U.S. states eager for a piece of the fast-growing green economy are in a quandary: Budget cuts, combined with the expiration of key federal subsidies, mean less cash and an uncertain future for clean energy.
Now, a group of leading experts has produced a policy paper showing that the solution to the problem lies in a financing mechanism used in other countries and within reach of all states, simply called the "green bank."
At its core, the green bank model turns state agencies into specialized lending institutions for loans and bonds to renewable energy and green building developers. The idea is that state clean economy ambitions won't be at the whim of Congress or year-to-year budget constraints.
So far, only Connecticut has passed legislation to create a state green bank. Hawaii, Montana, Rhode Island and California are at various stages of considering similar proposals.
The 19-page report, by the Coalition for Green Capital, a nonprofit that advocates for green banks, and the Brookings Institution, a research organization, was timed to influence 2013 legislative agendas at a precarious time for clean energy.
President Obama's $787 billion stimulus program—11 percent of which is incentives for renewable projects and programs—is all but tapped out. Congressional Republicans are pushing to end government support for renewables, including a $12 billion production tax credit for wind developers that's set to expire Dec. 31.
"States really are more or less on their own if they want to pursue a large scale-up of low-carbon energy solutions," said Mark Muro, policy director for the Brookings Institution's Metropolitan Policy Program, in an interview. He called green banks "a worthy experiment in trying to make limited state revenues go farther."
The idea, while controversial, isn't new.
Australia, Germany and the United Kingdom all have designated green banks. In the United States, the 43-year-old federal Overseas Private Investment Corporation, an independent agency, provides financing for American investment abroad. In 2011, clean energy projects made up nearly 40 percent of its investment portfolio.
Reed Hundt, CEO and founder of the Coalition for Green Capital, and a former FCC commissioner, said he launched the coalition nearly three and a half years ago to drum up support for green banks in Congress and the states.
In 2009, the coalition backed an effort by Rep. Chris Van Hollen (D-Md.) to create a federal green bank that would have doled out $10 billion, or just over half of what was invested in U.S. renewable projects at that time. (In 2011, investments reached $51 billion.)
But the measure bumped up against rising conservatism in the Republican party, and it never came to a vote. "We couldn't get across the finish line in the federal process. So we started working again with the states," Hundt said in an interview.
Green banks could take a variety of forms, the paper argues. States, for instance, could create an agency that uses taxpayer dollars to finance loans, much like state transportation authorities do. Or they could set up a quasi-public authority that combines taxpayer and ratepayer money with private investment from financial institutions or foundations.
In any form, green banks would be run as nonprofit organizations, which allows them to charge lower interest rates than commercial banks. This is key, say clean energy advocates. "If the cost of capital goes down, the price you need to charge people for clean energy goes down," Hundt said.
Perhaps most important for advocates, though, is that bonds and loans ensure a revolving pool of cash for new projects—assuming they're paid back. That's unlike one-time grants for clean energy projects or rebates for energy-efficiency retrofits.
Not all clean energy supporters believe green banks are necessarily a step in the right direction.
"Fire-and-forget" cash grants and rebates have been "a booming success" in driving renewable installations and R&D, according to Ian Bowles, who served as Massachusetts secretary of energy and affairs from 2007 to 2011, and who chaired the Massachusetts Clean Energy Center, which invests in clean technology companies. Bowles is now managing director of WindSail Capital Group, a cleantech investment firm he co-founded last year.
In Massachusetts, he said, solar installations soared nearly 800 percent since 2009, to 143 megawatts today, while wind power has jumped by 300 percent to 61 megawatts of installed capacity, thanks to one-time incentives. The number of clean economy jobs in the state grew by 11 percent last year to more than 71,500 people.
Bowles said the risk of a loan approach is more bureaucracy without much benefit. "You could end up setting up a system that is too cumbersome and too expensive from the legal perspective."
Connecticut 'Hotbed' for Green Bank Approach