Capital Sources and Providers
The most important elements of a clean energy lending program are the capital source and the capital provider. The capital source provides the funding to pay for clean energy projects, and the capital provider manages those funding sources. For instance, banks might use their customers’ deposits as a capital source, but as the capital provider, the banks manage the investment of that capital
Capital sources and providers can be from one or a combination of the following:
- Federal funds
- Bank capital
- Credit union capital
- Foundation grants and funds
- Community Reinvestment Act funds
- State government funds
- Utility system benefit charges and ratepayer funds
- State treasury funds
- Local government general funds
- Emissions allowance revenues.
State Energy Program (SEP) or Energy Efficiency and Conservation Block Grant (EECBG) Program funds are a common source of funds for loan capital. As long as those funds are used to support qualifying clean energy investments, they are a flexible funding source with few restrictions. Another possible source of federal funds is the funding designated to support lower income populations such as Community Development Block Grants. CDFI lenders may also be able to access grants from the U.S. Treasury to provide loan capital to targeted groups.
Bonds consist of many different types of funds that are too numerous to describe here. Some of the more common types of bonds are tax-exempt bonds that can fund investments in government facilities or, subject to many limitations, investments in certain private activities. Those are known as private activity bonds. Another category is tax credit and tax subsidy bonds, the proceeds from the sale of which can be used to fund some energy efficiency and renewable energy projects. Qualified Energy Conservation Bonds (QECBs) are one such example (see Chapter 2 for a discussion of QECBs and other bonding structures).
Banks can invest their own depository capital in clean energy lending projects if the banks feel that the return is sufficient, given their understanding of the risk involved in the investment.
Credit Union Capital
Like banks, credit unions invest their capital in projects for which they feel the return will justify the risks as they understand them. As noted earlier, credit unions tend to be smaller than most national banks and closely tied to particular communities or constituents. Credit unions may also have less capital to lend and a smaller network of branches than the larger banks.
Foundation Grants and Funds
CDFIs receive foundation grants to cover their operations and make loans to businesses, nonprofits, and homeowners in the community. CDFIs also receive foundation program-related investment (PRI) funds. Those are funds that foundations can legally place with CDFIs as an investment with a low interest rate, typically 2% to 3%.
Community Reinvestment Act Funds
Commercial financial institutions often meet their regulatory responsibilities under the federal Community Reinvestment Act (CRA) by placing funds at a low interest rate with CDFI lenders. Like PRI funds, these investments often earn a below-market rate of 2% to 3%. In turn, CDFI lenders are expected to lend the funds at that same low rate plus a small interest rate spread that typically ranges from 2% to 3%.
State Government Funds
Government entities can make loans and have often done so. For instance, some state energy offices created clean energy lending programs in the late 1980s and early 1990s using allocations of funds through the U.S. Department of Energy (DOE) and from certain legal settlements. Other state finance authorities operate lending programs using a number of different capital sources. State and local finance authorities are diverse, but tend to operate in collaboration with (rather than in competition with) private financial institutions. State finance authorities lend in markets that are not attractive to private entities, such as loans to cash-strapped nonprofits, or co-lend with private financial institutions. In some cases, government entities make direct loans, too. Colorado offers an example of a new loan program supported by funds from the American Recovery and Reinvestment Act of 2009 (ARRA), whereby the Colorado Housing Finance Authority offers direct loans to support clean energy investments in the state.
Utility System Benefit Charges and Ratepayer Funds
Ratepayer funds and/or utility system benefit charges can help capitalize or provide credit enhancements to a clean energy financing program. Arizona is soon to launch an energy efficiency lending program that uses ratepayer funds for credit enhancements. The United Illuminating program in Connecticut has access to the state’s public benefit fund to cover defaults on energy efficiency related loans to small businesses, and Delaware’s Sustainable Energy Utility also has an allocation of funds from its public benefit fund.
State Treasury Funds
In some cases, state treasurers may be willing to invest a portion of their capital in energy efficiency lending. The longest established program of this type is Pennsylvania’s Keystone HELP (Home Energy Loan Program). It began with an initial capitalization of $20 million over a 3-year period from the state treasury. A newer program is the Colorado Clean Energy Finance Program that will begin operations with an approximate $4 million annual capital pool from the state treasury. In both cases, the state treasury is willing to purchase loans made by the primary financial institution provided it takes care of all loan origination and loan servicing. In turn, the financial institution has access to a 5%–10% loan loss reserve set up by the state to cover potential defaults, and then the financial institution bundles and sells the loans to the state treasury. The financial institution agrees to guarantee the loans, so the credit risk from the perspective of the state treasury, which is partly related to the underlying loan assets, is mitigated by the financial institution's guarantee.
Local Government General Funds
Tax revenues can sometimes capitalize an energy efficiency or solar energy loan program. The Energy Independence Program in the City of Palm Desert, California, for example, was supported through general funds. Many jurisdictions, however, are experiencing reduced tax revenues and budget cuts, which limit their ability at this time to capitalize loan programs using their general funds. Palm Desert intends to refinance the loans once a portfolio is assembled, so the local government funds are serving simply as a way to get the program (a PACE program in this case) started.
Emissions Allowance Revenues
States that receive revenues from participating in a cap and trade structure (e.g., the Regional Greenhouse Gas Initiative (RGGI)) can use those funds to seed clean energy finance programs. Delaware, for example, is allocating a portion of its RGGI emissions allowance auction revenues to its new sustainable energy fund that lends across several market sectors.