PEDC and Leaders in Energy hosted their fifth annual green financing forum on Thursday, January 23. This year’s event, “Green Project Financing for Growth” was a sell-out, and looking at the program it’s no surprise. Program planners for the two organizations brought together a veritable brain trust of green bank and green financing industry leaders who discussed a wide variety of issues and provided insights into best practices.
Arlington Economic Development (AED) generously provided the program’s venue. AED, which is a part of the Arlington County Government, is dedicated to the preservation and enhancement of an economically competitive and sustainable community, and the creation of exciting, diverse, and amenity-rich places. AED provides visionary leadership and superior services to Arlington’s business community, its tourism industry, and its real estate development. Marian Marquez, Director Business Investment, welcomed the crowd noting that clean energy companies are among the targets the County is heavily recruiting. As an example, she pointed to Amazon’s recent selection of Arlington as the site for its HQ2, noting that their RFP asked about the types of clean energy companies, policies, and activities the county already had.
The first panel, “Update on Regional Green Banks Efforts” was introduced and moderated by Janine Finnell, Executive Director of Leaders in Energy. It featured Tom Deyo, CEO, Montgomery County Green Bank; Alex Kragie, Director, American Green Bank Consortium; and, Cheryl Chan, Green Bank Program Analyst, DC Green Bank.
She opened the discussion by noting that Montgomery County Maryland was the first county in the US to declare a climate emergency, setting forth an ambitious set of greenhouse gas emissions reduction goals. Likewise, Janine gave a nod to DC’s Mayor Muriel Bowser’s pledge to make the District climate resilient and carbon neutral by 2050.
Alex Kragie spoke first and provided context for comments. He noted that climate change is the “really big problem”, one that is no longer up for debate and around which the politics DC have changed dramatically. Two factors, the billions of dollars of damage to military installations and the unprecedented flooding in the Midwest, he feels have put the issue forefront on politicians’ minds. In spite of this political awakening, Kragie noted there is a lot of work that needs to be done vis-à-vis the amount of investments being made to combat climate change. As a point of reference, he cited Bloomberg New Energy Finance noting that in 2018 approximately $65 billion was spent; 10% more than had been spent in 2017. Yet, the 2018 number wasn’t much more than the $62 billion spent seven years prior in 2011. Further darkening the waters Alex pointed to Wood Mackenzie research that estimates it will cost $4.5 trillion over 10 to 20 years to transition the US power grid alone from carbon. In short, the levels of necessary investments required to make a difference aren’t even close to being reached.
Kragie noted that much of the attention given to policy debates tends to focus on the “sticks”, for example regulatory responses, clean energy targets, and carbon pricing. All of these he acknowledged need to be done, but more attention also needs to be given to the “carrots”, i.e. green banks. He explained that green banks aren’t depository institutions, instead, they serve to facilitate connections and relationships between clean energy projects and the capital required to bring them to life. They serve to maximize the deployment of clean energy projects within their jurisdictions.
In practice, green banks in the consortium have caused more than $4 billion in total investments since 2011; not an insignificant number, but still far below what’s needed to make the necessary difference. At the Federal level, Kragie noted that there is a piece of legislation, The National Climate Bank Act, that is gaining traction. The National Bank would be capitalized with $35 billion, and managed by an independent, non-profit entity. It would have three main activities. First, it would provide support to existing state green banks to help them scale their own activities. Second, it would directly fund Federal activities, particularly important for larger-scale projects. Third, it would be charged with establishing state and local green banks.
Tom Deyo followed Kragie, and began his comments with recounting the beginnings of the Montgomery County Green Bank (MCGB) with $14 million in 2016 provided by Montgomery County. From these humble beginnings, Deyo laid out the progress his group has made in moving local markets with a total of $25 million received from the County to date. With these funds, the MCGB first targeted the industrial commercial sector, looking at Michigan Saves as a model. With three lender partners initially lined up, Deyo noted it still took 18 months for two projects to be started and anticipated working with its lender partners on loans in the $50,000 range. Each project however exceeded expectations; one loan was for $200,000, a second was for $800,000. As well, the bank facilitated an additional $400,000 bridge loan, evincing its ability to be flexible in its lending practices.
