Why State Infrastructure Banks Should Assume Larger Role in Funding Clean Energy

As federal incentives evaporate, state revolving funds and state infrastructure banks will play an increasingly important role in financing infrastructure projects for clean energy and energy efficiency, says a new Brookings Institute white paper.

Established in the 1990s, these funding mechanisms have already provided billions of dollars to back more than 1,000 projects for water/wastewater, transportation and clean energy.

Epitomized by Connecticut’s Clean Energy Finance and Investment Authority, states would create dedicated clean energy banks that leverage scarce public money with private sector funds and expertise.

The low-cost financing these banks could offer would reduce clean energy projects’ dependence on expiring federal grants, tax credits, and subsidies and lower the cost of these projects enough to make them cost-competitive with conventional technologies.  

State revolving funds and state infrastructure banks combine the private functions of a bank with the oversight of a public agency. 

Funds can be capitalized in a number of ways, such as through a local tax, budget apportionments or by private investors. They most often take the form of low-interest loans but they can be structured as bond issues, credit and loan guarantees, or even grants.

"While these banks can take different forms based on each state’s unique circumstances, they essentially combine scarce public resources with private sector funds and then leverage those funds to invest in attractive clean energy and energy efficiency projects," says the Brooking Institute.

States can choose among at least three bank models:

  • Establish a quasi-public corporation where existing state clean energy and energy efficiency funds are kept, allowing private investment in the bank and enabling the new entity to make loans and leverage its capital with private capital;
  • Repurpose portions of one or more existing financing authorities from a grant to a lending model; then, through a partnership agreement combine the financing authority’s funds with private funds;
  • Attach a clean energy finance bank to an an existing or new infrastructure bank

For example, revolving funds for water infrastructure and wastewater treatment are available in every state through the 1987 federal Water Quality Act and can be created by leveraging a federal capitalization grant with a 20% minimum state match. Over the past 20 years, more than $100 billion in water projects have been funded through state revolving funds, says the Brookings Institute.

Over the past decade, similar funds for clean energy have created $12.4 billion in combined federal-state financing for 72,000 projects including commercial and residential solar, wind farms and biomass generation plants.

Capitalized state infrastructure banks exist in 33 states, although 10 are inactive, says Brookings Institute.

Emerging Best Practices

As interest in state funding mechanisms rises as a means of paying for critically important infrastructure upgrades, Brookings offers several ideas for increasing their use. These include:

  • Better alignment of federal and state priorities, to identify potential regulatory or requirements that may slow down projects or, alternatively, that could help accelerate their completion.
  • Better capitalization models, which help ensure state-raised funds aren’t allocated for other uses and that interest rates and potential return on investment are more attractive for private investors
  • Tighter public-private partnerships that make sure targeted projects carry the highest economic, environmental and social impact for the state

As the US grapples with its mushrooming federal deficit, funding that combines private and public interests will become more common. At the national level, Congress is considering legislation that would support clean energy and energy efficiency through green bonds that could raise more than $50 billion for this purpose.

Here’s the Brookings Institute white paper:

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