August 16, 2013

Storage and Finance: Overcoming Two Barriers to Renewable Progress

By Todd Olinsky-Paul

The future for wind and solar energy is bright. Both technologies are maturing, meaning they are becoming both more efficient and cheaper. But in order to realize even a fraction of their enormous potential, both technologies must address two major constraints, one physical and one financial.

The physical constraint is the intermittent and non-dispatchable nature of the wind and sun, which at high levels of penetration can cause problems for electric grids. Until now, we have coped with our inability to efficiently store electricity on a large scale by creating an overcapacity of dispatchable generators. But if we are to kick the fossil fuel habit, we need to finally solve our electricity storage problem. Intermittent renewables will not get to scale and provide baseload power without solving this problem.

To solve the storage problem, we need better and smarter partnerships between the federal government and the states. Fortunately, this Administration is working on some creative “federalist” strategies to move energy storage to market.

One of them is a partnership among Sandia National Laboratories and the U.S. Department of Energy, Office of Electricity and states through the Clean Energy States Alliance (CESA). CESA’s Energy Storage Technology Advancement Partnership (ESTAP) creates federal/state partnerships to get emerging energy storage technologies deployed. There are some interesting developments so far.

We are fortunate to be working with Connecticut on their three-year microgrids initiative; with New Jersey on their four-year energy storage program; with Vermont on an energy storage RFP that is being developed at this writing; and on individual battery storage projects in numerous states, including Pennsylvania, Maryland and Massachusetts. CESA’s sister organization, Clean Energy Group, is also leading a resilient power collaboration between a number of Northeastern states, to help them provide resilient electricity systems to critical facilities, which need to be able to continue to deliver emergency services during grid outages, such as those experienced by these states during Superstorms Sandy and Irene.

The financial constraint is well known but hard to solve. In order to get to scale, we need to find new ways to finance clean energy. The sole reliance on unreliable federal tax equity drivers is a problem for certain and reliable investment.  To get to scale, one avenue is to look to traditional finance tools like public finance and infrastructure bonds to finance the clean energy revolution.

Clean Energy Group released a paper last week through the Clean Energy and Bond Finance Initiative or CE+BFI ( about the state and city level innovations in clean energy finance, especially the new creative uses of bonds to support clean energy. The CE+BFI is joint project of Clean Energy Group and the Council of Development Finance Agencies, dedicated to expanding the use of bond finance for clean energy through a national partnership of clean energy and public finance officials across the country.

The paper, “Reduce Risk, Increase Clean Energy: How States and Cities are Using Old Finance Tools to Scale Up a New Industry,” makes a simple point: to make the old new again is the future of clean energy finance. The paper identifies several financing strategies at the state and municipal level that can be adapted and implemented to accelerate the clean energy finance revolution in other states and cities, and at the federal level.

Financial innovation is offering one of the best hopes for scaling the clean energy industry. But it’s not the invention of an entirely new class of complex tradable securities that’s beginning to accelerate the industry’s growth. It’s the innovative use—at the state and local level—of a set of rather commonplace and long-established financial tools that support bonds and other debt instruments by reducing financial risk.  States and cities are showing us that we don’t need entirely new financing models to scale up clean energy. With tried and true financial instruments, clean energy projects can access low-cost, long-term capital markets, and investors will be able to purchase investment grade securities that meet their financial and environmental requirements. Across the country, state and municipal leaders have begun to embrace this finance innovation. And for one of the most technologically advanced industries in the world, it’s surprisingly low tech.But one critical change has to happen for this to work. Energy policymakers must figure out ways to support the transfer of conventional credit enhancement tools to the clean energy sector.

Credit enhancements, simply put, are ways to reduce the financial risk of a project, to make the lender more secure that they will be repaid. Not flashy but often complicated to explain to those outside finance, they have been used in virtually every other sector to raise capital to scale. They are the bridge, the linchpin financial instrument, to get projects to capital markets.

Just as America financed its established infrastructure, its roads and bridges and airports, the clean energy sector is following suit. It is moving from an emerging industry strategy that was driven solely by the need to reduce technology and production costs, to one that must reduce risk—especially financing risk.

As an example, on August 13th, NYSERDA announced that it had issued bonds, the first in the country, to finance and refinance loans that were issued through the Green Jobs-Green New York (GJGNY) program to fund energy efficiency improvements in residential dwellings. The bonds will be guaranteed by the New York State Environmental Facilities Corporation, which manages the largest Clean Water State Revolving Fund (SRF) program in the U.S. New York in breaking new ground in clean energy financing; this is the first time in the country that a bond issued by a state water authority has been used to finance an energy efficiency project. Now other states can follow suit and raise more energy financing through these strategies.

The goal of these innovations is to firmly establish credit-enhanced clean energy bonds as a new asset class for institutional investors who could begin to invest in a clean energy asset that has an equivalent credit risk/return profile to any other similarly rated asset.  We can create a new asset class for clean energy and raise capital on Wall Street if we work together to bring infrastructure finance to the clean energy space.

If we can address both the physical and the financial constraints to clean energy at scale, renewable technologies will have a bright future in this country.

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