A precedent set by the U.S. Environmental Protection Agency (EPA) has opened up opportunities for states throughout the nation to potentially leverage the Clean Water State Revolving Fund (CWSRF) to guarantee energy efficiency financing and enable private investment.
This innovative approach was initiated in 2013 by the New York State Energy Research and Development Authority (NYSERDA), which encountered challenges while trying to securitize its energy efficiency loan portfolio. Securitization involves consolidating debt and selling it to investors.
By collaborating with the EPA and the New York State Environmental Facilities Corporation (EFC), NYSERDA was able to use CWSRF funding to support energy efficiency bonds.
Because energy efficiency programs can reduce the surface pollution affecting nearby bodies of water, the EPA approved the proposal. The proposal was submitted by James Levine, senior vice president and general counsel of the EFC.
Levine’s proposal contained a map showing that energy efficiency projects are located near waterfront areas in New York. Energy efficiency initiatives can reduce acid rain near these lakes and rivers.
“Acid rain largely originates from pollutants emitted into the air when fossil fuel is burned,” Levine said in the proposal. “Airborne pollutants cause water quality problems when they fall on impervious urban areas, adding to the pollution of storm water runoff.”
The CWSRF programs are designed to be flexible and inclusive of non-traditional approaches to pollution reduction. Levine emphasized this advantage in the proposal. For example, the CWSRF has funded smokestack scrubbers.
“If the cost of installing mercury- or nitrogen-reducing technologies at public or private sources is eligible, then the cost of mercury- or nitrogen-eliminating technologies such as energy conservation projects which reduce the burning of fossil fuel and the production of electricity should be no less eligible,” Levine said.
With the EPA’s support, the resulting bond issuance was able to achieve an AAA rating from S&P and an Aaa rating from Moody’s.
So far, no other states have announced that they are pursuing this financing approach.
“Every state, before they start to implement anything… needs to take a firm assessment of existing tools,” said Catherine Feerick, director of research and advisory services at the Council of Development Finance Agencies (CDFA). She said many states may try to adopt models that don’t match their existing program structures.
New York used the CWSRF funding as a credit enhancement. Feerick said that although any state can draw upon this funding, they should take a customized approach to creating credit enhancements. These credit enhancements can range from loan-loss reserves to municipal funding. Some states may take a state-level approach to program development while others may organize programs municipally or through port authorities.
CDFA and the Clean Energy Group have produced a white paper on the NYSERDA funding innovation titled “Anatomy of the Deal.” It calls the bond issuance “a monumental accomplishment for the clean energy and bond finance industries.”
CDFA is partnering with the Clean Energy Group on a five-year project to increase investment in energy efficiency nationally through an estimated $5 billion in financing. This initiative includes multiple types of programs, not just the ones supported by clean water funding.
“Our primary goal is to really scale whatever financing opportunities there may be for energy efficiency projects,” Feerick said.
“The entire industry is shifting over toward securitization,” Feerick said. “The state budgets are tight. Right now, there seems to be a lack of immediate capital at hand to implement new programs. You’re going to see a lot less support from the federal government.”
Feerick said private financing is playing an increasingly important role in energy efficiency programs. CWSRF programs can provide funding to make these programs more attractive to lenders.
“The fact that energy efficiency projects do improve clean water over the long term means that this pool of money is now available,” Feerick said. “It’s been decided at the federal level that the definition does include energy efficiency projects.”
This article was originally published by the Clean Energy Finance Center. You can subscribe to our newsletter, the Clean Energy Finance Source, by visiting http://www.cleanenergyfinancecenter.org/news/.