By Richard W. Caperton and Bracken Hendricks, Center for American Progress
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Protecting our national security, growing our economy, and avoiding the most catastrophic effects of global climate change require massively restructuring our energy system. Over the next 10 years the United States needs to move from a fossil-fuel-based economy to one powered by clean, domestic energy. Navigating this transition will require hundreds of billions of dollars in new capital investment from both public and private sources. We also need to reverse the current jobs crisis in a time of tight federal budgets and financial austerity. The solution is a Green Bank, which is the right tool to unlock private capital investment to renew America’s energy infrastructure and create jobs.
A transformed clean energy economy will rely on both deploying existing and proven technologies and the development of new highly innovative, high-growth technologies and business practices that today are still being developed in laboratories and business incubators. The U.S. government has an important function in developing better tools for financing and commercializing new energy solutions and bringing them to commercial scale. Through a tool such as the Green Bank the government also will support private investor leadership in unlocking this dynamic engine of jobs, growth, and competitiveness.
The United States will not remain a global leader in technology innovation in the clean energy sector without a sustained effort to move advanced energy from basic research, to early phase R&D, through to commercialization, manufacturing at scale, and the deployment of these technologies in functioning energy markets. Meeting this challenge has tremendous implications for America’s economic recovery and the global competitiveness of U.S. industries.
Yet very real structural barriers exist to financing this technology innovation process and sustaining the new jobs and industries it already supports. These financial market barriers are over and above the cyclical investment challenges that already hurt new investment as a result of the global economic downturn.
Many of our economic competitors already established clean energy finance entities to overcome these barriers. Sustainable Development Technology Canada provides a useful model, as well as green banks in the United Kingdom, Germany, and China. Launching a Green Bank financing facility here in the United States to attract new private capital to key domestic investments on our shores offers a proven, market-driven, and truly bipartisan approach to reigniting capital markets in support of American business innovation.
This memo outlines a specific proposal to improve private capital markets for clean energy investment in the United States through the development of a dedicated independent Green Bank, which can be pursued either as a standalone facility or within the context of a broader program of infrastructure finance.
We also offer reflections on key criteria for ensuring that such a project will succeed. The structural concerns we highlight apply equally to an independent Green Bank and to the treatment of clean energy under an infrastructure bank.
Summary of Green Bank recommendations
In the current jobs crisis, policymakers in Congress and the administration should work together to elevate financial solutions to clean energy commercialization and enact an enhanced Green Bank, which will finance the clean energy solutions that are proven job creators. Especially in this moment of heightened concern over deficits and federal spending, a strategy that leverages large amounts of private capital investment to build a more productive and competitive economy must be a priority.
The Clean Energy Deployment Administration proposal recently passed with strong bipartisan support by the Senate Energy and Natural Resources Committee contains the key elements that any Green Bank should include, and provides the right foundation for moving a Green Bank forward. In addition we offer some more thoughts on specific criteria for enhancing this vehicle to improve its effectiveness.
Improving the federal government’s capacity to support private capital investment in clean energy will require the establishment of a strong, resourced, and dedicated facility focused on the unique structural challenges clean energy faces in financial markets.
Any such Green Bank should meet the following criteria:
- Any U.S. Green Bank needs to apply a portfolio approach and have access to a range of financial instruments covering debt, equity, and insurance investments.
- This entity should have independence from the Department of Energy to minimize administrative barriers to effective program operation, but DOE should provide substantial guidance to align financing choices with broader energy strategy.
- This entity should be governed by an independent board with significant financial experience, similar to a private bank’s structure.
- The Green Bank’s portfolio of investments should be scored by the Office of Management and Budget on a product basis or using a pre-determined model, rather than deal by deal—thereby ensuring appropriate oversight while streamlining financial management.
- The Green Bank should prioritize commercializing clean energy and innovative business practices—not financing mature technologies or traditional energy resources.
- The focus on innovation-phase investments must also recognize both innovative technologies and innovative technology applications that also face market barriers even where the specific technologies are proven.
- The bank should be capitalized over five years on the scale of $10 billion to $20 billion, and the administration should actively work with congressional champions to assure an appropriate way to pay for it.
