- July 2014
- 33 Stan.Envtl.L.J. 457
- Note
The American clean energy industry has a problem. Many clean energy technologies have demonstrated not only commercial viability, but also lucrative returns to project investors. Despite this performance, many clean energy projects are unable to obtain appropriately priced capital to finance construction or must pay scarcity prices for the financing they can obtain. There are many reasons for this funding gap, but some popularly cited shortcomings include: 1) clean energy projects require large capital expenditures, 2) the capital markets lack familiarity with the underlying technologies, 3) loan agreements are not standardized across the industry and can include transaction cost-heavy structures, 4) the industry relies on complicated tax credit arbitrage, and 5) any secondary market for project interests remains nascent.
These market barriers suggest that the clean energy industry’s financing problems are largely a function of fissures in the finance supply chain. This view assumes that, were such barriers removed, new capital would easily flow to end-users and project developers who want to install solar panels or upgrade energy efficiency systems, but lack capital. New dollars will certainly find a number of projects eager for capital, but capital is not always the missing link.
The demand side of the energy markets is heterogeneous and includes many players such as utilities, regulators, independent power producers, homeowners, and businesses. Each of these groups has different incentives and will respond to increased capital flows for clean energy in different ways—if at all. When allocating scarce capital across bundles of goods and services, various energy consumers/investors may not believe that investing in clean energy presents the best-value proposition available. This may be because of poor information about the value proposition, utility billing structures, preferences, or actual opportunity costs and liquidity risks. The energy markets also fail to price carbon and thereby skew the value of clean energy.
Given these demand-side market barriers, and absent credibly binding carbon pricing, how do we stimulate the demand side to invest in clean energy projects if increasing capital flows will only take us so far? Some tools include state-level renewable portfolio standards (RPS), which set renewable generation targets, as well as subsidies and tax credits. But New York State, by order of the Public Service Commission (PSC), has repurposed $165.6 million of ratepayer money to provide the initial capitalization of a new tool: the Green Bank of New York (NYGB).
NYGB is a “bank” in name only—it does not take deposits or make consumer loans. Rather, it is a “state-sponsored investment fund” with a broad mandate to remove market obstacles in the clean energy industry by offering a suite of financial products such as securitization, loan warehousing, and credit enhancements. Ideally, these offerings will induce private sector spending for clean energy and grow the capital pool available for projects. To achieve maximal leverage of its ratepayer-financed initial capitalization, NYGB should attack demand-side inefficiencies and generate demand for clean energy. NYGB has an opportunity to succeed at this early stage so long as it works to overcome demand-side inefficiencies. This Note briefly reviews the creation of NYGB, its objectives, and financial products. It then discusses some shortcomings of its current financing model, suggesting that NYGB must pay more attention to non-financial barriers holding back clean energy projects.
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