ENERGY FINANCING

Green Banks See Benefit From Revived Loan Guarantee Proposal

Bill would open DOE program to clean energy-focused state financing institutions

Senate Energy and Natural Resources Ranking Member Sen. Joe Manchin (D-W.Va.) speaks to Chairman Sen. Lisa Murkowski (R-Alaska) before the start of a committee confirmation hearing March 28, 2019 in Washington, D.C. Murkowski on July 31 introduced a bill that would expand the Energy Department’s loan guarantee program to state lending institutions. (Zach Gibson/Getty Images)

Lawmakers are again looking to open the Energy Department’s loan guarantee program to state lending institutions, of which green banks — and their work to reduce emissions — could be a primary beneficiary.

Senate Energy and Natural Resources Chairman Lisa Murkowski (R-Alaska) on July 31 reintroduced the bill, which was first floated with similar wording in 2015 and passed within the Senate’s energy package in 2016. It would codify that state-based lenders have access to the loan guarantee program and would allow them to partner with private or tribal entities on projects receiving loans.

“We need so many more of these projects to happen than is currently happening if we’re going to get our arms around the climate change problem,” said Mike Carr, a partner at advisory firm Boundary Stone Partners who had multiple roles in the Energy Department under President Barack Obama and was senior counsel to the Senate energy committee from 2004-12. “There can’t be enough, whether it’s the state entities or federal entities.”

The measure would increase the loan program’s flexibility to use its remaining loan authority, said Joseph Hezir, managing principal at the nonprofit Energy Futures Initiative and former chief financial officer and senior adviser to the Energy secretary from 2013-17. That existing authority stands around $40 billion and has remained largely undeployed by the Trump administration.

The bill, Hezir said, could “greatly facilitate the ability of the state green banks to raise and deploy capital” and to support rural or smaller-scale applications of innovative technologies.

Green banks, which have risen in prevalence and prominence since the establishment of the first state green bank in Connecticut in 2011, work to deploy clean energy technologies and address emissions by connecting market gaps and mobilizing capital. There were 14 green banks as of May, according to a report by the nonprofit Coalition for Green Capital.

The bill “is another great example of momentum toward confronting climate change through the U.S. Congress” and would fit well alongside national green bank legislation, Bryan Garcia, president and chief executive of the Connecticut Green Bank, said through a spokesman via email. 

“If there’s a way that revenue can be directed at green bank activity that MCEC can tap into, that will help the center meet its goals,” said Katherine Magruder, executive director of the Maryland Clean Energy Center. The center, while not an official green bank, provides similar project financing.

It is increasingly common to create green banks as nonprofits that are still connected to state governments, said Jeff Schub, executive director of the Coalition for Green Capital. Murkowski’s bill would also allow the participation of groups like Michigan Saves, which is a nonprofit green bank initially created by a state grant.

Under the bill, Congress would have to appropriate additional money to the U.S. Treasury for any loan guarantees for state institutions, because amounts that were appropriated to cover credit subsidy costs, as required by the Congressional Budget Office, are already spoken for. The subsidy cost is a calculation required under the Federal Credit Reform Act of a loan’s risk of loss over its lifetime.

“It’s not spending in the traditional sense,” Carr said of the appropriation. “We’re just setting aside a reserve” as a projected loss.

In 2015, the Obama administration appeared supportive of clarifying that state financing entities could participate in the loan guarantee program and went so far as to announce that guidance to do so was forthcoming, though no such guidance appears to have been issued.

Notably, the bill would take the additional step of freeing state financing entities from one of the program’s two key requirements: that a project employ new or innovative technology. Instead, recipients would only need to meet a requirement that their projects reduce or sequester greenhouse gases.

“That was one of the biggest ways we got hung up when running” the Department of Energy’s Loan Programs Office — determining whether a technology was truly new and innovative as part of a technology review process that could last weeks or months, said Peter Davidson, former executive director of the LPO between 2013 and 2015 and current chief executive of investment adviser Aligned Climate Capital LLC.

By regulation, the program does not issue loan guarantees to technologies already in use for at least five years at three or more U.S. facilities in commercial operation. But substantial regional and performance variation exists within a given technology.

Still, for the loan program taken as a whole, the innovative technology requirement “is distinctive and crucial,” Davidson added.

Dan Reicher, an assistant secretary of energy for Energy Efficiency and Renewable Energy at the department from 1997-2001, expects that discussion around the bill will center on whether removing that innovation requirement for state financing entities is in taxpayers’ best interest.

“I think the challenge is that one could imagine much of the remaining loan authority being spent on standard-issue rural energy projects,” Reicher said.

The program could aid technologies such as storage, for which equity and debt capital for innovative business and financing models have been difficult to find. Davidson said it could also help distributed solar, geothermal or other projects that may not be new, but could be bundled together and provided with a loan.

The committee’s ranking member, Sen. Joe Manchin (D-W.Va.), who co-signed a letter in support of the loan guarantee program to appropriators last year, is not yet a cosponsor. A spokesperson for Manchin said the office is reviewing the bill.