Financing Clean Energy: A Cost-Effective Tool for State Compliance with EPA’s Clean Power Plan

July 15, 2015 | 11:02 am
Steve Clemmer
Director of Energy Research & Analysis

A new UCS report released today shows how clean energy financing programs offer a promising avenue for scaling up investments in renewable energy and energy efficiency that can reap significant economic and consumer benefits, while helping states achieve EPA’s Clean Power Plan carbon emission reduction targets.

The report highlights six state-level programs (Connecticut, New York, Pennsylvania, Kentucky, Iowa and Massachusetts) and one international program (Germany) that have successfully leveraged private-sector funding to strengthen clean energy investment. These programs range from all-encompassing “green banks” to more discrete efforts focused on a particular clean energy market sector.

State green banks are institutions that provide financial products to assist homes, businesses, and institutions with developing clean energy by leveraging low cost, private-sector capital. Financing costs for these programs are typically lower because the state backing lowers their risk. States have been innovating in this way because of challenges to implementing traditional financing programs. For example, direct incentives programs such as grants and rebates, while effective, can sometimes be difficult to scale up because of cost concerns and administrative complexities. The private sector also has a strong interest in getting in on the economic opportunity afforded by clean energy investments.

Germany wind and solar

Germany’s Green Bank has played a major role in making the country a global leader in renewable energy development.

More capital needed for clean energy

While investments in renewables and efficiency have rapidly increased over the past decade, further increases will be required to meet the growth in energy demand and to limit the worst consequences of climate change. For example, a 2012 National Renewable Energy Laboratory (NREL) study estimated that reaching targets of 30 percent of U.S. electricity generated from renewable energy by 2025 and 80 percent by 2050 will require investment on the scale of $50-$70 billion annually over the next decade.

A key tool in the toolbox

To spur investments in renewables and efficiency, states can adopt a number of proven clean energy market-development mechanisms. The most popular to date have included renewable electricity standards, energy efficiency resource standards, public benefits funds, tax and incentive policies, utility rebates, building-energy codes, net metering, and carbon cap-and-trade programs.

The states highlighted in this report have also used green banks and other financing initiatives to help secure funding for clean energy investments without the need for substantial direct incentives from state coffers. These initiatives complement existing policies, and can also help make renewables and efficiency more competitive, especially as existing policies change, expire, or become less effective. With the costs of renewable energy falling dramatically in recent years, this is also an attractive opportunity for private sector investors looking to participate in the rapidly growing clean energy economy.

These financing programs have also been effective at addressing key market barriers such as high upfront costs, the relative small scale of projects, financiers’ limited understanding of the technology and performance risks, and limited customer access to low cost capital.

An impressive track record

While some programs have a lengthy history of success, others are in their early proof-of-concept stages. Regardless, all seven programs have made impressive progress:

NY Green Bank Pie Chart

The investment potential for clean energy in New York State during the first 10 years of bank operations is more than $75 billion.

As the above programs show, states can use these programs and other existing policies to demonstrate commitments to renewables and efficiency—with quantifiable costs, fossil fuel savings, and carbon emissions reductions-—that can be used to meet EPA’s criteria for complying with the Clean Power Plan. Renewable energy and energy efficiency are two “building blocks” identified by EPA to quantify each state’s emission reduction targets and to demonstrate compliance. States are free to combine any of these building blocks in a flexible manner to meet their targets.

What other states should keep in mind

State clean energy financing programs have been able to successfully engage diverse stakeholders to help mobilize capital. Collaborative efforts have included:

  • making use of existing contractor networks to help roll out financing programs
  • consulting with the financial community to build trust and identify sustainable funding sources
  • drawing on local utilities’ experience delivering programs to avoid duplication.
Wall Street

Consulting with the financial community is important for designing and implementing effective clean energy financing programs.

State agencies have also learned important lessons for administering these programs. This includes using in-house energy expertise to reduce the financial risks of private-sector loans that have enabled a broad array of individuals, businesses, and institutions to achieve savings from clean energy projects.

These seven case studies clearly demonstrate that clean energy financing programs offer a cost-effective approach to help states achieve their Clean Power Plan emissions-reduction targets, while lowering consumer energy bills and generating local economic benefits. By leveraging private-sector capital and reducing the need for taxpayer or ratepayer dollars, these programs have also helped attract bipartisan support.