- Policies that increase market demand for clean energy and build complementary infra- structure should accompany this entity’s establishment.
Government financing is essential for clean energy to expand
Energy is a matter of strategic national interest, and energy access is both a public good andnatural monopoly—that is, it’s most efficiently provided by a single firm with monopoly power. Because of these unique characteristics the government has regulated and directly invested in energy markets from day one. From subsidizing canals and waterways that powered early industrial expansion, to encouraging railroad construction to carry coal and providing tax benefits to oil producers, to the massive public investments in rural electrification that brought a modern economy to every corner of America, the government is an active participant in shaping the growth of reliable and affordable energy markets. Historically, these two attributes—reliability and affordability—have been the priorities for our energy system.
This strategic decision was key to America’s growth and competitiveness in the 19th and 20th centuries. Today is no different, yet we now must add a third objective to our strategic energy priorities and use the full resources of the federal government to pursue universal access to affordable, reliable, and clean energy supplies.
Today, clean energy faces a number of exceptional hurdles in the market that conventional energy supplies don’t experience, from capital market shortcomings in financing innovative industries, to market rules that favor incumbent technologies, to misaligned price signals from the external cost of global warming pollution, to a lack of data transparency in real estate and energy markets that encourages wasteful consumption and underinvestment.
At every step in the process of research, development, commercialization, manufacturing, and deployment, clean energy faces additional costs while competing against historically subsidized incumbent industries. This situation is not in the public interest, and it hurts American competitiveness in emerging global markets.
These structural barriers can be best overcome through a capital market solution that reduces the cost of capital and improves access to financing for the commercialization phase of innovative technology. A Green Bank would provide just such a sustained institutional mechanism for overcoming these entrenched barriers to the growth of this vital infrastructure.
In addition, it is essential to target not only innovative technologies themselves but also innovative technology applications—such as energy efficiency—that deploy long-proven technologies through market innovations and thus similarly face structural economic barriers.
The government already engages in energy markets in a number of beneficial and targeted areas. In addition to well-known programs such as tax credits for renewable electricity, the government also manages ARPA-E (to provide support to companies that are developing new technologies), the Rural Utilities Service (to finance infrastructure investments in rural electric utilities), and the Export-Import Bank (which finances exports of clean energy technologies), to name a few.
These investments are all well targeted and do not crowd out private capital investment. They overcome market barriers to attract private investors into nationally strategic markets. These pro-market institutions and programs have a proven record of supporting the growth of private industry and long-standing acceptance by investors and businesses alike.
Currently missing, though, is a program that helps finance technologies in the “commercialization” phase of the product life cycle. That is, technologies that have moved beyond the research and development phase but have not yet reached broad-scale deployment in commercial markets.
Due to the perception of higher technology risk or innovative and unproven business models, these technologies are faced with what’s known as the “valley of death” where sufficient capital investment is simply not available as firms transition from venture capital financing of R&D efforts to commercialization at scale backed by low-cost capital from institutional investors and bond markets.
Equity investors, such as venture capital funds, don’t have enough money to meet the technology companies’ investment needs (which are often over $100 million), and debt investors are not willing to bear the technology and business risks inherent in these new projects. Too often, otherwise viable companies with promising technologies and improved business practices die at this stage because they are unable to successfully cross the valley of death.
The government can go a long way toward remedying this situation by creating a financing entity that enables capital to flow more readily to these projects during this transi- tional phase. The government is uniquely able to bear these risks, and it can access the large amounts of capital needed.
Government is the only investor that will commercialize the technologies that will power our future economy. But the U.S. economy as a whole will benefit as new intellectual property is created and profitable businesses rebuild the economy and hire workers.
And we will only be able to capture the entire value chain for clean energy and the jobs that come with it if we commercialize technologies domestically. An added benefit of commercializing technologies here in the United States is that manufacturing tends to follow commercialization, leading to deployment. There are logistical reasons to locate manufacturing near markets (especially for large equipment like wind turbines), and companies also find that increasing knowledge flows between R&D, manufacturing, and market deployment increases profitability.