Establishing the New York Green Bank (NYGB) and Reforming the Energy Vision (REV)

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1 Establishing the New York Green Bank (NYGB) and Reforming the Energy Vision (REV) Greg Hale, Senior Advisor to the Chairman of Energy & Finance for NYS 1 National Governors Association Energy Advisor Conference July 25, 2014

2 Executive Summary Strong political leadership and vision significantly accelerated the process of creating New York s Green Bank and getting it up and running so quickly. Wide-ranging stakeholder support combined with a bold administration and the right timing set the foundation to achieve broad-based political support and leadership. A regulatory route was the path-of-least-resistance given New York s circumstances and existing resources. Active engagement with the private sector to understand real financing market issues and working closely with state regulators enabled New York s broad mandate and the administrative flexibility that will be critical for its success. 2

3 Linchpin: Governor s 2013 elevation of NYGB in strategic priorities In January 2013, Governor Andrew M. Cuomo announced NY Green Bank, a state-sponsored specialized financial entity designed to help fill gaps in clean energy financing markets while supporting a strategic statewide energy plan New York State needs an expanded and diversified supply of clean energy to move ahead in the 21 st century a $1 billion NY Green Bank offers a cost-effective market mechanism to capitalize on this opportunity, unleashing green technologies and the many benefits that will come with them. -Governor Andrew M. Cuomo Created Cabinet-level Chairman of Energy & Finance position to marshal assets and integrate NYGB as part of larger comprehensive statewide energy strategy The Green Bank is just one component of the State s new chapter on energy policy that focuses on enabling self-sustaining private markets and reducing dependence on subsidies. -Richard Kauffman, Chairman of Energy & Finance 3

4 A few key ingredients helped us get there 1) Broad stakeholder support garnered as a result of a focused, coordinated advocacy effort with clear goals 2) Experienced, connected, and committed advocate(s) within the political administration 3) Ability to take advantage of the State s circumstances i.e. right place and the right time 4

5 Process depended on private market study & ongoing engagement NYGB Capitalization Source: Booz NY Green Bank Final Report Market-wide barriers confirmed Market survey conducted to identify financing barriers and potential solutions in New York Included in-depth interviews with over 90 private market participants Conclusions used to support petition for initial capitalization and establishment of NY Green Bank but also good idea for any statewide financing program planning! Private sector & stakeholder support More than 80 public comments in support of NY Green Bank in process Ongoing engagement to understand market opportunities and inform stakeholders 5

6 Substantial (and growing), attractive investments remain unrealized NY-Based Clean Energy Markets Selected Technologies Est. Market Size ($B) Energy Efficiency $55 Solar PV $13 Combined Heat & Power (CHP) $8 Biomass $4 Onshore Wind $4 Anaerobic Digesters (ADG) <$1 Sizeable Investment Opportunities Clean energy project investment can provide attractive risk/return profiles $85B directional estimate of NYbased projects is arguably conservative; excludes potential for: Further technology improvement Utility scale generation, fuel cells, charging stations, solar hot water systems, and other emerging clean technologies Source: Booz NY Green Bank Final Report $85B 6 6

7 Capitalized with New York State clean energy public benefit funds Reaching $1 billion goal for the Bank at lowest cost to ratepayers requires repurposing a portion of existing funding streams and collaborating with regulators to achieve goals 3% 5% 30% NYGB Capitalization 4% 1% 11% NYSERDA Funding Sources 34% System Benefits Charge (SBC)* Regional Greenhouse Gas Initiative (RGGI) Renewable Portfolio Standard (RPS) Federal grants State appropriations Other *Includes funding for Energy Efficiency Portfolio Standard (EEPS); Repurposing part of this stream to fund the Green Bank also impacts utility energy efficiency program funding Funding Process & Sources Initial $218 million approved as of December 19, 2013 Repurposed surcharges on gas and electric utility bills to support the State s clean energy and resiliency goals RGGI auction proceeds derived from sale of carbon emission allowances to support energy efficiency, renewable energy, and carbon abatement in NYS 7

8 Products Clients Roles A new division of [and direction for] NYSERDA NYSERDA s mission is to advance innovative energy solutions to improve New York s economy & environment Core NYSERDA Programs NY Green Bank Energy Efficiency & Renewable Energy Deployment Energy Technology Innovation & Business Development Energy Education & Workforce Development Energy & the Environment Energy Data, Planning & Policy Promote private financing and public capital markets development Financial institutions and other market intermediaries Credit enhancement Senior or subordinated debt Warehouse lending Provide financial resources, expertise, and objective information allowing New Yorkers to make confident, informed energy decisions Broad range of residential, commercial and industrial energy end-users across New York State Grants and subsidy-based incentives Training & education Technical expertise Low interest loans to LMI sector 8 8

9 NY Green Bank will strategically leverage capital to overcome barriers Value proposition: Support the financings of underserved transaction types in order to bridge to efficiently functioning private sector financing markets Key tools: Multiple forms of credit enhancement and the promotion of best practices / standardization where applicable Key partners & resources: work in conjunction with (not as competitor to) private entities to leverage both capital pools and institutional capabilities Cost/revenue structure: achieve return of and targeted return on capital invested 9 9

