Back to CESC

Green Banks

Green banks are innovative public-private or quasi-public institutions supporting the provision of long-term and low-cost financing for clean energy projects (EPA 2015). Green banks are often designed to use seed capital from the public sector to leverage significant amounts of private investment for clean energy projects and to eventually operate under a self-sustaining business model. Green banks are often intended to support technologies or products for which traditional market lending is not yet in place. Thus, green banks can be positioned as a fairly middle-ground policy support for technologies that are not totally reliant on incentives or grant dollars and do offer some payback, but that still need some assistance securing financing.

An important feature of the bank is its nature as a revolving loan fund—distinct from grant-based products, as you get to use the same funding over and over to lend to more projects. Green bank products are normally designed to ensure financial returns to the bank that will allow the institution to be self-sustaining; for this reason, rebates and grants are not normally managed through green banks (EPA 2015, Kennan 2014). Financial incentive products and programs, such as concessional loans, loan guarantees and green bonds can be consolidated and managed under green banks. This allows for greater efficiency and reduced administration costs across the incentives (EPA 2015, Kennan 2014). Green banks can support a multiplier effect for public funds invested in clean energy through attracting significant private investment using minimal public seed capital (Kennan 2014; Lecacheur 2010).

Green banks are also empowered to explore innovative financing approaches. For example, green banks can implement financing mechanisms that may result in greater financial benefit for the private sector investing partner than for the green bank itself (EPA 2015; Kennan 2014). Another role of the banks is to help educate the lending community on emerging technologies. For example, they sometimes provide underwriting support or expertise for specific products to help the rest of the private sector be comfortable with lending for clean technologies. Green banks can be focused on business, consumers, or both.

Analyze Green Bank Needs and Opportunities

Financial needs and opportunities are unique to each country and jurisdiction. Market barriers and opportunities will significantly inform green bank design and incentives offered. Mapping current financial incentives available and assessing needs and opportunities for new and innovative incentives provides a critical starting point in designing an effective green bank (EPA 2015). Utilities are a key stakeholder with which to coordinate, especially if they have existing programs or policy initiatives for efficiency, renewables or distributed generation.

Design a Self-sustaining Business Model

Green banks are unique in their ability to provide low-cost long-term financing through innovative and self-sustaining business models. Seed or ongoing minimal public funding for green banks is an important consideration. Governments can consider direct funding, grants and/or use of proceeds from complementary policies such as renewable electricity standard compliance payments or carbon taxes to provide seed funding for green bank investments. Ultimately, the business model should be designed to be self-sustaining by offering products that ensure a financial return to the institution. Strong private sector engagement is critical in supporting the design of green banks and an effective “capitalization strategy”. Such engagement can enhance fruitful partnerships with the private sector that will lead to significant investment with minimal public funding (EPA 2015; Kennan 2014; Lecacheur 2010)

Establish a Green Bank Policy Foundation and Infrastructure

As a critical starting point, legislation is often required to implement green banks. The legislative process will be unique to each country. However, policymakers can build support for green banks through analyzing and communicating potential costs and benefits of the green bank and presenting compelling benefits from other countries or jurisdictions that have implemented green banks. In addition, there is often a need to commit resources to train staff on operations and management of a green bank and to design new financial instruments that align with market needs and opportunities (EPA 2015; Kennan 2014)

Consolidate Financial Incentives under the Green Bank

Financial incentives are often implemented through various institutions and mechanisms. By consolidating these products and programs under a single financial entity, administrative costs can be significantly reduced and synergies across the products can be understood and captured (EPA 2015).

Implement Complementary Policies

Green banks can be supported by several complementary policies that provide a broader foundation for clean energy investment, provide initial funding for green banks, or attract investment. For example, proceeds or compliance payments for renewable portfolio standards, carbon cap and trade, or carbon taxes can provide seed funding for green bank investments. As another example, green banks and tax incentives are often seen as complementary as tax incentives attract renewable energy and energy efficiency investors that can receive financial products through green banks (Kennan 2014).

United States

New York Green Bank, Connecticut Green Bank, New Jersey Energy Resilience Bank, Hawaii: Working Paper: State Green Banks For Clean Energy and Energy and Environment Guide to Action: State Policies and Best Practices for Advancing Energy Efficiency, Renewable Energy, and Combined Heat and Power