New Climate Law Jumpstarts Clean Energy Financing

By Miguel Yañez-Barnuevo 

September 12, 2022

This article is part of a series examining the recently-passed Inflation Reduction Act, a wide-ranging law that includes tax reforms, healthcare investments, and $369 billion to address the climate crisis. For a broader overview and additional information about the new law, read our article, “How the Inflation Reduction Act and Bipartisan Infrastructure Law Work Together to Advance Climate Action.”

The Inflation Reduction Act (IRA) (P.L. 117-169) is the most significant federal investment made to help fight the climate crisis in U.S. history. And it could not have come at a better time, with megadroughts plaguing the West, wildfires tearing through California and the Southwest, relentless heat waves pounding the Great Plains and Texas, and floods decimating communities in Appalachia and the Southeast.

The IRA takes several different approaches to address the climate crisis. Most of its funding will go towards tax rebates, to encourage the faster deployment of renewable energy and energy efficiency systems. But it also allocates funds to jumpstart state and local clean energy financing. Included in the IRA, in Section 60101 of Title VI, is the creation of the Greenhouse Gas Reduction Fund (GGRF), which is a $27 billion allocation designed to incentivize the deployment of clean energy, including solar energy, battery storage, weatherization projects, electric vehicle charging, and heat pumps. With these funds, GGRF aims to reduce greenhouse gases that harm humans and the planet.

Out of the total $27 billion, $20 billion will go to the Environmental Protection Agency (EPA) to capitalize a yet-to-be-created national nonprofit financing institution called the Clean Energy and Sustainability Accelerator, which will be the first-ever national green bank in the United States. Green banks leverage private and public funds to offer low-cost, flexible financing for families, businesses, and nonprofits to install solar panels, battery storage and other clean energy measures, helping them lower energy bills, increase resilience, and decrease greenhouse gas emissions. They are mission-oriented financial entities that have the flexibility to inject capital into clean energy projects to address climate change impacts, in part by providing targeted investments in communities of color that have been disproportionally affected by the fossil-fuel industry.

The rest of the funds, or $7 billion, will be granted by the EPA to state, local, and tribal governments to fund clean energy projects. While guidelines still need to be developed and put into effect, the climate law states that eligible recipients can “retain, manage, recycle, and monetize all payments” coming from loans made with these funds. Effectively, this mean that states, territories, and local governments will likely use GGRF capital to create or capitalize existing revolving loan funds (RLFs). RLFs are pools of capital from which loans can be made for clean energy projects—as loans are repaid, the capital is then re-loaned for another project. Loans and grants made through these revolving loan funds with GGRF funds will enable the deployment of solar and other greenhouse gas emission reduction measures in low-income and disadvantaged communities.

The GGRF is tied to the landmark Clean Air Act of 1970 because it seeks a reduction in air pollution through federal investment in zero-emission technologies and clean heavy-duty vehicles. The IRA also amends the Clean Air Act to define carbon dioxide released by burning fossil fuels as an air pollutant.  The EPA has up to 180 days from when the IRA was enacted (August 16, 2022) to disburse funds to eligible recipients.

The idea of a national green bank to spur clean energy investments and decrease carbon emissions dates back to 2009, when the Green Bank Act of 2009 was introduced in the House. The measure, which would have established a federal nonprofit green bank, was later incorporated into the American Clean Energy and Security Act of 2009 (also known as the Waxman-Markey Bill) that passed the House in June 2009. The Waxman-Markey Bill would have created a Clean Energy Development Administration (CEDA) authorized to “issue direct loans, letters of credit, and loan guarantees to deploy clean energy technologies.” While the bill failed to pass the Senate, it encouraged the creation of several state green banks, the first of which was the Connecticut Green Bank in 2011. More recently, the precursor legislation to the IRA proposed a Clean Energy and Sustainability Accelerator, which would have invested $100 billion in renewable energy, energy efficiency, and clean transportation technologies by supporting the creation of state, territorial and local green banks.

Green banks are specialized in leveraging funds for clean energy deployment

There are now 23 green banks in 17 states providing targeted investments of more than $9 billion for clean energy technologies in rural areaslow- and moderate-income communities, and communities of color. Green banks have different structures (most are either nonprofits or state-sponsored entities), states and localities where they operate and lend money, and investment categories they focus on (residential, commercial, or large scale). These financial institutions, however, have some features in common.  Green banks are generally non-regulated entities with no deposit accounts, have specific expertise in financing equitable clean energy projects over long periods, and, target investments in underserved markets that need them the most. These investments can, for example, help families afford attic insulation and an air conditioner or heat pump to keep the house comfortable in all seasons.

