Brookings Examines State, Local Options in Financing Clean Energy Development

Inconsistent federal support for clean energy research and infrastructure projects in recent years has hampered the blossoming of an industry that has long been touted as a key part of the new American economy. As a result, states and local governments have stepped into the fray with clean energy funds, green banks and other tools to finance the development of the clean energy economy. A paper from the Brookings Institution explores another underutilized tool available to local governments, the bond market.

Bond financing is a common source of capital for large-scale, state and local infrastructure projects, but one that has often been underappreciated as a potential financing tool for projects related to clean energy, advanced manufacturing and the high-tech economy in general.  In recent years, however, a number of states and local governments have begun to experiment with the issuance of bonds to bring new capital into the clean energy sector.  The authors compile a number of examples of organizations in the economic development and technology-based economic development communities that have issued bonds to support clean energy projects.

The New York State Energy Research and Development Authority (NYSERDA), in particular, receives attention for its effort to issue revenue bonds to raise funding for loans that support energy efficiency improvements. In August of last year, NYSERDA successfully raised $24.3 million in the bond market as part of the Green Jobs-Green New York program. NYSERDA’s effort is the first time a state has used a revolving fund to support revenue bonds for residential energy-efficiency improvements.

The authors note that several challenges remain for state and local governments attempting to issue bonds to support clean energy projects, though they believe that the time is right to overcome them. First, is the lack of cooperation between development finance agencies and clean energy offices, which tend to operate in different spheres. Second, the market for clean energy bonds remains small, further hindered by the lack of credit enhancement tools often available for other kinds of bonds. Demand from larger institutional investors remains small, and little data is available on the performance of clean energy projects. The report includes a number of options for groups attempting to navigate these issues.

Despite these obstacles, the authors predict that bond financing will become a common tool in the development of the clean energy economy. Development finance agencies, a category which includes more than 50,000 state, county and municipal agencies across the country, already have played a key role in the development of the infrastructure that undergirds a number of high-tech fields. In certain cases, the connection is obvious, such as the use of bond financing to support the rollout of fiber-optic networks. In other cases, such as the funding of water systems and mass transit, the intersection of public infrastructure and cutting-edge IT and data analysis only is now beginning to yield more intelligent communities and thriving economies. As presented by the Brookings authors, clean energy represents an ideal path to introduce bond financing into the technology-based economic development toolkit.

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