The socially responsible bonds will be used to finance environmentally friendly infrastructure initiatives, including water-quality projects, energy-efficiency upgrades for state buildings, river revitalization, and habitat restoration projects. In June 2013, the state sold $100 million worth of green bonds as part of a larger bond sale, attracting some new investors specifically because of the green label. This program represents a positive step in Massachusetts to prioritize investment in green infrastructure projects and could serve as a strong foundation for a fully capitalized state green bank in the future.

West Coast Infrastructure Exchange

Launched in November 2012, the West Coast Infrastructure Exchange, or WCX, is a partnership of Oregon, California, Washington, and British Columbia that facilitates collaboration by the region’s four state or provincial governments on small and large infrastructure projects, especially interstate projects. The states anticipate that $1 trillion of necessary infrastructure investment will be required over the next 30 years. In order to facilitate efficient financing and project management, WCX will work to build public-private partnerships, standardize project assessments, and convene working groups to evaluate project-financing needs.

The most likely projects for WCX are new development and the retrofit of the region’s electricity grids and water infrastructure. WCX will seek to attract large state pension funds, such as California State Public Employees’ Retirement System, or CalPERS, and California State Teachers’ Retirement System, or CalSTRS, as well as institutional investors for these capital-intensive but reliable investments. However, while WCX will serve similar purposes to state green banks, there is no indication that it will provide direct financial support to leverage private investments for infrastructure. Rather, the exchange will likely facilitate the coordination and streamlining solely of private capital without public enhancement.

Key mechanisms for state green banks

State green banks are important but underutilized tools because they attack the very heart of the challenges currently facing renewable energy and energy efficiency in capital markets. These financial institutions can specifically target some of the most significant and persistent market barriers that have served to slow the development and deployment of new clean energy technologies. In order to maximize their effectiveness, green banks can employ improved mechanisms to flexibly facilitate the aggregation, credit enhancement, and securitization of renewable energy and energy-efficiency projects. By doing so, states can significantly improve the function and structure of their clean energy markets. Each of these tools will efficiently inject limited public dollars into transactions in a way that leverages far greater private investment than would have been accomplished otherwise, thus increasing the scale and scope of public-sector impacts. By allowing private capital to flow more efficiently into publically beneficial projects, a green bank can reduce costs for taxpayers and ratepayers, while significantly increasing the effective use of limited public dollars.


State green banks should focus on mechanisms that allow the aggregation of decentralized investments across energy and real estate markets. Currently, the volume and project size of clean energy transactions are often too small and decentralized to attract private capital efficiently into the market. As a result, pricing is artificially high, decreasing investment and establishing a vicious cycle that suppresses clean energy deployment. By serving as a warehouse for energy-efficiency and renewable energy loans—and by providing a clear point of entry into the market for customers, investors, and project developers—green banks can play a critically important function in beginning to build volume, reduce costs, and achieve scale across states’ clean energy markets and within the emerging industries. In addition, green banks should be allowed flexibility to experiment with policy designs in order to learn which types of aggregating mechanisms are most readily utilized in the market.

Credit enhancement

A key principle of green banks is that they use public dollars strategically to reduce perceived risks for private investors in undertaking investments in clean energy projects. By providing well-structured credit enhancements, a green bank can align public investments in a more targeted way to fill gaps in the capital market in order to leverage far greater volumes of private capital into needed projects. State green banks should employ a range of credit-enhancement mechanisms from establishing loan-loss reserve funds to originating subordinated debt into individual transactions and developing new insurance products or other risk-mitigation strategies. The particular structures employed, however, must be driven by the needs of different energy technologies, market segments, target investors, or beneficiary populations within the state, and they will vary across the programs of such a bank.


Green banks can add great value to a state’s renewable energy and energy-efficiency market by facilitating the securitization of these asset-backed investments. There is a substantial disconnect in current markets between the financing and origination of specific clean energy projects and the scaled institutional investment in pooled financial products. The current inability of project developers to efficiently access institutional capital in the secondary market limits the liquidity of investments and serves to further inflate pricing, increase complexity in transactions, and decrease overall volume. Acting in this way, green banks will greatly support the development of clean energy projects across states and will positively impact the cost of clean energy development by offering real consumer protection for ratepayers, while expanding the deployment of renewable energy and energy-efficiency projects.

