Bonds: A New Way to Fund Clean Energy

A new initiative hopes to pair the science of alternative energies with the power of bond financing.
by | August 16, 2012
 

The know-how and the tools to create efficient, clean energy projects are in place. What’s missing is the money. That gap is the reason for a recent partnership between Clean Energy Group (CEG) and the Council of Development Finance Agencies (CDFA). The partnership -- Clean Energy + Bond Finance Initiative (CE+BFI) -- aims to find ways to use bond financing to increase U.S. clean energy investment by an additional $5 billion to $20 billion in the next five years.

To help accomplish their goal, the partnership has created a national task force comprised of more than 50 representatives from the nation's top public and private clean energy and development finance agencies and organizations.

I talked to Toby Rittner, president and CEO of the Council of Development Finance Agencies, about what his group hopes to accomplish and what’s in it for states. Here are edited excerpts from that conversation.

How is this initiative different or noteworthy?

Energy folks work on energy efficiency and the development of technologies; they’re technology experts, not finance experts. My organization (CDFA) is made up of representatives of state and local government development finance agencies. We don’t know energy, but we know how capital markets work; how investors look at tax-exempt finance; and what motivates investors. It’s logical for us to say that clean energy is just infrastructure so we can underwrite it the way we underwrite sewers and bridges and other public facilities.

The uniqueness of the partnership is that this is the first time ever in the U.S. that clean energy and bond finance come together to scale up. The idea is to bring together the best of finance in the bond market with the best of the energy-development sector to create a financing methodology and best practices to move clean energy forward. Very few states use bond finance to support clean energy, so it’s an opportunity.

The national task force will look at existing examples of state clean energy programs. Who and what will they be looking at?

We’ll be focusing on eight to 10 existing state or local government models to see if they can be replicated around the country. The task force will be looking at what aspects worked well and why, and what aspects struggled.

One of the models is Morris County, N.J. The county wanted to figure out how to use renewable energy in its buildings. In a public-private partnership with a developer, the county used a creative, taxable bond structure to finance the infrastructure -- to put renewable energy (it happens to be solar) on all of its facilities. The developer agreed to develop the facilities, install the technology, and manage and operate the facilities. There was an agreement that the county would purchase power for 20 years at a specific rate, and therefore the developer got a long-term lease and a long-term payment stream. The county issued the taxable bonds to finance the project. The questions the task force will be looking at is whether there's a way to scale up. Can we take it to other states? Is there a way to make the bonds tax-exempt, which would make it less expensive? Also, what are the limitations? What if it’s not a county building but a shopping center or a university?

What other models are you looking at?

The state of Washington issued a bond so nonprofits like hospitals and schools can manage energy efficiency programs. So a YMCA can go to the state and say, ‘I need $100,000 to renovate my building to make it energy efficient. With the savings on energy costs, I will pay back the loan fund.’ The state is using the proceeds from the bond to help energy efficiency. That’s happening in a lot of places. It’s easy to do and not overly complex but you have to have good partners, good players and a development plan in place for how this is all going to work. Washington didn’t just issue a bond and hope people would come; it had projects lined up. So there has to be a lot of due diligence. We would look at why Wall Street was willing to buy Washington’s bonds; how the state structured its bond to make bondholders and investors feel secure; and whether those bonds could be issued with better credit enhancement. The state of Washington is big. We would want to see if a smaller entity -- say the city of Cleveland -- could do it on a smaller scale. Would Cleveland have the same access to capital markets?

Anything else?

A number of states have system benefit charges where they charge users of their energy grid a fee. Those charges come back to the state and are put in a fund that could be anywhere from $15 million to $100 million. New Jersey, Massachusetts, Connecticut, Vermont and Oregon are some of the states that have these funds. Traditionally, these funds sit in state energy offices and are used for ongoing project development or maybe to incentivize a company. We're looking at a model where you take those funds and use them as credit enhancement or as debt reserve for a bond fund that could support manufacturing and the supply chain. We would be looking at the political and economic feasibility of getting a state to commit those funds to bond structures. Connecticut is looking at it right now. Convincing energy experts to spend their hard-earned money on bond finance is difficult to do. We could use that model to break through barriers if we get a couple of states to try it.

There are other model ideas. Alaska is sitting on financial resources. Would they invest some of those resources in small bond funds in other states? They could help a community like Lexington, Ky., start a bond fund to support energy. Alaska would get a return on the bond fund and help clean energy in other parts of country. That’s the cutting edge.

I see you also have the U.S. Department of Energy on the task force. What’s their role?

The task force is an opportunity for what they could do -- maybe better loan guarantees, maybe create regional bond banks supported at the federal level. States know their energy needs. Here’s an opportunity to say to the feds, look at what we're doing: put programs in place to support us.

Is this kind of initiative a tough sell in today's economy?

States need affordable, efficient energy. They cannot ignore this issue. Businesses don’t locate where there's not proper energy infrastructure. Energy is one of a handful of things government has to get right. So it’s important to figure out a way to finance this stuff. It’s vital to a state’s economy.

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