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Green Bonds, Green Banks Could Free Up Massive New Investment for U.S. Decarbonization

TAFE SA TONSLEY/Flickr

Between green bonds issued by U.S. utilities and green banks set up by New York, Connecticut, and other states, the U.S. power sector could soon have access to huge new pools of investment capital from institutional investors that want in on the transition off carbon, Utility Dive reports.

Together, the two financing mechanisms “can attract hundreds of billions in institutional and financial market money to fund utility investments in large-scale renewables and public sector investments in local distributed generation,” the publication states, citing industry stakeholders. “They can also work together to support utility transitions away from high-cost legacy generation to lower-cost ‘green’ generation.”

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So far, the uptake has been small: compared to US$788 billion in green bonds issued world-wide since 2007, and $41.6 trillion in U.S. bond obligations at the end of 2018, U.S. utility green bonds have only produced about $10 billion in investment. Utility Dive says that’s because low interest rates have made conventional debt financing easy to raise, while some utilities have found the restrictions and reporting requirements attached to green bonds burdensome.

But earlier this year, a Boston University study found enough new money available that U.S. utilities could immediately “issue at least $250 billion to $500 billion [2] in green bonds.” And the bonds’ performance might soon begin attracting more interest, after credit rating agency Moody’s Investors Service found a 10-year default rate for green project loans of only 5.7%, compared to 8.5% for non-green investments.

“Over time, green bonds will be mostly financed by institutional investors like pension funds and insurance companies that prefer steady annual returns,” Jeff Schub, executive director of the Coalition for Green Capital, told Utility Dive. “We’re not there yet, but it is changing.”

The story traces the experience to date with green bonds at U.S. utilities Xcel Energy, Georgia Power, and Duke Energy. Citing American Council on Renewable Energy (ACORE) Chief Operating Officer Bill Parsons, reporter Herman K. Trabish adds that “there is a lot of money right now looking for sustainable investments or those that address the climate crisis.”

While green bonds are gaining clear momentum, Trabish says the picture is less clear for green banks, which are often used to support energy efficiency and distributed renewables projects at the local level. In January 2018, Aurora Solar senior content marketer Gwen Brown blogged that “government-backed green banks accelerate the growth of clean energy markets”—an important feature, since private lenders are often hesitant to get behind distributed solar projects. 

Parsons said green banks can “use finance to help achieve public policy objectives”. So far in the U.S, they’ve levered $3.40 in private investment for every dollar of public capital they provide, supporting $3.67 billion of clean energy investment across the U.S. through 2018.

But even so, “green banks are generally limited in two ways,” Utility Dive writes, citing Parsons. “They often have only the funds provided by enabling legislation and their operations, and they must avoid a political backlash from any appearance of using public funds to compete with the private sector.”