Ontario’s new climate plan is out and, as expected, the province plans to create a green bank to “deploy and finance readily available low-carbon energy technologies to reduce carbon pollution from Ontario buildings.” Among the technologies it’s expected to support are “solar, air-source heat pumps, geothermal systems, vehicle-to-grid energy systems, and energy storage systems.”
It will do this by providing low-interest financing to homeowners, and working with the private sector to bring more affordable financing to commercial and industrial projects.
When a leaked version of the province’s plan appeared in media reports last month, mention of a green bank largely flew under the radar. Media coverage dwelled instead on the threat of a natural gas phase-out (not happening) and the ambitious goal of having more than 100,000 electric vehicles sold annually in Ontario by 2025.
But a green bank is a big deal. Capitalized by some of the province’s cap-and-trade revenues, it could significantly boost Ontario’s clean-tech sector and accelerate deployment of renewable energy projects and low-carbon technologies. That the Wynne government plans to create such an organization suggests it doesn’t just want to throw dollars into a burning house; it wants to invest in the transition to a low-carbon economy that will deliver long-term dividends in the form of jobs and wealth creation. Just as important, it will make sure the private sector comes along for the ride and eventually takes over the steering wheel.
Conventional lenders don’t have much experience or expertise when it comes to financing renewable-energy or energy-efficiency projects. There’s a persistent, often inaccurate belief out there that such projects are risky or don’t deliver a high enough return. Since the objective of these lenders is to reduce risk exposure as much as possible, they naturally stick with what they know best — the safe bet.
Green banks have one overarching purpose: to lower barriers in the marketplace that make it difficult for financially sound clean energy or technology projects to get private financing. In other words, the goal of a green bank is to leverage a relatively small amount of public capital to unlock large amounts of private capital, says Douglass Sims, director of strategy and finance at the Natural Resources Defense Council in New York City. “Their mission is to mainstream green projects.”
The first green banks started to spring up a few years ago, most notably in the United Kingdom and Connecticut. Since then, green banks have become a feature in Australia, Japan, Malaysia, New York and a number of other U.S. states. They emerged because commercial lenders, such as Canada’s notoriously conservative big banks, have for a number of reasons been reluctant to finance green projects. When they do finance, they do so at such high interest rates that projects can become uneconomic.
“While risks around clean energy projects themselves may be well understood, the perceived risk is not,” says Lauryn Drainie, who leads marketing efforts at Toronto-based CoPower, which uses a crowdfunding platform to help green projects attract financing they can’t find anywhere else. “By providing credit guarantees and other instruments that help protect investors’ capital, a green bank can absorb or diversify some of the risk currently keeping mainstream investors out of the market.”
What the green bank brings to the market is expertise and understanding. It knows how to properly evaluate green projects and distinguish real from perceived risk. It tracks trends around the world. It shares and receives information and learning from other green banks. It does the heavy lifting on deals that traditional big lenders aren’t prepared to do, but may be happy to piggyback. As well, a green bank will look at deals viewed as too small for conventional banks, and it will aggregate small deals into larger project pools that are more likely to get love from Bay Street.
Tom Rand, a clean technology investor and adviser for the clean-tech practice at the MaRS Discovery District in Toronto, says the key to any green bank is that it’s arm’s-length to the government and has the freedom and flexibility to react to market forces. Existing organizations such as Export Development Canada and the Business Development Bank of Canada are non-green examples of such a bank in action.
“It sends and responds to market signals that no government entity could,” says Rand. “It’s designed to build bridges to market activity, rather than to define that activity.”
Think about it this way: The government wants to move from a fossil-fuel dependent economy, point A, to a low-carbon economy, point B. The vehicle to getting there is a stick shift, but the big banks don’t know how to drive manual so assume it’s a risky journey. The publicly capitalized green bank does drive stick, so it gets behind the wheel and invites the big banks along for the ride — and there’s plenty of room for passengers. In the end, all investors get safely to their destination and along the way the passengers learn how to drive stick shift themselves.
The New York Green Bank, a $1-billion “specialty finance entity” established in 2014 by Gov. Andrew M. Cuomo, is one model to learn from, Rand says. Indeed, Ontario’s plan says it will draw on best practices from the NY Green Bank, as well as an organization called Efficiency Vermont, which was the first state-level energy-efficiency utility in the United States.
Take the case of Sealed, a New York-based energy software company that makes it possible for homeowners to improve the efficiency of their homes without paying a cent. Sealed guarantees energy savings from efficiency improvements, and those savings are used to pay off the loan that covered the initial cost of those improvements.
Where do the loans come from? The skittish big banks won’t be the first to test the business model, which made it the perfect place for the NY Green Bank to step in. It ended up backing an initial US$7.5 million credit facility that will help 400 homeowners pay for energy efficiency retrofits. This will help develop a track record for a business model perceived as too risky today but potentially attractive to mainstream investors tomorrow.
“After a track record of payment history, it is much easier for banks and other investors to observe the success in action and start making loans and leases without needing much if any help from the green bank,” Sims says.
In Connecticut, he points out, $10 of private money has already been brought in for every $1 invested by a green bank. And that $1 invested by the green bank, once paid back, is reinvested over and over again to leverage even more private money.
“What’s great is that Ontario has the luxury of being able to get it right by looking at what other jurisdictions have done,” Rand says, adding that a green bank could also help Ontario-based clean technology companies by helping to finance early-stage projects with huge export potential. “The biggest bang for the buck would be to support our clean-tech exports to the rest of the world, which Export Development Canada currently does not do effectively.”
Sims warns, however, that establishing a green bank takes careful planning, and it would be a mistake to simply expand the mandate of an existing institution that, for example, only has experience handing out grants. “You need people with the right skills during startup, and you need to have a sufficient amount of capital from the start.”
To help jurisdictions like Ontario learn from the early experiences of others, the Natural Resources Defense Council is spearheading the Green Bank Network that was launched during the Paris climate conference in December. Six banks are already part of the network and others are expected to sign on. Ontario, says Sim, is welcome to join.
Tyler Hamilton is a climate writer and adjunct professor of eco-studies at York University.
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