Montgomery County, Maryland is getting closer to entering the green banking playing field.
Board members of the Montgomery County Green Bank (MCGB) met Wednesday to discuss matters of policy and prepare to name an executive director. The MCGB was established in June 2015 as a private nonprofit to accelerate investment in clean energy and energy efficiency in the county using a structure similar to that of state-level green banks in a few states around the country. Montgomery County would be the first local jurisdiction to follow suit.
In the absence of a national policy in this area, several more states and jurisdictions have indicated their interest in green banking. So far, however, tight funds have kept the majority from realizing those goals. In this respect, Montgomery County has been lucky. As part of its settlement with Exelon Corp. regarding its acquisition of local utility company Pepco Holdings Inc., $20 million was originally set aside to capitalize its green bank. The MCGB is currently preparing for its first tranche of $3 million.
Without this initial funding, it is unlikely that the MCGB would have left the drawing board. Maryland invested in a feasibility study for a state-level green bank not long ago, but was unable to free up enough state dollars to fund it. Maryland Congressman Chris Van Hollen introduced a federal green banking bill in 2014, but it met a similar fate.
How do green banks work?
Development banks differ from traditional fiscal initiatives in that they do not give away money. Instead, they lend it or they leverage capital in order to induce lending for projects that fit their mission statement. A green bank might help to provide funding for a building to invest in energy efficient retrofits, for example. That money would then need to be paid back, with interest, so that the bank could invest in another project.
This limits a development bank to projects that are market viable, but there appears to be no shortage of those in the green industry, particularly in the commercial sector. The Connecticut Green Bank has received so much demand for its C-PACE program, which helps commercial, industrial, and multi-family property owners to invest in long-term energy upgrades, that it has had to raise external private capital to meet it, according to Brookings.
One important consideration for development banks is that they not “crowd out” traditional sources of funding with taxpayer dollars. Instead of replacing the source of financing for a project that would have received funds anyway, development banks want to fund the projects that private capital doesn’t have the patience or risk tolerance for, or that haven’t yet been sufficiently explored and programized.
Another consideration is limited funds. Montgomery County’s $20 million is a drop in the bucket in the finance world, and even larger, better financed green banks have reaches that significantly exceed their grasps.
Development banks attempt to solve both of these problems by using public-private partnerships that multiply the power of banks’ capital and make private financing available to borrowers who would otherwise be unable to obtain it.
“Right now, you can maybe use a home equity line of credit [to finance a green investment], but then you can’t use that for other things,” said Michelle Vigen, Senior Energy Planner at the Department of Environmental Protection and Special Adviser to the MCGB Board of Directors. “You can take out a general consumer loan, but those can be expensive. Generally, there’s not an obvious option for a lot of small businesses or homeowners that need financing for an energy efficiency project. The green bank model, by offering some type of incentive like a loan loss reserve or a guarantee, can ‘crowd in’ funding to those targeted projects.”
Under a loan loss reserve program, a green bank might identify energy efficiency projects that are close to, but just outside of a private lender’s risk tolerances. The green bank could then agree to guarantee a small portion of the loans needed for these projects – often five to ten percent – thereby reducing the risk to within the lender’s acceptable range. By putting up just enough capital to move the needle on such projects, a green bank can have an impact that is several times the size of its total capitalization.
“That’s the whole point,” Vigen told Aquicore. “We use limited public purpose dollars to invite private capital in to do this important work toward a clean energy future.”
Green banks across the country
As of right now, green banks only exist in a handful of states, but where they spring up, they tend to be successful. The Connecticut Green Bank reported not long ago that it had helped to spur over $1 billion in total funding with an average of six dollars of private financing for every dollar of public money. The bank also claims that it has prevented the emission of over 2.6 million tons of carbon dioxide and created almost 215 megawatts of clean power.
Green banks have opened up in Rhode Island, New York, Hawaii, California, and Michigan at last count, and several other states are looking into them. As different banks learn which strategies work and which don’t, they share insights and talent, ensuring that future green banks are even more successful. At the MCGB, for example, Connecticut Green Bank Executive VP and CIO Bert Hunter is a board member.
In 2014, members of green banks and interested officials from across the country met to discuss strategies and share insights at an event termed, “Green Bank Academy.” This distributed network of initiatives is seen by some as one of the key advantages of the way that green banks have thus far been approached; where the federal government is sometimes slow to move, local governments can be quick and agile, experimenting with new ideas and seeing what works from the bottom up. This advantage is what sometimes leads state and local governments to be called the “laboratories of democracy.”
Unfortunately, most initiatives continue to run into problems obtaining the capital they need to get off the ground.
Reed Hundt and Jeff Schubhe from the Coalition for Green Capital proposed a solution in a 2015 memo. The memo’s authors suggested that some clarifications of definitions and eligibility at the federal level could free up billions of dollars in Department of Energy loans and loan guarantee dollars to capitalize green banks. More money could be found in the Department of Agriculture’s Rural Utility Service. These programs, the authors argue, are under- or poorly utilized. By setting simple standards for green banks to access these programs, the federal government could funnel billions of dollars into programs across the country that have demonstrated an ability to multiply their impact.
In 2015, Brookings reported that the Obama White House had met with several states and key stakeholders on this issue, but since then no significant new source of funding has emerged. Prospects under the Trump administration don’t look much better, though the federalist approach to green bank capitalization could potentially appeal to conservative legislators.
The Montgomery County Green Bank has a lot of work to do before it can start facilitating lending, but Vigen says that the board is excited to start serving the whole of the Montgomery County community.