Clean energy bank could drive $200 billion in investment

A little-discussed provision in the clean energy bill, the Clean Energy Deployment Administration, would have a huge impact on the U.S. clean tech industry, as this guest post by CAP’s Jake Caldwell explains.  Yet the EIA didn’t even model the clean energy bank in its recent climate bill analysis (see “Despiteits many flaws, EIA analysis of climate bill finds 23 cents a day costto families, massive retirement of dirty coal plants and 119 GW of newrenewables by 2030 — plus a million barrels a day oil savings“). Combined with all the other provisions in the bill, plus the stimulusand the Administration’s other clean energy and climate policies, Obamawould easily meet his promise of $150 billion in U.S. governmentinvestment in clean energy over 10 years — and in fact will ultimately drive some $100 billion a year in total U.S. investment in clean energy.

Introduction

The United States must build and deliver clean energy todayto create jobs, lower energy costs, and strengthen our economy. Theestablishment of a federally owned, independent, not for profit GreenBank—formally called the Clean Energy Deployment Administration, orCEDA, in legislation now before the Senate—will spur private-sectorinvestment in innovation and American ingenuity to help end ourdependence on oil, and help diversify our nation’s sources of energy tolower prices over the long term while also confronting global warming.The Green Bank will improve our global economic competitiveness, too,by making the United States a worldwide leader in the manufacture anddeployment of clean-energy technology.

The creation of a Green Bank will encourage a long overdueintegrated and strategic approach to clean-energy innovation,efficiency, and deployment in the United States. In combination withSenate action on clean energy—legislation that provides incentives forthe research, development, and deployment of clean-energy technologies,and a market-based pollution-reduction program that reduces greenhousegas emissions and reinforces a predictable price signal on carbon—theGreen Bank will open credit markets, motivate private business toinvest again, and create good, clean-energy jobs here at home.

In partnership with the private sector, the Green Bank will enableinnovative, commercially viable clean-energy technologies in such areasas wind, solar, geothermal, advanced biomass, increased efficiency, andtransmission infrastructure—all to be deployed on a large scale. Theconstruction and actual deployment of these clean-energy technologyprojects is vital to a clean-energy future.

What’s more, clean energy delivers long-term job growth and holdstremendous new job-creation potential, particularly in themanufacturing sector. A recent report from the Center for AmericanProgress and the University of Massachusetts Political Economy ResearchInstitute notes that $150 billion per year in clean-energy investmentcan generate a net increase of 1.7 million jobs.

In short, the Green Bank can encourage the rapid deployment of cleanenergy and ensure that lower energy costs are passed on to consumers.In addition, the Green Bank can act as a bulwark against higher energycosts associated with volatile fossil fuel prices.

Costs and benefits of the Green Bank

A Green Bank funded at $7.5 billion could fund generation of 60 to80 gigawatts of clean energy over a period of 20 years, or 3 to 4 GWannually. The result: Our national security will be enhanced byreducing our dependence on foreign oil. A fully capitalized Green Bankat $50 billion could:

  • Provide enough electricity to power approximately 22.9 million cars per year
  • Decrease gasoline consumption by an incremental 12.6 billion gallons per year
  • Decrease oil consumption by an incremental 642 million barrels per year, or 1.8 million barrels per day

In the past, Congress has encouraged private-sector equityinvestments in wind, solar, and other clean technologies through taxcredits. Equity investments are important, but the deployment of majorclean-energy projects will also require significant loans and low-costdebt financing. The Green Bank will marshal a variety ofwell-established financial tools and incentives to enable the federalgovernment to enlist the private sector to increase the amount of debtcapital available at lower rates to clean-energy projects. A Green Bankcan vastly expand the tools available to lenders by providing directsupport, such as direct loans, letters of credit, and loan guarantees,and indirect support, like authority to issue bonds, purchase debtsecurities, and other financial products.

In a clean-energy project, the Green Bank can potentially reduce thecost of debt by half—to about 4.5 percent in today’s credit marketsfrom around 8.5 percent without federal support. As the cost of debt isreduced, projects can still provide a 15 percent return on equity andmeet debt coverage ratios without an increase in electricity rates. Theupshot: By lowering the cost of debt, the Green Bank allows utilitiesto provide the same levels of electricity from clean-energy sourceswithout passing on any additional costs to the consumer.

The result will jumpstart business investment, increase capital atreduced loan rates, lower energy prices to consumers, and spur theconstruction and operation of more clean-energy technology andenergy-efficiency projects throughout the country.

Jumpstarting private-sector investments in clean energy

A Green Bank is essential because many clean-energy technologiesface several unique obstacles along the path to large-scale deploymentand then to the delivery of clean energy in our homes. Traditionalbanks and commercial lenders are reluctant to loan to many of theseclean-energy projects with limited track records in the marketplace.

And many existing off-the-shelf clean energy and efficiencytechnologies are abandoned due to a lack of funding as they attempt tobe deployed at larger scale.

Indeed, renewable energy investment dropped precipitously in thefirst quarter of 2009, the period for which complete data areavailable, to $500 million compared to $2 billion in the fourth quarterof 2008 and $5 billion in the first quarter of 2008.