A key design principle of any proposed green bank is that it is structured to increase private-sector participation in the market for clean energy project financing. This will gradually reduce the need for public subsidy as the market achieves maturity and commercial scale. Rather than crowding out participation of private financial institutions, a green bank should use carefully targeted inducements to leverage greater private investment and bring new participants into these transactions. As previously noted, the tools employed by green banks are well understood and have been amply proven in other areas of public finance, including affordable housing, community economic development, technology research and development, and infrastructure investment. Through green banks, these strategies can be employed to meet the specific challenges of clean energy deployment and market transformation.

As free standing and self-sustaining financial institutions, green banks can also offer much-needed support for more effective implementation of widely used state regulations such as Renewable Portfolio Standards, or RPS, and Energy Efficiency Resource Standards, or EERS. Thirty states and the District of Columbia currently employ RPS initiatives, and 25 states have EERS mechanisms to promote clean energy development. Green banks can act as powerful accelerants of these important policies by facilitating the availability of the capital necessary to finance the costs of meeting these goals and by boosting the expansion of the markets that such policies are intended to support. Green banks can enhance the predictability and stability of renewable energy and energy-efficiency markets and, if properly administered and fully capitalized, they will accelerate and magnify the impact of these market-driving regulations. By mobilizing private capital efficiently in the service of meeting strong standards, state green banks can prove to be powerful resources in helping utilities, developers, and state regulators to more effectively meet the ambitious goals and targets laid out in RPS and EEPS statutes across the country.

Finally, green banks offer states a mechanism to reallocate unspent direct subsidies or new revenue from environmental initiatives into establishing durable credit facilities, which will induce vastly more private capital for vitally beneficial public projects. Establishing a green bank allows states to put dollars to work that would otherwise provide one-time consumer benefits and instead use those limited public funds to leverage new private capital resources that would otherwise be unavailable for clean energy investments. Furthermore, because green banks are designed to recycle the proceeds from these transactions, they are able to cycle investments multiple times, thereby reducing the need for further public subsidy over time.  For all of these reasons, a green bank should be a preferred mechanism for inducing new capital investment, accelerating the maturation of state clean energy markets, and helping the nation as a whole move toward a transformed, clean energy economy.


With the initial capitalization of the New York Green Bank, New York has launched a dynamic tool that, by operating within the market, will yield incentives that are far more enduring than any programs of one-time subsidies. By establishing a robust green bank, Gov. Cuomo has taken bold leadership action. New York’s green bank offers an evergreen source of capital, which will continue to invest in clean energy projects and promote overall economic growth long after the Obama administration’s tenure. Such a proposal represents smart economic policy, as well as sound energy policy, and it will benefit New York ratepayers and taxpayers as it improves environmental and community health.

New York, Connecticut, and Hawaii are paving the way today with their green banks for new private- sector investment within robust, reliable, and expanding clean energy markets that meet the needs of a vibrant and growing economy. As clean energy technologies continue to demonstrate their growing competitiveness, they will require access to sufficient streams of affordable capital for successful commercialization. This trend is already underway through new investments in public solar companies‘ and auto companies’ renewed focus on clean technologies. Green banks are the right tools to leverage the private financing necessary to bring these technologies to wide-scale commercialization and support their competition within energy markets. Moreover, state green banks offer great potential to drive innovation, fueling local and regional economic growth and job creation.

America and the rest of the world are facing vast climate and energy challenges. State green banks are a uniquely flexible solution that can operate at the scale of this challenge to accelerate the development and deployment of next-generation technology and infrastructure that is clean, resilient, and vastly more efficient. As our country faces the growing danger of extreme weather and climate change, it is all too clear that investment in state-of-the art clean energy infrastructure is essential for the continued strength of the U.S. economy. By advancing this financing strategy, elected officials and regulatory agencies can take bold action to ensure the economic vitality and long-term interests of their citizens, consumers, and ratepayers. The New York Green Bank represents a bold next step in this growing national movement.

Bracken Hendricks is a Senior Fellow at the Center for American Progress. Ben Bovarnick is a Special Assistant at the Center

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Bracken Hendricks

Senior Fellow

Ben Bovarnick

Research Assistant