Creating State Financing Tools to Make Clean Energy Markets Grow Quickly. Reed Hundt, CEO, Coalition for Green Capital May 2015

Creating State Financing Tools to Make Clean Energy Markets Grow Quickly Reed Hundt, CEO, Coalition for Green Capital May 2015

Table of Contents Introduction to CGC Description of Green Banks Green Bank Objectives & Accomplishments Real Green Bank Financing Examples Capitalization & Structuring Green Bank Examples 111(d) & Green Banks 2

Consumer preference should drive shift to clean, affordable power platform CGC s mission is to use state finance, regulatory and legal power to accelerate move to clean power platform. Consulting Nonprofit 501(c)(3) organization CGC s leaders have been driving Green Bank movement since 09 Based in Washington DC Receives pro bono support from Latham & Watkins LLP, Skadden Arps LLP, Covington & Burling LLP Modeling Networking Advocacy Policy 3

CGC drives green bank movement across the country CGC Engaged with 11 States CA MD NY CT DE HI MN NV OH RI VT 4

Table of Contents Introduction to CGC Description of Green Banks Green Bank Objectives & Accomplishments Real Green Bank Financing Examples Capitalization & Structuring Green Bank Examples 111(d) & Green Banks 5

Many clean energy solutions reside outside traditional utility-based finance model Centralized Projects Utility-scale Power directly to grid Strong credit Traditional project finance Relatively easy to finance Distributed Projects Smaller scale Scattered locations On-site energy use Varying credits Range of structures and approaches to finance Green Bank Focus 6

Most distributed clean energy markets suffer from expensive or lack of capital Markets With Adequate Private Capital High-credit residential rooftop solar Credit-rated large commercial efficiency projects Markets With No or Expensive Private Capital Mid-and-low credit residential solar Group/community solar Non-rated commercial solar MUSH and non-profit rooftop solar Residential energy efficiency Non-rated commercial energy efficiency Grid storage and micro-grids Alternative fuel vehicles and infrastructure Distributed biomass, biofuels, CHP and fuel cells 7

Green banks support distributed clean energy markets where private capital is not yet available A green bank is a state charted financing authority that leverages private capital with public dollars to grow clean energy markets quickly. The goals are to return all capital to taxpayers, boost private sector investment, and maintain affordable energy prices to consumers. Deploy public capital efficiently to maximize private investment Green Bank Implement new market behavior and lower price to spark demand Inefficient Capital Markets Clean Energy Market Tepid Consumer Demand 8

Green bank principles yield numerous benefits Taxpayers held harmless Finance, not grants, means dollars are paid back and preserved Lower consumer energy bills Substitute carbon-based energy for cheaper clean energy or by lowering demand for energy More total clean energy investment Lend in partnership with private lenders at terms commercial banks will/should offer when markets reach scale 9

Table of Contents Introduction to CGC Description of Green Banks Green Bank Objectives & Accomplishments Real Green Bank Financing Examples Capitalization & Structuring Green Bank Examples 111(d) & Green Banks 10

Green bank s goal is to transform clean energy markets Four Green Bank Objectives 1 Accelerate growth of all clean energy markets 2 3 4 Fill gaps in commercial investment; maximize private:public leverage Maximize consumer demand for clean energy by facilitating affordable prices and up-front financing Build self-sustaining loan programs to maximize efficiency of public dollars while holding taxpayer harmless 11

1 Problem: Clean energy markets need to be large and fast-growing to reduce emissions negligible clean penetration Source: EIA, The mix of fuels used for electricity generation in the United States is changing, November 8, 2013. 12

1 Solution: Delight consumers by eliminating upfront cost and lowering price of clean energy Solar Install Cost ($/Watt) Price of Electricity from Solar (cents/kwh) in CT as a Function of Green Bank Debt and Installed Cost % of GB Debt in Solar Project 0% 10% 20% 30% $4.5 21.0 18.7 16.3 14.0 $4.0 17.4 15.4 13.3 11.2 $3.5 13.9 12.1 10.3 8.5 $3.0 10.3 8.8 7.2 5.7 Green-highlighted prices are below current retail electricity price in Connecticut Public/private combined finance = affordable prices to consumers. 3.8 interest point decline yields 26% drop in solar price. Source: Rooftop Solar PV Green Bank Financing Model, Sponsored by The Connecticut Green Bank and the Coalition for Green Capital, Developed by the Brattle Group. Available for download from: http://www.coalitionforgreencapital.com/the-model.html Assumptions: Developer Equity Return is 15%, Tax Equity Return is 12%, total leverage is 40%, Commercial Debt is 6% for 6 years, Green Bank Debt is 2% for 15 years, 15-Year REC price of $0.03/kwh, 6-year state incentive of $0.225/kwh. Structure is 20% Green Bank Debt, 20% Commercial Debt, 48% Tax Equity and 12% Developer Equity 13

