Brookings Proposes State and Local Clean Energy Bonds

The state and local bond market that, for years, has financed the construction of U.S. roads, bridges, hospitals and other infrastructure projects offers a viable but vastly underused funding source for clean energy development, finds a paper released  by the Brookings Institution Metropolitan Policy Program.

Clean Energy Finance Through the Bond Market: A New Option for Progress maps out a new approach to tapping the bond market to boost clean energy investment. The paper identifies states and communities that have successfully applied this approach while also exploring barriers to widespread adoption of bond finance and strategies to overcome them.

Currently, energy projects are financed differently than those in all other sectors of the U.S. economy. They rely on non-capital market sources, including a small group of tax equity investors such as Bank of America and JPMorgan Chase, and federal incentives such as production and investment tax credits.

Non-energy infrastructure projects, on the other hand, are financed through bond or stock markets. Over decades, as a result, the nation’s many state and local infrastructure finance agencies have built up significant expertise as they have issued trillions of dollars’ worth of public finance bonds for roads, bridges and other projects.

Clean energy leaders are beginning to experiment with bond finance because it can reduce both the cost of capital and the financial risk.

For example, late last year the state of New York raised $24.3 million in its first issuance of revenue bonds, which will finance loans for energy efficiency improvements. Hawaii plans to issue green infrastructure bonds to provide low-cost financing for clean energy generation projects and energy efficiency building upgrades. And since 2009, Morris County, N.J., has financed solar installations in public facilities partly with low-interest bonds.

Bond finance holds tremendous potential for future clean energy investment, according to the paper, perhaps at levels in the tens of billions of dollars over the next several years.

However, finance and policy hurdles remain. Among the most serious obstacles is the limited experience of the clean energy community with bond finance tools, as can be seen from the small size of the current pool of clean energy bond issuances. At the same time, an absence of compelling performance data and standardized documentation related to clean energy projects make bond finance agencies unwilling to assume new risks.

Despite these challenges, there is renewed interest among both the development finance and clean energy communities to apply well-established bond finance tools to clean energy. To fulfill this promise, the Brookings paper proposes that states, regions and localities take four key steps:

  • Establish partnerships between development finance experts and clean energy officials at the state and local levels
  • Expand bond-financed clean energy projects using credit enhancement to mitigate risks
  • Improve access to data so that the risks and rewards of clean energy investment can be better understood
  • Create a pipeline of rated and private placement deals, a new clean energy asset class, to meet the demand by institutional investors for fixed-income clean energy securities
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