WASHINGTON — A new paper makes recommendations for increasing the number of bond financings for clean energy projects.
"Bond finance holds tremendous potential for future clean energy investment, perhaps at levels in the tens of billions of dollars in the next several years," said in a new paper released by the Brookings-Rockefeller Project on State and Metropolitan Innovation.
Financing renewable energy and energy-efficiency projects is challenging, in part because federal subsidies, which were amped up by the American Recovery and Reinvestment Act have mostly wound down.
"There's a big need for finance solutions now that don't involve direct government subsidy," Mark Muro, a senior fellow and policy director of the Brookings Institutions' Metropolitan Policy Program, said in an interview.
Bonds, which have long been used to finance other types of infrastructure, could be used to finance clean energy development in a time of federal paralysis, the paper said. They can become a more normal part and large part of the way these types of projects are financed, Muro said.
There are a variety of bond instruments that states can use for different types of energy projects. Capital projects of clean energy supply chain manufacturers can be financed with industrial development bonds, which are a type of qualified tax-exempt private-activity bond. Additionally, bond agencies can use taxable bonds to finance clean energy public-private partnerships, the paper's authors said.
Some state and local governments are already starting to innovate and use bonds for clean-energy projects. In August 2013, the New York State Energy Research and Development Authority issued $24.3 million of revenue bonds to finance loans to make energy efficiency improvements. Also last year, Hawaii enacted legislation that allows it to issue green infrastructure bonds backed in part by a utility surcharge. And Morris County, N.J. uses a model that finances solar institutions in public facilities through a combination of bonds and power purchase agreements, the paper said.
But there are problems that are preventing bond financing from being broadly used to finance clean-energy projects. These include weak cooperation between development finance agencies and clean-energy offices, a limited amount of innovation in applying bond financing to clean energy, spotty performance data and a lack of standardized documentation, as well as limited institutional demand related to the fact that rating agencies have difficulty rating clean-energy bonds, the paper's authors said.
The paper argues that states and localities should consider pursuing four main agendas in order to get bond financings for clean energy projects to take off.
The first is that local clean energy leaders and development finance agencies should establish partnerships. This way, clean energy officials can learn more about public finance and bond authorities can learn more about clean energy, the Brookings-Rockefeller paper said.
In order for the partnerships to be productive, clean energy policymakers and finance entities should identify opportunities and barriers for using the capital markets to finance energy projects, analyze how different types of bond finance instruments can be used in the clean energy area, see if state and federal policy changes are needed to expand the source of bond capital, work with federal agencies, and establish state peer-to-peer learning networks, the paper said.
The second agenda is to expand bond financing for clean energy projects by using credit enhancement and demonstration projects.
Bond financing for clean energy projects can take off when the industry shifts from one-off projects to
a more systematic use of bond finance tools across states and regions. Credit enhancements such as loan loss reserves, debt service reserve funds, loan guarantees and subordinated debt can help the clean energy sector to access low-cost capital and increase the scale of bond financing in the area.
Also, states should look at the few examples of clean energy bond finance that have been executed and see if they can adapt and replicate them, the paper said.
The third agenda should be to improve the availability of data and standardization of documentation. Doing so will allow the credit risks for clean energy bonds to be better understood and mitigated, as well as make it easier for the bonds to be assigned credit ratings that major investors can accept and reduce the cost of capital, the paper said.
States can take a number of steps to address the data and standardized documentation gaps, including improving the collection of ongoing project and loan-performance data and sharing the information across states, working with national laboratories and other organizations to develop relevant project and performance data and create standardized documentation. They can also work with rating agencies to understand the current ratings for clean energy investments and the challenges the agencies have in assigning ratings.
A fourth agenda should be to create a pipeline of rated and private placement deals to meet institutional investors' demands. Based on developments in the international and corporate bond markets, it appears that institutional investors are interested in the right clean energy bond, so the challenge is to expand the number of offerings "that can be aggregated for sale to these investors," the paper said.
States should look into a new partnership with institutional investors to explore their needs and create products that will be acceptable to them. They should also create bond products in a variety of clean energy market segments and focus on how to get those bonds rated or how to structure them as private placements in a way that will allow them to meet investors needs. And they should educate investors about clean energy projects so that the investors will consider investing in the sector, the paper said.
While much can be done to create a standardized national set of clean energy bond products without changes to state or federal laws and regulations, some changes at the federal level could be beneficial, the Brookings-Rockefeller paper said. These include specifically making clean energy a purpose for which tax-exempt PABs can be used, increasing the funding amounts for IDBs so they can be used to finance clean energy projects on industrial property and creating a state-level capital-access program at the Treasury Department, similar to the state small business credit initiative.
Authors of the paper include Lewis Milford, president of the Clean Energy Group, and Toby Rittner, president and chief executive officer of the Council of Development Finance Agencies. CEG and CDFA are behind the Clean Energy and Bond Finance Initiative, which brings together finance agencies, energy offices and institutional investors to explore how to expand bond financing for clean energy development.
