Should We Finance Energy Efficiency as We Do Roads and Bridges?

Aug. 10, 2013
What’s the best way to finance energy efficiency projects? Forget the complex, new approaches. Look to how we built our roads, bridges and airports with bonds, says a new report.

Finding the best way to finance energy efficiency projects may be the industry’s single most important quest. A lot of new options are on the table, many of them complex and some politically trying.

So maybe the answer isn’t to find a new approach, but to remake an old one. That’s the message in a recent paper that proposes bringing “credit enhancement” to clean energy. The US has already used this financial tool – which reduces risk and lowers borrowing costs – for years to build the nation’s infrastructure.

“The construction of the nation’s roads, bridges, hospitals, airports—virtually every large infrastructure project in America—relies on credit enhancement, which can be done with bond insurance, letters of credit, and other mechanisms,” says the Clean Energy and Bond Finance Initiative (CE+BFI) in a 29-page paper, “Reduce Risk, Increase Clean Energy: How States and Cities Are Using Old Finance Tools to Scale Up a New Industry.”

Today, clean energy depends on financing that is largely “tax equity driven, one-off transaction.” The approach often results in high transaction costs. Moreover, it is risky. (Witness the boom and bust of the US wind energy market when the federal production tax credit waxes and wanes.) The era of government rebates, subsidies and tax incentives appears to be ending. The future lies in leveraging public funds to attract more private capital. That is what credit enhancement can do, according to the report.

“The challenge is to accelerate the learning curve for clean energy and the bond development experts, and create a new clean energy bond ‘asset class’ that institutional investors and Wall Street can readily purchase,” the report says.

Experimentation is already underway to bring credit enhancement to clean energy. As is often the case, it is the states, not the federal government, leading the way. The paper describes some of these programs, which it calls the “quiet revolution in clean energy financing.”

New York’s win

Sometimes it takes out-of-the-box thinking to make new forms of financing work. Consider what New York did. Its program links energy efficiency with reduction in water pollution, not a commonly made connection.

It began when the New York Energy and Research Development Authority (NYSERDA) decided to securitize its $26 million residential energy efficiency loans to sell them to Wall Street. The authority wanted to issue a bond. But since the underlying loans were new and offered little track record, NYSERDA found it difficult to achieve the needed investment-grade rating on the bond.

Then NYSERDA saw opportunity through New York State’s Environmental Facilities Corporation (EFC), a bond authority that finances environmental projects. The authority appeared to be an excellent issuer, the report says. But there was a problem; its focus was clean water, not energy.

As the report explains, a lot of discussion followed between the two entities. Then EFC asked the U.S. Environmental Protection Agency if energy efficiency financing could qualify for the EPA’s Clean Water State Revolving Fund (CWSRF). New York argued that fossil-fuel burning power plants create pollution that harms water supply. Energy efficiency reduces the need to build power plants, so therefore helps keep water supplies clean.

The EPA agreed. Now, the NYSERDA/EFI program could become a “nationally replicable model as all states have water bonding authorities that leverage EPA’s revolving loan funds,” the report says.

There is still a great deal of work to be done to bring credit enhancement to clean energy. CE & BFI would like to see bond financing for clean energy and efficiency increase by an additional $5 billion to $20 billion in private capital over the next five years. The goal is to help the sector access the resources of pension funds, life insurance companies, and other long-term institutional investors. The report recommends actions that cities, states and the federal government can take to help achieve the goal.

What are the chances this will work? Note not just what the report says, but who is saying it. The Clean Energy Group is one of the founders of CE & BFI. These are some of the same folks that pushed state funding mechanisms launched several years ago that helped spur renewable energy’s tremendous growth. They know their stuff and may be pointing the way to clean energy’s next financial answer.


A few days after this story was posted, NYSERDA announced that it successfully raised $24.3 million through the water/efficiency bond issue described above. The revenue bonds are financing loans for residential energy efficiency improvements.

“Today, New York broke new ground in clean energy financing,” said Lewis Milford, president of the Clean Energy Group, following NYSERDA’s Aug. 13 announcement. “It is the first time in the country that a bond issued by a state water authority has been used to finance an energy efficiency project. Now other states can follow suit and raise more energy financing through these strategies.”

It is a nationally replicable model since all states have water bonding authorities that leverage EPA Clean Water State Revolving Funds, according to Milford.

The bonds (Series 2013A) were issued as part of  NYSERDA’s Green Jobs-Green New York program for energy efficiency and clean tech. The bond proceeds will be used to replenish the $42.5 million GJGNY revolving loan fund.

Standard & Poor’s and Moody’s rated the bonds AAA/Aaa.  Citigroup, Jeffries & Company and Ramirez & Co are the underwriters for the financing.

More details are here.

Watch for an upcoming, related story by about Sealed, a new energy company bringing energy efficiency to homes through New York’s financing program.

About the Author

Elisa Wood | Editor-in-Chief

Elisa Wood is an award-winning writer and editor who specializes in the energy industry. She is chief editor and co-founder of Microgrid Knowledge and serves as co-host of the publication’s popular conference series. She also co-founded, where she continues to lead a team of energy writers who produce content for energy companies and advocacy organizations.

She has been writing about energy for more than two decades and is published widely. Her work can be found in prominent energy business journals as well as mainstream publications. She has been quoted by NPR, the Wall Street Journal and other notable media outlets.

“For an especially readable voice in the industry, the most consistent interpreter across these years has been the energy journalist Elisa Wood, whose Microgrid Knowledge (and conference) has aggregated more stories better than any other feed of its time,” wrote Malcolm McCullough, in the book, Downtime on the Microgrid, published by MIT Press in 2020.

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