Billions in public financing would keep investment flowing into energy sector despite interest rate hikes.
by Lee Harris
August 2, 2022
Matt York/AP Photo
Electricians install solar panels on a roof in Goodyear, Arizona.
A surprise deal by Democrats on tax reform, climate investments, and health care features new ways of using public finance for clean energy.
The Inflation Reduction Act (IRA) breathed new life last week into President Joe Biden’s climate agenda, which had been pronounced dead earlier in July. A variety of tax credits would help consumers buy technologies that are less prone to price spikes. One set of rebates would encourage drivers to buy electric cars. Another would help households install heat pumps, as Japan did after the 1970s oil crisis.
Beyond tax incentives, the bill directs new streams of public finance to rally private energy investment. It gives authority to the Department of Energy to issue up to $250 billion in loans, and creates a $27 billion national green bank.
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That public financing is especially timely as central banks launch markets into an era of tighter money. Sen. Joe Manchin (D-WV), the holdout vote on past versions of the package, has emphasized that the bill is about curbing inflation.
But the unprecedented scope of public financing also makes the legislation well suited to helping the renewable-energy sector withstand investment-killing rate hikes. “In solar, wind, and other forms of clean energy, most of the investment is up-front, so projects live or die on interest rates,” said Justin Guay, a philanthropic adviser on global climate issues.
AS MUCH AS $250 BILLION in loans and guarantees for energy infrastructure would flow through the Department of Energy’s Loan Programs Office. That number not only multiplies the department’s investment muscle—the LPO is currently working with around $40 billion in lending authority—but also allows the agency to stretch each public dollar much further. The new $250 billion loan authority would be funded with just $5 billion in appropriations, or a leverage ratio of 50-to-1.
That generous limit on lending contrasts with President Obama’s rescue package in 2009, which relied on the LPO to make investments such as an early bet on the electric-car company Tesla. While the program made several successful loans, it could have taken more risks, with more potential payoffs, if it had been given the ability to leverage appropriations.
Because loan guarantee programs tend to pay off, the higher leverage ratio of this new program will help “build a durable and appreciating public asset,” Arnab Datta, an industrial-policy expert at the think tank Employ America, told the Prospect. “It’s a fantastic way to stretch limited government dollars to have maximal impact.”
Senate staffers disagreed over what the Department of Energy Easter egg would go to fund. One aide told the Prospect that the $250 billion for the LPO will be “focused on converting coal to clean energy.” Another said that the money might be put toward building electrical transmission lines, a bottleneck in the power grid. Jigar Shah, who runs the LPO and will have significant discretion over how the money is used, has recently emphasized the urgency of expanding transmission.
Since taking charge at the office, which was mostly dormant during the Trump administration, Shah has focused on making investments where the private market will not venture. Until now, that has meant a focus on helping technologies like advanced nuclear energy and green hydrogen achieve commercial viability. Shah’s LPO has not focused much on funding solar and wind, with a few exceptions, like experimental deployment of solar installations that can be collapsed during big storms.
The public financing is especially timely as central banks launch markets into an era of tighter money.
But the LPO’s investment conditions, and public funds, are both changing. Until this year, although commercializing new technology remained a challenge, markets were awash with cheap capital for launching new green ventures. But given the expanded loan cap in IRA, and as interest rate hikes raise the cost of capital for big wind and solar projects, it could make more sense for the LPO to get back into financing renewables.
THE FIRST NATIONAL GREEN BANK in the United States, capitalized in the Inflation Reduction Act at $27 billion, would look to help poor and middle-class homes switch to clean energy.
The bank would arrange deals with private and community lenders for deploying heat pumps, solar panels, and other devices in neighborhoods that large private banks often deem subprime, or too small to be worth investing in. The bank, of which 60 percent of loans must be spent on disadvantaged communities, represents the single largest investment in “environmental justice” in the IRA.
In recent years, publicly owned green banks have sprung up in cities and states across the country. They’ve aimed to invest in profitable projects and eventually recoup their investment, so that they can turn around and lend the money again. But they’ve been less focused than private lenders on turning a high profit over a short time period.
Even when it would save money over the long term on energy bills to swap a gas boiler for a cleaner heating system, building owners often struggle to come up with the financing to make the initial investment. The IRA stipulates that the bank must “prioritize investment in qualified projects that would otherwise lack access to financing.”
Ensuring that these investments have “additionality”—that they are truly supplementing private banks, not just forking money into deals that existing lenders would have struck anyway—will be key. Critics say that some existing green banks, like the one run by New York state, have been unwilling to take on riskier projects in poor areas that have historically seen low rates of investment. While that more conservative strategy has allowed the New York bank to avoid investing in projects that fail, which can be a political liability, it has also made it redundant with private banks. Pushing the frontier of investment requires taking on risk.
Reed Hundt, CEO of a coalition that has fought for the green bank, is the former chairman of the Federal Communications Commission and has been an adviser to venture capital funds since the 1990s. He told the Prospect that deploying technologies that reduce home energy costs for less affluent households would be “fundamentally deflationary.”
Getting clean energy into poorer homes, Hundt said, is a lot like internet adoption in the 1990s. At that time, it was important to make sure access to the web was not a luxury reserved for the rich, not only because mass participation was fairer, but also in order to create a domestic market big enough that American internet companies would vault ahead of competitors.
The same logic applies to clean energy: Universal deployment creates a huge customer base. “Low to medium income is 70 percent of America. We’re not interested in luxury products,” Hundt said. “We want Home Depot to be selling heat pumps, for them to be flying off the shelves.”
Lee Harris is a writing fellow at The American Prospect.
August 2, 2022
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