Some industry leaders are advocating for billions of dollars in new federal funding for green banks to go toward a national nonprofit institution that could jump-start the clean energy market and help state and local banks.

A green bank is a public, quasi-public or nonprofit institution that uses public funds to attract private investment in clean energy funds. More than 20 such banks now exist at the state and local level in the U.S. The Inflation Reduction Act, signed by President Joe Biden on Aug. 16, provides a total of $27 billion for green banks through the Greenhouse Gas Reduction Fund.

Debate remains about whether that funding should be directed toward individual green banks or should be used to create a national bank that could leverage capital and create financial products to generate more money for green banks nationwide. The Coalition for Green Capital and the American Green Bank Consortium, as well as some lawmakers, are pushing for the latter option, saying that direct grants would not be enough to help the industry provide funding across the board.

Of the total $27 billion, $7 billion will go to states, municipalities, tribal governments and eligible recipients to enable low-income and disadvantaged communities to deploy or benefit from zero-emission technologies or other types of emission reduction activities. The other $20 billion is earmarked for eligible nonprofits to provide funding assistance to green projects through direct and indirect investments — money that will be administered by the Environmental Protection Agency.

Coalition for Green Capital pro bono counsel Michael Gergen, a partner at the law firm Latham & Watkins, told S&P Global Market Intelligence in written comments that the $20 billion is "a small amount of funding relative to the size of the need," since Congress would need to invest $100 billion per year for the next 20 years to meet the needs of state and local banks in providing loans and other financial assistance to green projects. Almost all of that investment would have to come from private capital, and investors are seeking "de-risked" ways to spend their money, Gergen added.

Instead, the $20 billion should be used to create financing efficiencies, including standardizing, aggregating and securitizing clean energy loans originated by state, local and community financing agencies, Gergen said. That goal is "best achieved through initial capitalization of a central, national coordinating entity."

Some green banks agree that a centralized entity would be more efficient when it comes to funding.

"We're looking to build a big tent so we can all go in together," Bryan Garcia, president and CEO of Connecticut Green Bank, a member of the American Green Bank Consortium, told Market Intelligence. "Having somebody else to put in the capital so we can get more of it is an achievement."

Growth in green banking

Garcia's institution is the nation's first green bank, established by the Connecticut General Assembly in July 2011. Others are located in New York, Maryland, California and the District of Columbia.

The new law comes as the green bank industry is expanding. According to a 2021 report from the American Green Bank Consortium and the Coalition for Green Capital, green banks have caused $7.0 billion in clean energy investment since 2011, and every green bank dollar invested resulted in $3.70 of overall investment in the American clean energy economy.

The national green bank measure is part of a law that offers billions in funding to a wide range of clean energy and other environmental protection projects. It follows years of efforts by House and Senate Democrats to create such an institution at the national level, including Sens. Chris Van Hollen, D-Md., and Ed Markey, D-Mass., as well as Rep. Debbie Dingell, D-Mich.

In remarks during the House consideration of the bill, Dingell said she hopes the EPA will make awards to capitalize a single, national nonprofit financial institution, similar to what she proposed in her own legislation. The national institution would then use the funding to leverage private investment in amounts several times greater than the initial public offering.

Dingell said that money could then be used to invest in projects at the national, regional, state and local levels. It also could go toward indirect investments to provide financial and technical assistance to "an open, inclusive and ever-expanding network of state and local nonprofit financial institutions," including new and existing green banks and community development finance institutions.

National investments pictured

One investment that would benefit from national help is the funding that green banks often offer for heat pumps, Gergen told Market Intelligence in a separate interview.

"We have to get lending for heat pumps, and then we have to provide a place where they can sell that loan," Gergen said. "Really, what we're trying to do is animate markets, what we're trying to do is create markets." Other areas where state and local green banks offer funding include cleaner heating and venting, rooftop solar energy, and electric vehicles.

Time is of the essence, though. The EPA has 180 days to create rules for grant applications and start handing out funds.

"It's urgent, we need to get the money out there," Garcia said.

Reed Hundt, chairman and CEO of the Coalition for Green Capital, said green banks are ready for the challenge and hope to see investments in the near future as a national institution takes shape.

"We have the products, we have the people, we have the plans, we just haven't had the cash," Hundt said in an interview. "The loans are standardized and everything is ready to go."

Hundt said the money granted by Congress might not go far if the EPA distributes it as grants to individual institutions. Capitalization at a national level would be the best approach, and "we hope to get investments right away," he said.

The process of securing funding from a national pool is going to be "quite an intense experience" for local lenders, Connecticut Green Bank Chairwoman Lonnie Reed said in an interview. "It's going to be a scramble. We have some very seasoned players in the federal money grab game."

The DC Green Bank, part of the District of Columbia's government, said any money is welcome.

"This really is a game-changer for us in terms of scale," DC Green Bank CEO Eli Hopson said in an interview. "On a citywide scale, we are going to transform residents' lives. With this volume, we can standardize products and work with private capital markets. It really is a transformation."