10 Known market barriers create widespread financing constraints Lack of sponsorship or product / coverage clarity Long tenors Common Clean Energy Transaction Issues Small transaction sizes Unfamiliar structures New counterparty credits Market Issues Projects rely on non-capital market sources of tax equity, bank debt, and private equity Highly fragmented market inhibits scale and related efficiencies Policy Issues New regulatory regimes make banks less viable on balance sheet funders Potential expiration of certain tax benefits has increased demand for innovative financing options Overwhelmed system and de-prioritization of energy investments 10 10

11 Five options for Green Bank financing Invest Directly Credit Enhancements Recycle Capital Creating the Data Warehouse and Securitize Provide debt or equity financing directly to clean energy projects from the bank balance sheet Use GB capital to de-risk loans. Through LLRs and sub debt, the GB takes on a disproportionate amount of risk to attract hesitant lenders Sell down pools of loans in secondary market to recapitalize the GB balance sheet and ultimately drive more clean energy lending Make private lenders more comfortable with the idea of clean energy lending. Creating case studies and data showing that these are safe and reliable loans Bundling loans for securitization creates an opportunity for clean energy investments in the biggest and cheapest market the public markets Project Risk Credit Risk Asset Risk Origination Risk Liquidity Risk

12 Ongoing and open solicitation for financing partnerships NY Green Bank will incubate and scale transactions meeting core criteria: Have expected financial returns such that the revenues of the NY Green Bank on a portfolio basis will be in excess of expected portfolio losses; Be expected to contribute to financial market transformation in terms of scale, improved private sector participation, level of awareness and confidence in clean energy investments, and/or other aspects of market transformation; and Have the potential for energy savings and/or clean energy generation that will contribute to greenhouse gas reductions in support of New York s clean energy policies. Support a transition from illiquid to better functioning financial markets 12

13 BURDEN ON RATEPAYERS rate of capacity utilization: under 60% 13

14 BURDEN ON RATEPAYERS 90 Capacity Utilization Rates Across Sectors % 79% 71% NYS Electrical System Auto Plants* All Manufacturing* *2013 Capacity Utilization Data from U.S. Federal Reserve 14

15 REFORMING OUR APPROACH Why What How 15

16 REFORMING OUR APPROACH Why What How From Status Quo: One-time subsides... Being the market... Outdated regulatory framework To Animating Markets: Give customers more value Create price signals and regulatory incentives to deploy more DER Focus on support programs to stimulate markets, not fund projects

17 BUILDING THE BRIDGE Why What How Building a bridge to a cleaner, more efficient, and affordable energy system... Reforming the Energy Vision Focus on system efficiency, price signals, and competitive markets around customers ADDRESSES: rising T&D costs and surcharges NYSERDA Transformation Align energy policies and the use of ratepayer funds to animate private markets and scale deployment ADDRESSES: surcharges and industry reliance on subsidies 17

18 REFORMING THE ENERGY VISION Why What How REV includes the goals and vision of this administration... A public regulatory proceeding to Improve system efficiency Create price signals that will help markets work better Develop competitive markets around customers to provide more choice and value In one of the most promising moves in the energy sector in years, New York State is proposing a way to get a head start on, and perhaps help lead, a revolution in the world of electricity generation. New York Times, Smarter Electricity in New York May 13, 2014 New York Prodding Utilities to Shift From Monopoly Model The move would spur generation from thousands of smaller systems owned by individuals and other companies -- notably rooftop solar panels. Bloomberg, May 12,

19 REFORMING THE ENERGY VISION Other major changes to NY s Energy Picture include... Leadership: - Governor s Energy & Finance Team - NYSERDA - Public Service Commission - NYPA - LIPA / PSEG LI Restructuring NYSERDA: - Clean Energy Fund - Corporate Strategy Assessment Evolution of NYPA: New Business Model for Municipal Customer Services Major Initiatives: - New York Sun -- $1 billion 10 year commitment to solar - Renewable Heat NY - long term commitment to biothermal market - $27 million identified for first 4 years 19

20 CLEAN ENERGY FUND A single comprehensive fund consolidating the State s clean energy revenue sources (EEPS, RPS, SBC, RGGI...) Provide continuity of funding for a full suite of clean energy programs and strategies that facilitate greater penetration of clean energy technologies Provide flexibility to allocate / reallocate the funds among portfolio of clean energy programs in response to evolving market and regulatory circumstances Spur demand and enable scale - working with and through markets - as opposed to being the market Establish a transparent upper limit on contributions from ratepayers; and Continue to provide access to clean energy for low-income customers that may not otherwise benefit from the new markets. 20

21 REFORMING NYSERDA Why What How NYSERDA s transformation includes the goals and vision of this administration... Principles Fill in market gaps, as opposed to being the market Leverage private sector capital Focus on reducing soft costs, no subsidizing hard costs Examples NY Green Bank Clean Energy Fund Community Aggregation 21