1 Solution: Expand pool of viable projects with lower price and credit enhancements Technically Feasible Projects Typical Capital Structure Economical Projects High Cost of Capital Pushes Consumer Payments Above Grid Electricity Price Green Bank Lowers Price, Allows for Lower FICO Scores, Can Serve Neglected Low-Income Market Green Bank Capital Structure Larger Pool of Economical Projects 14

1 Example: Connecticut Green Bank expands solar market with financing tools for installers Annual kw of PV Installed 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 Annual Connecticut Residential Solar Market (kw) CT Green Bank Established 2,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 15

1 Example: Connecticut Green Bank sparks commercial efficiency with C-PACE CT PACE Investment in Commercial Efficiency (millions) Market Expansion in only 18 months $30 $0 Before Green Bank With Green Bank 16

PACE financing is secured and repaid through voluntary property tax assessment Commercial Building Capital Stack Prop Tax & PACE Lien Mortgage PACE lien is new tax assessment PACE is lower cost, longer term than commercial loan PACE seniority secures repayment Equity PACE stays with property upon sale 17

2 Problem: Lack of available financing is significant barrier to adoption Upfront cost is primary barrier to consumer adoption In auto and home market, this is solved by commercial lenders offering auto loans and mortgages But banks are not jumping in to lend to clean energy Short track-record for project and loan performance Unknown technologies Banks unfamiliar with underwriting savings Therefore, available private capital is expensive, has short terms, or for only perfect credit 18

2 Solution: Use financing techniques to leverage multiple private dollars per public dollar Credit Support Co-Investment Warehousing Senior Private Capital Green Bank Capital Project Green Bank Credit Enhancement Project Green Bank Origination Project Private Capital Private Purchase of Portfolio 19

2 Example: CT Green Bank sets national example for public-private investment partnerships 10:1 Leverage Landmark Securitization 10 dollars of private investment per 1 dollar of green bank investment Prior CT subsidy system only had 1:1 leverage Green bank bundled and sold 80% stake in C-PACE loans to private investor, option to sell another 10% First deal of its kind in the nation UPDATE: $200 million NYGB investment leverages $600 million private capital. 20

3 Problem: Consumer demand must drive accelerated growth 280 GW Rooftop Market Size NREL estimates that 280 GW of rooftop solar PV could be viable U.S. market size by 2030 Only 7 GW of rooftop PV installed today 97.5% of market is unrealized 2.5% Potential U.S. Rooftop PV Market Size by 2030 Unfilled U.S. Rooftop PV Potential Source: NREL, Modeling the U.S. Rooftop Photovoltaics Market, September 2010. Potential based on scenario with favorable policies, financing, incentives and technology costs. Current market size equals cumulative capacity in Commercial and Residential segments. SEIA, Solar Market Insight Report 2014 Q2, September 4, 2014 21

3 Solution: Not just finance: GB increases demand with aggregation, info-sharing, targeted campaigns Financing Eliminate Upfront Costs Online Tool Gives Personalized Solar Options for Roofs Solarize Campaign Lower Price as More Enroll Consumer Demand 22

3 Example: CT Green Bank makes cheaper price and cost savings transparent and accessible Geostellar Solar Tool and C-PACE Savings Report 23

4 Problem: Existing subsidies are expensive and cannot scale to support market penetration Connecticut was exposed to billions of dollars in subsidies In CT, 50% solar market penetration would cost state $3 billion in cash grants. For the U.S., would be $300 billion in cash grants. Potential market size, and associated subsidy cost, will only grow as technology costs decline 24

4 Solution: Cheap capital and declining technology costs mean cash grants can be reduced 20 Price of Residential Solar in Connecticut (cents/kwh) Levelized Cost of Energy (cents/kwh) 18 16 14 12 10 8 6 4 2 12.66 12.62 With Grant No Grant Grid Price 0 Cash Purchase with Grant PPA Finance No Grant 25

4 Example: Connecticut Green Bank changes grants to loans, and expands solar penetration Installation Cost ($/watt) $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Installed Capacity (kw) $0.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Cost to Consumer Subsidy Installed Capacity 0 26

Green Banks work! Connecticut Grant-Making Authority versus Connecticut Green Bank Connecticut Clean Energy Fund FY 2000 2011 Connecticut Green Bank FY 2012 FY 2014 Years in Operation 11 3 Renewable Energy (MW / GWh) 43.1/2,299 65.3/3,189 Total Investment ($ MM) $349.2 $350.2 Ratepayer Investment ($ MM) Ratepayer Investment as Loans versus Grants $168.1 $100.00 9% / 73% 57% / 43% 27

Table of Contents Introduction to CGC Description of Green Banks Green Bank Objectives & Accomplishments Real Green Bank Financing Examples Capitalization & Structuring Green Bank Examples 111(d) & Green Banks 28

