On April 14, the Clean Energy Finance Forum spoke with Richard Kauffman, chairman of energy and finance in New York and chairman of the New York State Energy Research and Development Authority (NYSERDA). This conversation offers a close-up look at the process of creating the NY Green Bank (NYGB) and the broader initiative to transform energy policy and markets to achieve economic and environmental benefits.
CEFF: What are the critical factors involved in launching a green bank? To what extent do they include political or legislative issues, legal issues, and private-sector relationships with financiers and developers?
Richard Kauffman: First, you need someone in the state, ideally the governor, who says he or she wants a green bank. The setup of the bank may vary, but it needs to have a champion. In New York, Governor Cuomo was that champion.
The funding for the NYGB comes largely from reprogramming ratepayer funds regulated by the New York State Public Service Commission (PSC). The setup for the NYGB required a regulatory process that began with engaging stakeholders and filing a petition to the PSC. Those stakeholders and many others submitted comments on our petition to the PSC. Along the way, we also held conferences and created forums for soliciting comments and testimony.
The actual creation of the NYGB occurred when the PSC issued its order establishing the bank and laid out the terms for its existence within the New York State Energy Research and Development Authority as its parent organization. Those terms included significant flexibility in how the NYGB can use its funds. This flexibility is key for allowing the NYGB to continue to fill financing gaps on an ever-evolving frontier.
We received numerous letters from financial institutions in support of the NYGB. The dominant initial source of financing for the NYGB will come from ratepayers or taxpayers. Some members of the business community feel burdened by the variety of charges they incur. However, they appreciated the strategy of the NYGB because it will better leverage those public funds.
CEFF: To that end, how are you engaging business much earlier in the policy and program design process?
Richard Kauffman: I started in my position as New York’s chairman of Energy and Finance in in February 2013 and began talking about the NYGB right away. Between then and the filing of our petition to the PSC in the fall of that year, I had many dozens of meetings with stakeholders across the public and private sector about the strategy for the NYGB.
The NYGB is a different kind of entity than the private sector is used to. People asked: would the Bank be like the U.S. Department of Energy Loan Program? Or would it be in the subsidy business? It’s neither.
One of the most striking meetings was with a group of bankers — describing the NYGB and bringing them up to date on the latest progress. Although I had previously met with individual members of the group and the whole group, I was still getting questions about what types of programs the NYGB would support. It took many conversations to convince them the NYGB wouldn’t unilaterally dictate the terms of its programs. Instead, private sector entities would have real input on the types of programs and products they need and the NYGB would deliver.
CEFF: Now that the NYGB is up and running, how will you define success for the bank?
Richard Kauffman: One important measure of success will be seeing the private sector step forward and take advantage of our offerings. That will be proof that the bank is filling financing gaps in the market.
We do not yet know how many companies will come forward to be in partnership with us. I know that such partnerships can feel like a dangerous space for some companies. The NYGB is trying to mitigate those concerns by hiring staff with private-sector and banking backgrounds who understand the needs of potential customers extremely well.
In its processes, the NYGB is pushing aside preconceptions about what government proposals and funding applications should be. For example, we wrote our first request for proposals (RFP) in plain English and in a style akin to the private sector. Proposals can and should be commercial proposals prepared in a commercial way. There is no need for a 250-page binder. Regarding timing, the proposal does not have a deadline and the NYGB expects to respond to proposals within 30 days.
CEFF: Previous public-sector programs have had a mentality of “if you build it, they will come.” This has had mixed results. How are you ensuring that the NYGB’s products and programs are the right ones for the markets you hope to serve?
Richard Kauffman: The NYGB’s strategy of engaging with the private sector to fill financial gaps and transform markets without crowding out the private sector is an unusual strategy for a public entity. And that’s why we are talking to as many audiences as we can — like the Clean Energy Finance Forum — to reach the right universe of potential customers and make sure they understand what we are trying to do both for and with them.
As a kind of specialized finance company offering a range of products like credit enhancements, senior and mezzanine debt, and warehousing, the NYGB must be vigilant about staying on the frontier in the areas we serve.
Finding space that is close to the market on an evolving frontier is very important space for government to operate. By filling gaps near to where the market is currently operating, we’re looking to animate the market to become self-sustaining, allowing us to harness market forces for achieving economic development and climate benefits. If we do this correctly, eventually we want to step aside and let the market forces lead.
To achieve real market transformation, the NYGB needs to be in the wholesale business. Rather than originating our own loans, we should work through intermediaries. There is very little leverage in the retail model and government is sometimes not so good in retail-type businesses.