Key to MCGB’s success, Deyo points out, have been two abiding aspects. First, is recognizing that each project is unique and offering one-size-fits all products will not work. Second, is conducting aggressive outreach in different markets. More recently, the bank has been developing a residential product that it will launch in early February 2020, partnering with two credit unions to provide loans. Affordable housing is another area into which the bank has expanded, which provided unique challenges with respect to capital stacks. MCGB conducted a technical assistance program, proposing a financing package that is being reviewed for approval. Community solar projects are also a new area of focus for the bank, partnering with Groundswell. Finally, the bank has moved to develop power purchase agreements (PPAs) for projects of less than 50 kw, working to launch this product in the spring of 2020.
The final panelist was Cheryl Chan, representing the DC Green Bank. She began laying out DCGB’s history by noting that it started with District of Columbia Green Finance Authority established by Mayor Muriel Bowser in July 2018. The bank is a quasi-governmental financial institution and was the first US city to establish a green bank. Its primary mission is to accelerate the deployment of clean energy, energy efficiency, and resilient design and is capitalized through 2025 with $105 million from the Renewable Energy Development Fund (REDF) and the Sustainable Energy Trust Fund (SETF). Alluding to earlier comments, Chan noted that this amount is nowhere near the estimated $1.8 billion to $2.3 billion needed to meet DC’s climate change amelioration goals.
Chan continued by speaking about the DC Clean Energy Omnibus Bill passed in 2018, that laid out its climate goals: achieve carbon neutrality by 2050, achieve a 50% reduction in carbon emissions by 2032, achieve a 50% reduction in energy consumption by 2032, and derive 50% of its energy from renewable sources by 2032. Another aspect of the Bill included the Building Energy Performance Standard (BEPS), that mandates that as of 2021 owners of buildings larger than 50,000 ft2 that operate below an energy standard had to bring up their performance within five years. The DCGB would then fill the role of helping building owners finance the necessary upgrades and improvements to meet the standards.
The DCGB is currently in its administrative development phase and as yet has no products or programs in the marketplace. It’s passed bylaws and created a Board of Directors, and is currently seeking both an Executive Director and CEO. Its ambitious plans however include four main products:
- A whole home residential renovation program, a quick to close, low interest rate loan for single-family homeowners to fund energy efficiency upgrades;
- A low interest commercial loan program aimed at multi-family projects;
- Gap financing for solar installation projects, that usually require significant upfront outlays of cash; and,
- DC Commercial Property Assessed Clean Energy (C-PACE), a novel energy upgrade financing program that is tied to a property’s tax assessment.
Chan concluded that the ripple effects of the DCGB’s efforts will positively affect other areas such as creating jobs, helping the cities achieve its broader sustainability goals, reducing utility costs, and overall transforming the market for a broader acceptance of energy efficiency efforts.
The second panel of the program, “Case Studies: Project Financing for Growing Small & Medium-sized Companies”, was moderated by Dave McCarthy, Executive Director, PEDC. This portion of the program featured Timothy Effio, Market Director, Fluence & Commissioner, Environment and Energy Conservation Commission, Arlington County; Maria Goravanchi, Director, US International Development Finance Corporation (formerly Overseas Private Investment Corporation); and, Jack K. Sterne, Esq., Principal, Lumenant LLC.
Timothy Effio led off with an overview of the creation of Fluence, an energy storage joint venture of AES and Siemens. Financing, Effio stated, was what allowed the newly created company to put energy storage projects on the ground. This in turn lent credibility to a very complex technology that fits into many different parts of the grid, such as generation and behind-the-meter activity, in addition to being a valuable stand-alone technology. Given this complexity, banks sometimes have a hard time understanding how its revenues operate or even what they are. Fluence’s earliest projects, such as those in Chile, hinged on securing solid financing; in this case being rolled into a larger AES project dealing with thermal plants. This first project allowed Fluence to put approximately 15MW on to the grid. Fluence built upon this success with an entree to the frequency regulation market at PJM, which began to provide a regular revenue stream.
A major catalyst continued to be AES which provided balance sheet financing for Fluence to build out another 50MW worldwide, including in Asia, Europe, India, and Latin America. These projects accessed revenue streams, in this case savings, that were at the time novel. A key moment came when California utilities began to explore storage as a way to move solar energy from one time of day to another, a project that Fluence successfully took on. Effio noted that since Fluence’s creation, financing for these kinds of companies and their projects has become more commonplace.
