Green Banks Are Ready to Grow the Clean Energy Economy and Protect Affordability. Now They Need New Sources of Capital

Clean energy projects are, at their core, cost-saving projects. A rooftop solar array enables a school to redirect money spent on electricity toward paying teachers and maintaining the building. A geothermal conversion locks in predictable heating costs for a church that has been at the mercy of natural gas prices. A building efficiency upgrade allows a small manufacturer to redirect thousands of dollars per month from utility payments to wages or equipment.

While these clean energy solutions exist for communities across the country, access to affordable capital remains a major barrier between those solutions and the people who need them. As advisors to state governments and nonprofit green banks, we view this as a critical moment. Demand remains strong for local projects that reduce fossil fuel use and save money amid rising energy prices. With the loss of many federal supports and the elevated cost of private capital, we risk losing many of the small- to medium-sized projects that most clearly demonstrate the value of clean energy to local communities. With adequate capital, the new national financing infrastructure can sustain momentum for the transition to cleaner energy and address the affordability challenges faced by communities.

The Local Opportunity

We have more opportunities to grow clean energy support locally than many people realize — we do not have to wait for the next act of Congress. State governments, local authorities and philanthropies can step up right now. Mature green banks have already supported billions in project investments, proving that patient capital deployed for long-term impact can leverage many multiples of private funding.

Green banks are place-based lenders that know their markets. They have built trusted relationships with contractors and community organizations and have developed creative financing structures to address market gaps left by conventional lending. Unfortunately, what many of them lack right now is capital at rates that make their projects viable.

Strategies for Growing Clean Energy Lending

Federal funding pullbacks are not the end of the road. Clean energy projects can and must continue across the country. State and local clean energy lenders have options to increase their capitalization, but most of these strategies have not yet been widely adopted. Accessing them requires new capacities and relationships with partners such as philanthropy and state legislatures. Private capital alone will not enable green banks to meet the strong demand from local projects.

Here are a few ideas for growing our local clean energy lending during this critical period:

Program-Related Investments

While IRS rules require philanthropies to deploy at least 5% of their endowments annually toward charitable purposes, they often do so primarily through grants. Foundations can use the other 95% to make loans or take investment positions at below-market rates, for longer terms and with greater tolerance for risk than conventional lenders (and sometimes count these investments towards their 5% requirement). Philanthropy may be willing to trade capital returns for mission returns, and PRIs can help nascent green banks build lending experience and grow program revenue.

Many philanthropies already treat their investment portfolios as mission assets. The MacArthur Foundation made a $5 million, 15-year PRI to the New York City Energy Efficiency Corporation to extend clean energy financing into affordable housing markets that conventional lenders had previously ignored. The Kresge Foundation supported the Connecticut Green Bank with a $3 million, 10-year investment to fund the installation of solar and battery storage systems in affordable housing and community buildings in low-income neighborhoods.

Loan Guarantees

A philanthropy can promise to cover losses on a loan made by a private lender, reducing the lender’s risk and enabling better credit terms to be extended to underserved borrowers. Green banks can use guarantees to unlock private capital that would otherwise remain on the sidelines. The Community Investment Guarantee Pool is an example of an attempt to organize this kind of support, achieving success across multiple states. Philanthropies can also partner directly with their local green banks to maximize local mission outcomes.

Donor-Advised Funds

DAFs are donation-funded investment accounts that can be directed at the donors’ discretion to make loans, issue recoverable grants or take investment positions. DAFs hold billions of dollars in idle capital waiting to be granted. For the philanthropists advising these funds, investing this capital in a green bank represents a massive opportunity for impact. Currently, organizations such as the Sierra Club Foundation and Impact Foundation allow donors to direct their DAFs toward climate mitigation, renewable energy infrastructure and policy advocacy. Green banks can partner with these fiscal sponsors or engage donors directly to mobilize this source of capital.

Credit Enhancements and Blended Finance Structures

Green banks can layer their own concessionary capital alongside private lending. Michigan Saves has originated over $700 million in residential loans by providing modest 5% loan loss reserves to credit unions, enabling those institutions to extend green lending to their members with confidence. The green bank absorbs the first-loss risk, the credit union originates the loan and the borrower gets a reasonable rate.

