President Obama will not stray from his early promises to build green energy as the foundation from which this nation will grow a 21st Century economy. He said as much in his State of the Union address. But one component of his strategy was not mentioned -- using green banks to finance that expansion.

The concept could take two forms: The sale of bonds and then the resale of those investments into the secondary markets, much like mortgages are handled. The second would come from the federal government funding banks, which would lend the money at favorable interest rates. Trillions are needed to finance all kinds of energy infrastructure. But such green banks would work in combination with the public sector, which would also set clean energy aims.

To that end, President Obama has discussed at length his goal of getting utilities to use 80 percent of clean energy fuels by 2050. Clean energy would have a broad definition and include not just wind and solar but also natural gas, nuclear and any coal project that could capture and bury the carbon dioxide.

“As with any other fixed income investments, investors enjoy a financial return. But these investments also contribute to global solutions like tackling climate change and poverty reduction,” says Takashi Hibino chief executive of Daiwa Securities Group.

It’s an idea that has the general endorsement of the World Bank. In 2009, it launched its first “green bonds” initiative to support low carbon activities. The goal behind it is to help stimulate and coordinate new public and private-sector financing for climate action, the bank says.

Similar ideas have been floated in the United States. The selling point that advocates of green bonds make is that such financing would help put the country out front in terms of innovation. They say that China is actively involved in trying to build up its green energy sector while Europe has set mandates.

Take New York State: Governor Andrew Cuomo wants to fund a green bank there that would help attract private investment. Basically, the governor says that the bank would provide a more certain financial structure for clean energy developers -- one that is now absent at the federal level. The bank would provide low-interest loans to well-qualified borrowers with viable projects.

Due Diligence

Green banks, generally, are not about funding unworthy projects. They are about giving good ideas the push they need to make it commercially. To obtain loans for renewable energy projects, developers must be able to demonstrate to lenders that they have locked-up most of the available capacity in advance of construction so that they can pay back the loans.

“We need to develop financial support for clean energy through low cost financing from entities like green banks,” says Ken Berlin, executive vice president for the Green Capital Coalition, in a speech in January. “The cost of the transition to a clean energy economy will run into the trillions of dollars and in a time of limited financial resources to government, low cost loans have tremendous positives.”

He goes on to say that the loans would be repaid and that the repayments would then go into a revolving fund where they would be lent again.

To be sure, such a policy has plenty of critics. The idea that either the federal or state government would bankroll green energy projects smacks of another Solyndra, they say. They add that the loans that would be more attuned to political connections than to their merit, which would increase the chances that they would never get repaid. The bonds, they add, are just as risky.

The argument against using this funding mechanism concludes that the lack of due diligence would distort market conditions. Basically, developers may be looking for a quick buck while the citizenry would be left with “inefficient” power projects. Implicit in those points is that wind and solar are less reliable than natural gas or coal, and therefore any green funding would unfairly tilt the scales.

“You mean like packaging high risk mortgages into derivatives and re-selling them to pension funds?” writes one EnergyBiz Insider reader, with respect to the bonds.

Berlin’s response to those criticisms is that green energy deals are hugely expensive to finance and that by leveraging federal and state funds, they can better attract private investors. Already, he says that such projects are generating nearly $2 trillion in global revenues. But trillions in new investment is needed. He also says that fossil fuels have received $450 billion in public assistance since 1918.

Berlin and the president are emphasizing that other countries are investing in their clean tech sectors and if the United States fails to respond in-kind, it will get left behind. That view, though, is getting met head on by one that says that the risks are too great and that the safer bet is to let free markets reign.


EnergyBiz Insider has been awarded the Gold for Original Web Commentary presented by the American Society of Business Press Editors. The column is also the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has been honored as one of MIN’s Most Intriguing People in Media.

Twitter: @Ken_Silverstein

energybizinsider@energycentral.com

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