In order to maximize the leverage of private capital, the Green Bankshould have at its disposal a wide range of direct and indirect supporttools and incentives to encourage loans to facilitate deployment ofclean-energy technology. These direct and indirect incentives tend toreduce the risk to lenders so they are encouraged, in turn, to offerbetter loan rates to potential clean energy and energy efficiencyprojects.

Under current Senate clean-energy legislation, the Green Bank willbe capitalized with $10 billion. This capital can be leveraged at thestandard 10-1 ratio to provide loan guarantees in support of $100billion in private-sector investment in clean energy. The privatesector can also provide an additional $100 billion in equity. Asa result, a $10 billion capitalization of the Green Bank translatesinto $200 billion available for in clean-energy investments.

The surge in capital will allow clean-energy projects to be deployedat the operational and commercial level in a shorter timeframe than isstandard today. As clean-energy and efficiency technology is deployedat a larger scale, valuable experience and cost savings will be gained,and more and more clean energy will be delivered to American homes atlower prices in every region of the country. The United States willreclaim its rightful place as a global leader in clean-energytechnology.

The Green Bank creates clean-energy jobs

As a nation, we can and must do better at nurturing and growing ourclean-energy sector and clean-energy jobs, because competitors in othercountries are already filling the void. A Green Bank will ensure theUnited States is a job leader in the clean-energy technology growthindustry of the future.

Clean energy has the potential to create significant jobs in themanufacturing sector. A Green Bank will provide low-cost capital tohelp build clean-energy manufacturing facilities, create long-term jobsin the United States, and deliver clean energy at lower cost toconsumers. As noted above, a recent Center for AmericanProgress-University of Massachusetts Political Economy ResearchInstitute report demonstrates that $150 billion per year inclean-energy investment can generate a net increase of 1.7 million jobs.

A significant portion of these jobs will occur in the strugglingconstruction and manufacturing sectors. Moreover, the CAP-PERI reportalso notes that clean-energy investments generate roughly three timesmore jobs than an equivalent amount of money spent on jobs related tocarbon-based fuels.

A Green Bank can ensure the clean-energy manufacturing sector isable to overcome several challenges, including securing access tocapital when prospective lenders are reluctant to provide financing tomanufacturers producing clean-energy technology. Frequently,clean-energy businesses are small, innovative, and highly specialized.They often have limited collateral and revenue and face costuncertainties, as supply and demand for finished product fluctuates.The Green Bank can provide stability and incentives to leverage privatecapital, raise the comfort level of prospective lenders, and allowmanufacturers to meet their goals and set us firmly on the path to longterm job growth and a clean-energy economy.

The Green Bank can lower carbon emissions to reduce global warming

The establishment of a Green Bank will provide a coordinated,strategic approach to clean-energy innovation and energy efficiency inthe United States, enhance federal government and private-sectorcomplementary efforts to reduce carbon emissions, and deliver cleanenergy to American homes in as short a timeframe as possible.

The establishment of an independent Green Bank, governed by a boardof directors and comprising additional members with clean-energy andenergy-efficiency financial expertise, will make a significantcontribution to the nation’s overall energy innovation strategy andproject funding decisions. Importantly, the Green Bank will not placethe federal government in the role of picking winners and losers inspecific clean technologies. Rather, the Green Bank would establishbroad, overarching performance-based goals such as the deployment ofclean energy that diversifies our energy supply, and reduces orsequesters greenhouse gases.

The Green Bank will work in an integrated manner with clean-energyand climate-change legislation that promotes clean energy, energyefficiency, limits on global warming, clean-energy jobs, and transitioninvestment to ensure U.S. competitiveness. The Green Bank has thepotential to reduce carbon emissions by an estimated 22 to 59 millionmetric tons a year, which would be the equivalent of:

  • Taking between 5 million and 13 million cars off the road every year
  • Neutralizing the carbon emissions of between 15 and 39 power plants every year

The Green Bank also can help meet the demand created by a nationalrenewable electricity standard, and it will encourage the deployment ofa smart grid and modernized transmission to ensure supply comes fromoptimal locations throughout the country. In addition,energy-efficiency projects financed by the Green Bank would include anyproject that results in a net reduction in energy use required toachieve the same level of service prior to their application. Suchprojects would include smart-grid technologies and energy-efficiencygains in existing buildings and new construction.

Smaller projects could be aggregated so as to attract more financingin an area where it has been difficult to secure financing in the past.As noted above, credit support from the Green Bank includes awide-ranging toolbox (including direct loans, letters of credit, andloan guarantees) that will assist states, localities, and the privatesector in rolling out innovative mechanisms to finance building energyefficiency retrofits at scale. This includes municipal bonds, utilityloans with on-bill repayment, and increasing commercial loans forretrofits, as the Green Bank effectively lowers the uncertainty andtechnological risk associated with a lack of historic performance data.

All of these goals would be interwoven into expedited fundingdecisions as projects were evaluated for viability and creditworthinessby a professional and experienced staff. In sum, the Green Bank willprovide the means to allow us to meet our most ambitious carbonreduction targets while promoting clean-energy jobs to ensure U.S.industry and workers will be leaders in the clean energy technologyfuture.

Download this memo (pdf)

This post was first published here.

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