Bond Markets

Properly accessed bond markets are the most efficient source of long-term capital. Tax-exempt municipal bonds can carry interest rates in the 3% to 5% range — affordable enough for small projects and marginal borrowers. The New York State Energy Research and Development Authority has been issuing bonds secured by utility assessments and loan portfolio revenues for years. The Connecticut Green Bank has used securitization — bundling its loans together and selling them to investors — to raise fresh capital for new loans. Many green banks must build new capacity to access bond markets, but these markets are often within reach for state-level institutions.

Ratepayer Funds, Special Utility Tariffs and Legislative Allocations

In states where the political will exists, utility-supported financing mechanisms have historically been significant sources of durable, recurring green bank capital independent of both federal appropriations and foundation cycles. Green banks in Connecticut, New York and Hawaii have all received capitalization support from charges added to utility customer bills.

Amid rising utility bills, green banks and state policymakers should carefully consider the impact of new utility charges by scrutinizing program costs and benefits and by determining whether bill charges or state general funds yield the most equitable outcomes. A novel approach has been proposed in Pennsylvania with House Bill 1834, under which large utility users, such as data centers, would be required to contribute to the fund each year based on their peak demand. This account would be appropriated to the Pennsylvania Energy Development Authority, the state’s green bank, to finance clean energy projects.

Overcoming Implementation Challenges

More work lies ahead to expand the impact of these tools, especially for newer clean energy lenders.

• Aligning with philanthropy: PRIs require green banks to build relationships with foundation investment offices, which often operate under different incentive structures than grant offices. PRIs require foundations to make an internal argument that deploying endowment capital in service of their mission is worth the administrative complexity. They require, in some cases, a willingness to accept a lower financial return in exchange for a greater mission return.
• Coordinating complex structures: Guarantees and blended finance structures require coordination among philanthropic organizations, private lenders and green banks — each with different risk tolerances, reporting requirements and legal constraints. Building these structures takes time and expertise that many smaller green banks are still developing, and local philanthropies are often unfamiliar with this option for using their capital.
• Navigating DAF networks: Accessing DAF capital requires green banks to build relationships not only with institutional foundations but also with individual high-net-worth donors, wealth advisors and community foundation managers. To effectively navigate this decentralized network, green banks must package their capital needs as standardized, off-the-shelf products — such as community solar funds — that can be easily pitched to the advisors managing donors’ wealth. Crucially, DAFs offer a significant speed advantage because DAF capital is tax-advantaged and already held in accounts. Once a donor gives the green light, these funds can be deployed rapidly, providing green banks with the agility necessary to fund active, time-sensitive community projects.
• Entering bond markets: Bonds require statutory authority, bond counsel, municipal advisors and revenue streams. Consequently, green banks must think and operate more like capital market institutions — the banks, funds and firms that raise and trade capital by issuing investments such as bonds — than they may be accustomed to or built for. Green banks will need to manage this by building internal capacity or hiring bond counsel.

Moving Forward

While philanthropic grants remain valuable for building new organizational infrastructure and preparing individual projects for financing, the organizations that have successfully built the nation’s clean energy financing infrastructure now also need patient capital to lend at scale. Program and investment officers in philanthropy can deploy PRIs to support projects in their communities and leverage their existing relationships with investment advisors, private banks and other institutional investors to elevate community energy projects. Concurrently, state and local governments can prioritize their local green banks to address affordability challenges and support the local workforce by providing these entities with new tools — such as bonding authority and other revenue streams — to finance cost-effective projects that deliver labor, environmental and cost-saving benefits.

The green banking ecosystem built over the past decade is an asset we cannot afford to lose. These institutions have earned community trust, developed lending infrastructure, and built extensive track records of community projects — all despite an often turbulent national approach to clean energy. What they need now is to continue building capacity and gain greater access to capital. This is a moment for green banks, philanthropies, private lenders, utilities and state governments to work together with urgency.