Priming Banks for Green Loans
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Green energy needs more access to financing. That’s why the banking industry will be critical to its growth. But government support remains vital.
That’s the conclusion of a study by Barclays and Accenture. The issuance of so-called green bonds would be the mechanism, or the means by which primary loans could be packaged and re-sold in secondary markets to pension funds, institutional investors and individuals. While the results of that study pertain solely to Europe’s transition to a low-carbon society, their findings are also pertinent to renewable energy markets both in the United States and around the world.
“The path to a low carbon Europe has largely depended on government initiatives,” says Peter Lacy, managing director of sustainability services, Europe, Africa and Latin America, Accenture. “High public sector debt and maturing technology now mean that private sector capital, primarily intermediated by banks, must be provided to accelerate the investment we need to meet our 2020 goals.”
That would enable Europe to bring down its carbon emissions to 83 percent of 1990s levels by 2020. To push those countries, the European Commission has set a goal of cutting the continent’s carbon emissions 20 percent below 1990 levels. It has renewable energy standard of 20 percent by 2020.
Accenture goes on to say that the European nations would assume too much risks if they tried to do it alone. Literally, trillions must be financed. Having said that, it says that governments must still play a role to stimulate demand and stabilize carbon markets, which is best done through policies that remain certain and transparent.
Investment could be made available to a number of ventures: Making energy efficiency retrofits to commercial properties; creating the kind of transportation energy infrastructure that will be necessary to support alternatively-fueled vehicles and building out a smart grid that could reduce carbon emissions by 13 percent.
But perhaps the biggest investments would be targeted to the creation of solar and wind installations, which would comprise about two-thirds of the money loaned out. Solar, both Accenture and Barclays say, would likely remain the most capital intensive. But those prices should fall as the technology spreads and the cost of production declines.
It’s an idea that has the general endorsement of the World Bank. In 2009, it launched its first “green bonds” initiative to support low carbon activities. The goal behind it is to help stimulate and coordinate new public and private-sector financing for climate action, the bank says.
“Tackling climate change is going to take immense resources that will only come from a well-orchestrated flow of public and private finance,” says Robert Zoellick, head of the World Bank. “This transaction is an important early effort to show one way in which this can be done,” referring to partnership with several Scandinavian institutional investors that raised $350 million.
Similar ideas have been floated in the United States. The selling point that advocates of green bonds make is that such financing would help put the country out front in terms of innovation. They say that China is actively involved in trying to build up its green energy sector while Europe has set mandates.
An ad hoc group calling themselves The Coalition for Green Bank is pushing for a U.S. agency that would provide a comprehensive range of financing support to qualified clean energy and energy efficiency projects. It espouses a green bank to be capitalized with $10 billion through the issuance of green bonds. The bonds would be issued by the U.S. Department of Treasury, not to exceed $50 billion.
The federal bank would supplement those loans made in the private sector. Among the supporters: Florida Power & Light, General Electric and the American Wind Energy Association.
“Green Bank is a critical step towards facilitating green power development while meeting the primary objectives of carbon reduction and economic stimulus," says Todd Filsinger, co-chair of the group and Global Head of PA Consulting Group's Energy Capital Markets. "The environmental benefits are unprecedented and have the potential to drive US emissions to 1990 levels by 2020.”
Green banks, generally, are not about funding unworthy projects. They are about giving good ideas the push they need to make it commercially. To obtain loans for renewable energy projects, developers must be able to demonstrate to lenders that they have locked-up most of the available capacity in advance of construction so that they can pay back the loans.
Green bonds will have a part in the acceleration of renewable energy projects. The government’s role will be to create the certainty that developers need to go forth. Early on, the public sector will participate. But as the industry wins market share, those projects could later become a boon to private lenders.