How Old Finance Models are Breathing New Life Into the Clean-Energy Market
Financial innovation offers one of the best hopes for scaling the clean energy industry. But that doesn’t mean inventing a whole new class of complex tradable securities. States and cities are already showing how well established conventional tools, such as bonds, can help clean-energy projects access low-cost, long-term capital markets.
That’s the conclusion of a report, “Reduce Risk, Increase Clean Energy: How States and Cities are Using Old Finance Tools to Scale Up a New Industry,” prepared for the Clean Energy and Bond Finance Initiative (CE+BFI), a joint project of the Clean Energy Group and the Council of Development Finance Agencies.
The high cost of capital is an important barrier to clean-energy investment: The ability of clean energy to compete with other technologies depends heavily on what kind of financing is available and on what terms. The finance tools covered in this report fall under the general category of credit enhancements: ways to reduce the financial risk of projects and make lenders more secure that they will be repaid.
Credit enhancements include loan guarantees, debt service and loan loss reserves, subordinated debt, interest rate buy-downs, bank letters of credit, and credit insurance products. The aim is to create finance products for clean energy that can be bought and sold on Wall Street like any other publicly traded marketable security.
The report includes case studies on cities and states using these tools and gives recommendations on clean energy finance for state, city and federal governments. It tells how public finance in clean energy is beginning to resemble the policy framework that made it possible to finance cars and mortgages and other trillion-dollar capital markets.
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