CEFF: When reviewing proposals and considering programs, how do you screen for transformational potential?
Richard Kauffman: The NYGB has lots of flexibility in how it can design programs and financial products to be transformational and it can design products for individual companies as well as industries.
Closing a financing gap for a particular company might require a lot of time, effort and money to create that product that the company might not want to invest in if it were immediately made available to competitors. An additional question is: how transformational can a product be for just one company?
Conversely, a product for an industry might be more transformational, but some industry participants might prefer a more closed architecture. To lower costs and achieve scale, we need an open architecture system rather than a closed architecture system. Bringing about open architecture is key.
Another issue is working with the private sector and being close to the frontier. Government is safer when far away from markets… for things that are not economic. This is an argument for such R&D or technology investments. People understand why the government would be in that role.
As we get closer and closer to market, concerns about government potentially being too close to the private sector arise. Shouldn’t government be adversarial? We want to avoid government picking winners and losers. Or crony capitalism. We want to avoid crowding out the private sector.
CEFF: How do you balance the need for early wins and quick results with transformational vision and lofty goals related to state policy?
Richard Kauffman: We want to demonstrate from a branding standpoint that the NYGB is quickly filling a market gap and therefore expect to announce a first deal in the first half of 2014. We are confident that we can. 2014 announcements will show we are doing things that are innovative and transformational. It works in areas where lack of availability of financing, rather than cost, is the limiting factor.
CEFF: How does the NYGB fit into overall New York energy policy?
Richard Kauffman: In New York, we put financing in the context of overall demand for energy efficiency and renewable energy. It is too often assumed that financing drives demand, but that isn’t true. No one wakes up saying they want to borrow more money. We need to look at other policies that will stimulate market demand for energy efficiency and renewable energy.
Incentives for distribution utilities to have better economic incentives for energy efficiency are a priority. These incentives would create more end demand for lower-cost solutions such as efficiency and distributed generation rather than traditional and more expensive infrastructure.
The second thing is looking at the grant programs that we have, to be sure that the grant programs are animating markets as opposed to just being the market. We really need to look at the NYGB itself as the same idea of using money that would have otherwise been used for giving grants. It’s a mechanism that we hope will provide more leverage on ratepayer dollars because it is working with private sector entities that are operating in the market whose activities are constrained by lack of financing, so if we provide a financing solution they will do more and we will make the markets move faster.
We get leverage for several reasons: first, we have private-sector funds that are being engaged; second, in contrast to a grant, we get paid back for the credit we provide; third, as we are successful in demonstrating that this is working and moving the markets, we can look to stepping out of the market and having markets operating on their own.
We can see a similar kind of notion in grant programs for the stimulation of energy efficiency or for renewable energy. A great example would be our solar fund, where we change the program so that the industry knows that it’s going to get long-term support, because the industry needs scale to reduce costs.
By providing long-term support to the industry — not talking about financing, just talking about various grants — what’s achieved is that the industry can come into the market and the support steps in based on the volume of installations. That’s an example of where the support program is being used to get more leverage on ratepayer dollars, trying to animate markets, and those are the underlying principles of what we’re trying to do.
CEFF: What do you think about the fact that the NYGB makes a profit?
Richard Kauffman: It’s not a profit-making entity, but I think that if we make a profit it shows that we are operating in a commercial market where there is a financing gap. And we get to redeploy those profits back into the markets we are trying to serve.
If somebody is willing to pay us for our capital, it means that what we’re offering is valuable and that we have the potential to demonstrate that we have a commercial market with a financing gap, and once the financing gap is closed, the market can carry on. That’s all that matters.
CEFF: What private-sector lessons from the financial industry and other industries are guiding the green bank model?
Richard Kauffman: This may go back to the earlier question that you asked. The end-game for financing energy efficiency and renewable energy is the stock and bond markets. Too much of the current financing in this sector is based on anachronistic forms of financing.
When we’re talking about small efficiency projects and long-dated renewable energy projects, these are not financing opportunities that fit banks. Long-dated assets are typically funded in the bond markets, and smaller projects are typically securitized and also sold in the bond markets.
So we view the NYGB as helping to facilitate the creation of bond markets by working with other entities and establishing standards, collecting data, and acting as a warehouse facility to create scale so that securitization can take place.
CEFF: On the question of scale, we’re seeing the NYGB innovation happening at the state level. Are there aspects of sharing or collaboration to help achieve that scale?
Richard Kauffman: A lot of innovation is occurring in the states. Building codes and projects are at the local level. There are a lot of reasons why it makes sense to have financing entities at the state level.
I think that it would be best not to have 50 different state banks with different procedures and different documents, so I think it is incumbent upon those of us at the state level to try to work through collaboration with others, because it’s in all our interests to create opportunities that are going to lower costs for deployment of renewable energy and energy efficiency, because it’s all about the upfront cost.
It doesn’t matter if we’re talking about technology cost or financing cost: if you find ways to lower cost, you’re going to achieve more benefits.
Alexander Metz is a writer for the Clean Energy Finance Forum, a publication of the Yale Center for Business and the Environment. He is currently in his final year of the JD-MBA program at the Yale Law School and the Yale School of Management.
This article was originally published by the Clean Energy Finance Forum, which is produced by the Yale Center for Business and the Environment. You can subscribe to our newsletter by visiting our website.
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