Jack Sterne followed Timothy with a presentation about his energy efficiency company Lumenant. Started in 2016, by 2017 it had $200,000 in revenue, by 2018 had reached $3 million. They finished strong in 2019 with $7 million in revue and project between $10 to 12 million for 2020. Lumenant’s financing model Sterne explained is “energy efficiency as a service.” That is, it looks like a lease but is in fact a service plan whereby Lumenant assumes all the risk, installing the equipment, such as lights at a facility, and also taking on the responsibility for servicing it. Early on Lumenant worked with Sparkfund, a DC-based financing company, for its backing, and with its support hit the $3 million revenue mark. Soon after, through luck and perseverance, Lumenant struck a deal with Affinity Living Group, a senior-living company based in North Carolina to upgrade one of their facilities. Its success convinced Affinity to have Lumenant provide the same service to all of its 140 assisted living facilities. Sterne’s company has now grown to 18, with 14 or so doing the actual projects.
Lumenant’s continued success necessitated that it look beyond Sparkfund for additional sources of financing; the company had begun to bump up against the concentration limit. As a result of Sterne and Lumenant’s involvement with PEDC, Sterne was introduced to Jigar Shah founder of Generate Capital, who worked with Sterne to create a term sheet and eventually signed a warehouse financing agreement that brought finance in-house. This was important to Lumenant as it allowed the company to expand its financing options as well as provide a recurring stream of revenue. Its clients’ payments now come directly to them, which in turn increases Lumenant’s valuation by approximately five times. Sterne credits Sparkfund’s creativity in working out a structure whereby it paid Lumenant’s suppliers directly, essentially extending it terms. Most recently Lumenant met with Brookdale, the largest operator of senior living facilities, and is working to install circadian lighting systems in all of their facilities. The bottom line for Lumenant is that the variety of financing sources allowed the company to grow, establish credibility in the market, and build upon that credibility to get more business.
Maria Goravanchi of the US DFC rounded out the panel with some thoughts and examples of international green project financing. She began by noting that by a recent Act of Congress, the 2018 BUILD Act, the Overseas Private Investment Corporation was reorganized and renamed to US International Development Finance Corporation. Additionally, the USAID’s credit authority was incorporated into the DFC. The DFC she explained has three a three-pronged mission: first, to support economic development; second, continue OPIC’s legacy of returning a profit to US taxpayers through its various financing tools; and, three, to support US foreign policy through catalyzation of US private investment through partnerships in emerging markets.
Among the tools available to DFC are a long-term financing product, a legacy from OPIC, that now allows DFC to offer up to $500 million in debt financing per project. DFC has approximately $23 billion under management, that is used for a wide range of projects including energy, infrastructure, financial services, and healthcare. As well, it continues offers political risk insurance that can help offset and mitigate risks in emerging markets such as political violence, government interference, or inconvertability of currencies. Two new authorities granted the DFC are, first equity authority. This allows it to deploy equity to strategic projects from a Congressionally approved pool of capital. During the rollout period, Goravanchi noted, the DFC will provide about $1 to $5 million in financing per project in order to establish a solid track record. The second new authority is a technical assistance and grant program.
Goravanchi noted that DFC seeks to partner with private US investors in emerging markets, as well as looks for bankable transactions that have a track record, and finally looks for transactions may be situated in an emerging market that also have positive development, social, and, environmental impacts.
She provided two examples of projects, that showed not only the range of financing amounts DFC provides, but also displayed the additional positive effects on the communities where the projects were done. At the smaller end of the financing spectrum, DFC closed a $5 million project to support Greenlight Planet, a majority US-owned company that distributes pay-as-you-go solar home kits that are being predominantly deployed in Africa and Southeast Asia. The project is helping DFC meet its renewable energy targets but is also helping offset carbon emissions by reducing the use of kerosene for lighting and cooking. These kits also can provide an alternate source of income for the users.
On a larger scale, DFC financed an aggregate 100MW solar PV project in El Salvador through its US-based client AES. It lent up to $50 million on the debt side with a tenor of approximately 18 years to support longer term financing and mitigate the risk of providing financing in that region.
In closing, the panelists offered a variety of parting thoughts about financing. Effio advised companies to be as scrappy as they can in obtaining that first bit of project financing, noting that a company’s first project can open the door to other sources of financing. Sterne observed that there is a lot of money available for good projects, but the key is to use your available network to make new connections. Finally, Goravanchi advised companies not to feel discouraged if they feel they’re too small. Echoing Sterne, she stressed that she and her team at DFC have an extensive network among which may be a financing partner looking for their particular type of project or idea. This is especially true for US-based companies that are looking to do overseas projects.