November 9, 2022
Growing impact: This Maryland green bank is leveraging millions in private capital to drive clean energy and climate-resilient solutions
Edison Energy recently sat down with the Montgomery County Green Bank to discuss how green banks can partner with the private sector to provide more affordable and flexible financing options for clean energy and climate-resilient projects for commercial property owners, developers, and businesses; the latest in C-PACE innovation; and solutions to climate investing barriers.
Green banks have gained significant traction over the last several years, thanks to their ability to accelerate the delivery of cleaner, cheaper power to cities, counties, and states across the nation.
The ultimate nod to green banks came from Washington in August with the passage of the Inflation Reduction Act (IRA), with $27 billion provided to the Environmental Protection Agency for the Greenhouse Gas Reduction Fund. Of that number, $20 billion is designated for a non-profit green bank which will make direct investments with private sector partners to reduce greenhouse gas (GHG) emissions. Of the $20 billion, $8 billion – or 40 percent – will be dedicated to projects benefiting low-income and disadvantaged communities, while another $7 billion will be allocated for zero-emissions tech in low-income and disadvantaged communities
The national green bank will directly invest in projects and indirectly invest through state and local green banks like the Montgomery County Green Bank (MCGB), headquartered in Rockville, MD.
Stephen Morel, Chief Investment Officer at MCGB, says the green bank’s impact has taken off in a big way over the past year.
“In just one year, our annual GHG reductions have almost tripled, monetary savings realized by County end-users have almost doubled, and projects that we financed have supported over three times the number of direct and indirect jobs,” he said. “Our rapid growth and impact are due to many factors, but a big part of it is that our product suite is addressing market gaps and the financing structures are overcoming market frictions. All of our recent transactions have been unique and interesting examples of filling market gaps and leveraging impact.”
A recent example is a condominium complex in Chevy Chase, MD, in need of significant upgrades. The financing structure utilized MCGB’s Commercial Loan for Energy Efficiency and Renewables (CLEER) program, which accelerates the availability of up-front financing to commercial and industrial (C&I) property owners for energy storage, geothermal, solar PV, combined heat & power, and EV charging projects.
That was paired as a participation loan with Sandy Spring Bank, which together provided flexible funding to affordably finance clean energy projects at the condominium complex.
The funding subsidized a major energy efficiency and renewable energy project to replace aging infrastructure, with a $3.2 million investment supporting an overall $5.8 million energy retrofit project that will result in $25,000 of annual energy savings and the mitigation of 153 metric tons of GHG emissions annually.
“The condo ended up reaching a much more significant impact than expected, with over $25,000 in annual savings that limits the need to increase HOA fees and that mitigates a significant amount of greenhouse gas emissions,” Morel said. “An interesting feature of this structure was the risk-sharing allocation that we had with Sandy Spring Bank. By splitting the loan capital with them, it allowed for a larger project to get done and a cost of capital that made sense for the project’s payback profile.”
Another example is a partnership between MCGB and Sunnova Energy to help low-to-moderate income (LMI) households in Montgomery County transition to solar.
“We put forth a credit enhancement product that helped Sunnova provide access to more County residents in that LMI space,” Morel said. “It’s exciting that Sunnova can take that product to reach new customers they formerly may not have served. Now, Sunnova will reach more County residents with PPAs because of what MCGB put out there, plus it inaugurated the launch of an entirely new pricing option for Sunnova.”
Through this innovative MCGB structure, qualifying households can either lock in a predictable solar energy rate for 25 years or select Sunnova’s new offering that allows customers to lock in a set discount relative to utility pricing. Sunnova is now taking this offering to its entire national chain of dealers.
“I like to call it the ‘Montgomery County Example,’” Morel said. “Sunnova is bringing this pricing option national and it’s really quite a success that they were able to leverage that credit enhancement that we put out there to reach LMI residents across the nation.”
C-PACE innovation
A large part of MCGB’s work involves Commercial Property Assessed Clean Energy (C-PACE), which authorizes private capital providers to provide commercial property owners with financing for qualifying projects and to collect the repayment through annual or semi-annual surcharges on the property’s tax bill.
Earlier this year, the Montgomery County Council unanimously passed the C-PACE Financing Amendments legislation (Bill 46-21), which significantly improves and expands C-PACE financing opportunities and enables property owners to make their buildings more climate resilient and energy efficient to improve operating costs and reduce GHG emissions.
