Green Banks: Rethinking Energy Finance in New York and New Jersey

New York and New Jersey are building a roadmap for financing the future electric systems by embracing green banks. Several states are pursuing ambitious programs to provide incentives and regulatory reforms that will accelerate the adoption of distributed energy resources. These states are now actively working to shift away from large, traditional power plants by making the electric system more energy efficient, reliable, and resilient, boosting renewable energy technologies, and encouraging wider deployment of mircogrids, on-site power, and energy storage. Increasing costs of energy, aging infrastructure, energy security, system resiliency in the wake of extreme weather events such as Superstorm Sandy, and environmental concerns related to a fossil-fuel based electric grid are just a few of the factors that are driving this transition.

Perhaps the most important way to accelerate the adoption of these new systems is by facilitating financing. Over a series of posts, we will explore recent state initiatives and programs intended to reform the energy industry and regulatory practices, all aimed at supporting investment in these new distributed systems. In today’s post, we discuss several of New York and New Jersey’s initiatives, including the creation of green or Infrastructure banks.

New York

In the Spring of this year, New York State Governor Andrew Cuomo announced that the N.Y. Public Service Commission will overhaul the state’s energy market regulations with the goal of increasing distributed generation, smart-grid technologies, energy storage, and demand response technologies. Reforming the Energy Vision (REV), as it is known, is the first plan to consider changes to operations of regulated utilities and their business models to address generation ownership and resiliency in grid operations. As part of the new vision, Governor Cuomo extended the N.Y. Sun Initiative, a strategic plan to consolidate all of the state’s existing solar incentive programs.

Perhaps the most exciting program in New York was the creation of a state-owned start-up $1 billion Green Bank, which was funded to help spur New York’s initiatives through strategic lending for smaller-scale projects that more traditional financial institutions shy away from. By offering “gap” financing, the Green Bank will provide loans, debt guarantees, securitization, and other financial products to help private-sector bankers fund more smaller-scale clean-tech deals. The Green Bank’s focus is on proving out models that private banks might not be willing to try, but that once proven can be adopted by private lenders and can scale quickly. This goal of using state dollars to leverage private capital can be huge in a financial center like New York and is the key for meeting targets like 3,000 MW of installed solar capacity throughout the state by 2023.

To head the Green Bank and lead New York to become a clean-tech giant, Gov. Cuomo appointed Richard Kauffman, an ex–banker from Goldman Sachs and Morgan Stanley. Mr. Kauffman was recently quoted in a Fortune article discussing the direction of New York’s energy policy. “We’re not installing enough renewables, and we’re not getting the economic-development boost that a transition to a new-energy economy can provide. We need to rethink what we do.” And rethinking the energy financing model is exactly what the state has done. Wielding the power and influence of the Green Bank, Mr. Kaufman hopes to reinvent the state’s power system.

A wide variety of projects involving commercially proven technologies are eligible for financing through the Green Bank, including solar, wind, and other renewable energy generation, residential and commercial energy efficiency, electricity load reduction, and on-site clean generation. It appears that the only criteria is that the project supports the state’s clean energy objectives. To obtain financing, the Green Bank has opened an ongoing solicitation process that invites private capital providers and energy industry participants to propose financing arrangements and partnerships. The Green Bank hopes to finance its first project later this year.

New Jersey

As part of New Jersey’s post-Superstorm Sandy plan to prevent energy disruptions and build energy resilience, New Jersey established a $200 million Energy Resiliency Bank (ERB) to support distributed energy resources, with an early focus on water and wastewater treatment. The ERB is being funded initially through the New Jersey’s Community Development Block Grant-Disaster Recovery allocation from the U.S. Department of Housing and Urban Development. The state will allocate money when the ERB funds are depleted with a long-term goal like New York of using the program to facilitate the use of private-sector capital to accelerate the adoption of these more resilient technologies.

The ERB intends to finance a broad range of commercially available and cost effective distributed energy resources technologies through revolving loans and grants. Initially, the ERB is focusing on combined heat and power, fuel cells, and renewable technologies, but states on its program website that it will adapt to the emergence of new markets and technologies. The bank is in the process of considering public stakeholder comments on its draft program guidelines. The draft guidelines suggest that the ERB will utilize a two-step application and review process to determine eligibility. First, an initial application will gather general information about the applicant and the proposed project. Second, a “Full” application will be required if it is determined that the initial application has met general technical and financial requirements. This second round of review will include a more complete technical evaluation, as well as an underwriting analysis, among meeting other requiremetns. Projects will be approved by the Boards of the New Jersey Board of Public Utilities and the New Jersey Economic Development Authority.

Conclusion

These two states were not the first and will not be last to rethink the financing model for energy projects and create green banks. Neighboring state, Connecticut, launched a similar bank in 2011, but on a smaller scale. Other states such as Hawaii, Maryland, and California are also exploring similar legislation or proposals. These banks provide an outstanding opportunity for anyone in search of financing for a clean- or renewable-energy project. More importantly, the programs these green banks create will provide the foundation for the enormous capital the industry needs as it grows.

This is the first in a series of reports from the state front lines on programs that are changing the energy finance landscape. Please check back here regularly for updates and for more information on green bank opportunities and other innovative energy financing needs, please contact any of the members of S&W's Energy Finance Practice.