Do we need a green bank to accelerate the transition to clean energy?
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Suppose for a moment that we want renewable energy, but the technology does not exist to effect a rapid and substantial change that is financially viable in 2021.
Suppose further that we are looking for a financial mechanism to encourage the switch to renewables faster than slower, and bigger rather than smaller.
Maybe we need a green bank?
No, don’t feel bad – I hadn’t heard of it until recently either. It is something that exists in Australia. It briefly existed in the UK. It is used in smaller forms in Michigan, Connecticut, and New York.
As a concept, I like it better than other financial tools.
The context in which I love the Green Bank is twofold: First, as the Biden administration tries to shape a big infrastructure bill and weighs different levers to accelerate the shift to renewables. Second, compared to other levers.
I recently wrote that ESG investing was not my favorite boost.
ESG investment, or environmental, social and governance investment, is too diffuse. I see it offering hype but a questionable benefit for the transition to large-scale renewables.
ESG investment in mutual funds is also generally negative, in that it encourages divestment from old fossil fuel companies – ExxonMobils, BPs, pipeline companies. He usually seeks change by removing capital. But it cannot necessarily fulfill the positive role of providing capital to innovative renewable energy companies.
Another problem with the divestiture of old oil and gas companies is that the oil majors represent the biggest potential private investors in renewables. They have in-depth expertise, technological and logistical prowess in supplying energy from sources to users. We might remain skeptical about BP’s commitment to zero carbon by 2050 or the recent inclusion by Exxon of up to three climate activists on its board of directors. But we could also take into account the fact that the orientation of the oil majors towards renewable energies could and would be a big boon for the private sector for the fight against the climate.
On the private market side, the most appealing approach to me would be for innovative, climate-friendly energy companies to find a way to accelerate the transition in a cost-effective manner. There is no doubt that many private equity firms and venture capitalists are attempting this right now.
A green bank, at its best, is a financial boost from the public or quasi-public sector to accelerate and expand this type of private sector investment. To the extent that a green bank can bring scale and speed to a private equity market, it is a much more attractive financial model than ESG.
The typical financial approach so far has been to push a shift to renewable energy through tax credits. Federal tax credits made it possible to build the GE-Alstom Block Island wind farm, the country’s first offshore wind farm, off Rhode Island. Texas property tax breaks in the form of the Chapter 313 (RIP!) Program have boosted some renewable energy projects, as well as a larger number of traditional fossil fuel projects.
Federal Investment Tax Credits, or ITCs, offer a 26% tax saving on the cost of a solar installation, with no upper limit on the amount of the tax saving. These JTIs have been extended in 2020 for an additional two years, so they will continue to stimulate investment in solar and wind installations and the adoption of renewable energy sources.
So we are already doing a lot of tax credits.
The problem of tax credits as the primary solution to renewable energy, however, is ironically captured in the word “renewableâ€. These credits usually have to be renewed through a political process. This inherently makes them short term. They can expire or be canceled. Stimulating a long-term transition in energy technology is not served well by something subject to a political process of renewal.
A green bank, on the other hand, offers a (perhaps) better financial model. The idea is that a one-time investment creates a more permanent source of capital, independent of a two or four year policy cycle. Like the World Bank, infrastructure banks or export banks, Green Bank loans to renewable energy projects are expected to be repaid over time, albeit on attractive terms. Since a successful loan portfolio returns capital to a bank like this, it can theoretically provide a financial incentive indefinitely, beyond the term of the tax credit.
I keep saying moot because real world green banks have run into political problems.
The Connecticut Green Bank is a quasi-public entity, created by the General Assembly of this state in 2011. The main idea is to mobilize private sector banks and private capital for green projects. The bank has also offered $ 1,000 Green Liberty Bonds to people who want to invest their money this way, which in turn can help finance households and businesses wishing to invest in solar power and other renewable energy projects.
In Texas, state funding is already available for public institutions that wish to modernize their energy facilities to reduce energy use and costs. It’s called STAR loan. This type of funding seems useful at the state level. But it is different and less ambitious than a bank that would finance the creation of private renewable energy companies or transition technologies.
A 2020 survey of existing and emerging green banks in dozens of countries shows that the methods and orientations of banks vary enormously.
Australia created what is considered the world’s largest green bank, the Clean Energy Finance Corp., with $ 10 billion available to invest. In particular, it has succeeded in financing large-scale wind power projects. Perhaps equally important, it has, to this day, survived attacks from a political party opposed to the model.
In the UK, an experiment in a national green bank ended when it was sold and privatized in 2017. This may be an argument for designing a bank sufficiently independent from a political process and not too associated with one side of the world. political spectrum.
Certainly a green bank has a better chance of lasting if it has impeccable good governance and is separated from a traditional political process.
Michael Taylor is a columnist for the San Antonio Express-News and author of “The Financial Rules for New College Graduates”.
michael @ michaelthesmart
money.com | twitter.com/michael_taylor
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