Range of financial tools, applied to prioritized markets, through innovative structures Green Bank Products & Services Direct Debt Wholesale Debt Subordinated Debt Loan Loss Reserve Warehousing Securitization Standardization Data Collection Financing Mechanisms On-Bill PACE ESA s Customer Acquisition Solarize Big-data Targeted Markets Residential EE C&I EE Multifamily & LI EE MUSH EE Distributed Generation Community Solar Energy Storage EV s and Charging 29

Example: CGB s Residential Solar Tax Equity Fund expands customer access to rooftop solar CGB created unique public-private financing platform Product enables local developers to offer financing to customers who otherwise would have to pay all upfront Green Bank -Subordinated Debt -Loan Loss Reserve -Equity Residential Solar Lease Fund Local Installers Solar Customers Private Investors -Senior Debt -Tax Equity 30

Example: CGB s C-PACE enables secure efficiency investment at scale Centralized State-wide Green Bank Administration Green Bank Portfolio Securitization + Credit Support 4 Cash Purchase Private Investors Loan 1 3 Loan Payment Commercial Building 2 PACE Assessment Tax Collector 31

Table of Contents Introduction to CGC Description of Green Banks Green Bank Objectives & Accomplishments Real Green Bank Financing Examples Capitalization & Structuring Green Bank Examples 111(d) & Green Banks 32

A Green Bank is an institution not a program that implements this strategy Organization Placement Government Agency Quasi-Independent Independent Non- Profit What existing structure can green bank be part of? Energy office, Treasurer, clean energy non-profits, finance agencies Do these entities have legal ability to create new subsidiaries? Can they perform green bank actions? If not, need to pass law. Pros & Cons of new v. existing entity 33

Org placement may define capital sources Capitalization Sources - New or Repurposed Regulatory Surcharge Cap-and-Trade or RPS Revenue Issue Bonds Legislative Appropriations Unused State Investment Funds Federal Resources (USDA / DOE) Seek most funds with least political resistance What is bank s cost of capital? Want to get most accessible funds with lowest cost How to ensure stability Ideally, funds are protected and stable for long-term strategy 34

Table of Contents Introduction to CGC Description of Green Banks Green Bank Objectives & Accomplishments Real Green Bank Financing Examples Capitalization & Structuring Green Bank Examples 111(d) & Green Banks 35

Examples abound throughout the world State Green Banks National Green Banks Connecticut Green Bank New York Green Bank New Jersey Resilience Bank NEW! California CLEEN Center Hawaii Green Infrastructure Authority Rhode Island Infrastructure Bank Australia Clean Energy Finance Corporation Japan Green Fund UK Green Investment Bank GreenTech Malaysia State Green Banks In Development: MN, MD, DE, VT & NV International Developments: OECD leading global green bank initiative 36

CGC drove creation of nation s first green bank and new institution in California Connecticut Green Bank Policy advocacy and stakeholder engagement prior to legislation Development of legislative strategy and drafting of bill Implementation and guidance of org and product strategy On-going advisory work CEO Reed Hundt is active board member New York Green Bank Advocated for GB policy Developed business plan Assessed market needs through interviews Modeled financial products CA CLEEN Center Created stakeholder working group to lead advocacy Defined CA GB opportunities Drove legislation that led to formation by Gov. Brown 37

CGC work in progress - Many more states are on path to creation Minnesota Clean Energy Development Authority Report 4-month consulting project to identify financing gaps & barriers to adoption Recommending specific financing and market development solutions Work being performed for committee of three state government agencies Vermont Clean Energy Finance Initiative Report Consulting project to develop a collaborative clean energy financing initiative among multiple state agencies 4-month project will identify gaps and recommend specific solutions Rhode Island, Maryland, Nevada & Delaware Recent Developments Working with Rhode Island Treasurer to launch new clean infrastructure bank Advising Maryland s legislatively-directed Green Bank viability study Working with Nevada energy office to launch official Green Bank study Advising Delaware Sustainable Energy Utility on potential Green Bank expansion 38

Table of Contents Introduction to CGC Description of Green Banks Green Bank Objectives & Accomplishments Real Green Bank Financing Examples Capitalization & Structuring Green Bank Examples 111(d) & Green Banks 39

Every state can meet 111(d) targets cost-effectively and with green banks Green Banks & 111(d) States can use green bank as tool to implement 111(d) rules cost-effectively Power prices don t have to increase with more renewables State doesn t have to spend expensive subsidies Green bank financing can make clean energy cost competitive Carbon Emissions from Fossil Fuels 40

Green bank solutions for 111(d) mean faster compliance and minimal permanent expenditure Lower the price of solar and other renewables by lowering the cost of capital Increase commercial efficiency adoption through PACE Stimulate greater private investment in residential efficiency by warehousing and aggregating small projects All green bank 111(d) solutions expand clean energy markets and preserve taxpayer dollars. 41

Thank You Comments and Questions: Jeffrey Schub, Executive Director, Coalition for Green Capital jeff@coalitionforgreencapital.com