Perhaps the most exciting component of the bill is a provision that allows PPAs to be eligible for C-PACE coverage. Known as a PACE-secured PPA, property owners and renewable energy developers can combine the efficiency of PPAs with the transparency and security of C-PACE – considered a powerful approach for scaling solar energy deployment within a large and active real estate market segment.
“For renewable energy developers, securing the payments under a PPA by PACE provides an important ability to scale up and balance out individual project or counterparty risks of every single small or medium-sized deal,” Morel said. “From my perspective, one of the greatest benefits is that this makes small and medium-sized projects significantly more attractive to developers, which in turn brings more competitive solar to the County.”
The law expands C-PACE project eligibility to include climate resiliency, climate adaptation, water conservation, and environmental health and safety upgrades, while also providing for an increase in loan to value ratios, thus allowing property owners to go deeper into affordable financing opportunities.
“It is important that, as people think about the energy profile of their properties – be it for regulatory or voluntary purposes – they can rely on C-PACE to align incentives for doing more and more energy efficiency,” Morel said.
In addition, eligible projects can now be retroactively financed through C-PACE, which is critical for developers who need to initiate emergency projects like replacing a building system but don’t have knowledge about C-PACE ahead of time.
“Those who come to C-PACE for financing retroactively can turn a relatively expensive emergency project into one with a cost of capital that makes sense over the long run,” Morel said. “Owners can then shore up reserves and improve cash flow, all stemming from the savings associated with selecting the higher efficiency to net-zero option. I think this will be very attractive among developers and property owners to move forward with projects relatively quickly.”
Barriers to climate investing
Significant barriers to climate investing continue to exist both locally and nationally, although many of these issues are being addressed through local and federal legislation.
“We see a lot of potential to fix these barriers through green banks,” Morel said. “Jurisdictions are trying to align climate-forward action with monetary incentives for property owners and developers to deploy projects. Everybody thinks about what comes down to their bottom line and aligning those incentives is really what will help move climate goals forward.”
Perceived risk and the need for scale are top of mind among capital providers in the climate arena, both of which can be addressed by green banks by lowering the cost of capital into a project, providing credit enhancements, and mitigating risk.
“Thinking about PPAs and C-PACE, for example, the secondary market is very interested in these instruments because they are well-understood and have low risk profiles,” Morel said. “I think that green banks are phenomenal mechanisms to address perceived and actual risks, thus getting projects of all sizes banked, and thus reaching the scale to bring in capital otherwise on the sidelines.”
Grid resiliency is also an issue as more renewable projects are interconnected to the power grid.
“We need to make sure that the grid is able to handle that kind of capacity,” Morel said. “From a national perspective, there is a huge backlog of thousands of megawatts of renewable energy across the U.S. that is stuck in permitting and interconnection limbo or subject to curtailments. Addressing these issues alongside resiliency from storage, microgrids, aggregate net metering, new technology sources, and other methods, will allow more renewables to reach the grid.”
Protracted project timelines are yet another hurdle to renewable energy deployment. Time is money, and the longer a project takes, the costlier it becomes for developers. Ultimately, those costs are passed along to financing entities, offtakers, and customers.
“For us to think about speeding up development is a direct benefit to the cost that people pay for renewable energy on the back-end,” Morel said.
“Game changing” legislation
After years of Congressional efforts, green banks won big in the IRA, which is expected to drive significant investments with private sector partners to reduce GHG emissions that will benefit consumers – particularly from low-income and disadvantaged communities.
“Overall, you can characterize this legislation as an absolute gamechanger,” Morel said.
One major shift is the ability for city, county, and state level governments to access tax credits, which will now make a host of previously unaffordable projects economically feasible. In addition, decades of “stop and start” tax credits like the ITC and PTC will finally come to an end.
“This legislation really promotes business planning at a 10-year time horizon of when those are going to be available,” Morel said. “Having that certainty is huge, especially as we think about some of longer-lead development cycles.”
The creation of a national green bank will mean much-needed funding for state and local green banks, enabling these institutions to grow their impact.
“We know that green banks around the country have a pipeline of shovel-ready projects,” Morel said. “And it’s very significant. It’s very important to have the kind and scale of investment that a national green bank will bring to jurisdictions around the country.”