Green banks are adept at leveraging funds from multiple sources, including public ones, and multiplying them. Since its creation, the Connecticut Green Bank has leveraged $288.4 million in public funds to attract $1.85 billion in private investment—a ratio of $7.40 in private dollars for every $1 in public money. The Solar Energy Loan Fund (SELF), a nonprofit-structured green bank in Florida, opened its doors in 2009 thanks to a $3 million grant from the U.S. Department of Energy and helped revitalize its local economy during a recession through the creation of clean energy jobs. To date, SELF has leveraged the initial $3 million into $24 million in loans and grants, with more than two-thirds invested in low- and moderate-income households. This means SELF has an 8-to-1 leverage ratio to invest in clean energy in neighborhoods that have been most affected by the fossil fuel industry.

Communities of color are suffering from long-term pollution burdens

Historically, communities of color and environmental justice communities have been disproportionately impacted by air and water pollution from fossil-powered plants, refineries, and highways located next to these communities. As a result, Black and Latino families in these communities are more likely to suffer from health illnesses than families in predominantly white neighborhoods. Carbon dioxide released into the atmosphere by the fossil fuel industry and fossil-based transportation is making extreme heat events more common and reducing the air quality in cities.

Predominantly Black neighborhoods also lack green spaces and trees, making them up to 10 degrees hotter than surrounding white neighborhoods. Underfunded infrastructure, poor housing conditions, little-or-no insulation to keep houses comfortable, and a lack of air conditioning exacerbate hot temperatures in these communities. Because of these systemic conditions, heat-related deaths disproportionately impact people of color and low-income households. A severe lack of investment from commercial banks has left these neighborhoods behind in the clean energy transition. They have unequal access to clean energy, including rooftop solar panels, and spend, on average, three times more of their income on energy than white households due to uninsulated housing structures.

To solve these climate injustices and disparities and to include communities of color in the clean energy economy, the Accelerator will allocate at least 40 percent, or $8 billion, of its investments to deploy renewable energy in these neighborhoods through grants awarded on a competitive basis. This will help meet the goals and objectives set by the Justice40 initiative created by the Biden-Harris Administration. Under the IRA, GGRF investment funds need to prioritize households and businesses that lack access to financing, meaning low-income families and those with no and low credit scores. The Accelerator will use the other 60 percent, or $12 billion, for clean energy grants and direct investments in communities of all types to spur carbon emissions reductions.

“We know that frontline communities have historically and persistently suffered chronic disinvestment, exacerbating systemic injustice and inequity”, said Raya Salter, founder and executive director of the Energy Justice Law & Policy Center, member of the New York State Climate Action Council, and on EESI’s Board of Directors. “Black, brown and low-income communities bear the brunt of dirty energy infrastructure, resulting in catastrophic health, social and economic outcomes. In order to achieve a just clean energy transition, we must change these trajectories of harm and open access to capital that results in community-level investment, ownership and self-determination. This will require deep and principled outreach to new community ecosystems, a culture of accountability and proven yet innovative approaches to financing. The capitalization of a national green bank – one with a demonstrated commitment and mandate to energy justice—offers an opportunity to drive real dollars into frontline communities on an unprecedented scale.”

Using the Accelerator to Jumpstart a Clean Energy Economy

A few more steps must be taken before the Accelerator starts releasing funds for clean energy projects. First, a board of directors needs to be formed along with an advisory committee. The Board will then find a chief executive officer who will be in charge of hiring employees for the Accelerator. The EPA will carry out these actions in the next six months. The IRA sets aside $30 million for administrative costs to operate the Accelerator and to help with start-up costs for newly created local and regional green banks.

Once capitalized, the Clean Energy and Sustainability Accelerator will invest in community development finance institutions and in existing state and local green banks—including newly established ones. The Accelerator and these financial institutions will also use private funds to leverage the money in the GGRF many times over. With financial expertise and a clean balance sheet, the Accelerator could turn $20 billion into more than $200 billion in clean energy investments in the next few years. These developments in turn provide a powerful signal to financial markets that clean energy is viable, generating more investments in these technologies. Increasing investments in clean energy for underserved and low-income communities will help everyone benefit from lower energy bills, energy savings, and decreased carbon emissions. The Accelerator will help make the United States a global leader in clean energy investments by leveraging private capital and helping communities impacted by climate change.

Author: Miguel Yañez-Barnuevo

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