The US Inflation Reduction Act signed into law by US President Joe Biden includes US$27bn for a National Climate Bank that is expected to leverage billions more in clean technology investments over the next decade from banks and private equity investors.
The so-called Green Bank is part of US$370bn in spending and tax credits included in the legislation. The programme will be run out of the Environmental Protection Agency.
The National Climate Bank will focus on investments in nine key areas, including renewable energy, energy storage, clean transportation and decarbonisation of industrial processes.
“My understanding of the green bank is that it will provide a few types of funding,” said Nneka Chike-Obi, Asia-Pacific head of ESG research at Sustainable Fitch.
One is through the EPA to directly finance renewable energy projects, Chike-Obi said. The second is capital to governments and non-profit organisations to fund low carbon and renewable energy. A third is capital for green banks, which are types of public-private partnership structures that use a combination of public and private funding to finance green activities.
The Green Bank will not impact on private banks directly, but projects ultimately funded by the development bank can take on private financing, leveraging billions in private investment, said Devlyn Tedesco, counsel in the energy and climate industry group at law firm Foley Hoag.
There are several examples of successful green banks the EPA can use as models, Tedesco said. Connecticut and New York State have successful green banks that have leveraged billions in private investment over the past decade, he said.
There are currently more than 20 green banks in the US.
The legislation signed by Biden also includes tax credits for clean energy projects, including solar and wind, expected to bolster investment in these technologies, Tedesco said.
“The tax credits may help to incentivise fossil fuel energy companies to begin developing clean energy given the proven revenue streams from the tax credits,” she said.
The process for applying to receive money from the Greenhouse Gas Reduction Fund has not been established yet. The legislation requires the National Climate Bank must be established within one year of the date that the law is enacted.
“As soon as the appropriate process is concluded we hope and expect the waiting state and local green banks will be supercharged with new funding and other projects . . . will be underwritten,” Reed Hundt, CEO of the Coalition for Green Capital, said in a statement.
Leverage up
Clean energy credits would be the primary beneficiaries from the legislation, given the capital deployed by the green banks as well as additional private capital mobilised through green banks’ lending programmes and credit enhancements, said William Attwell, associate director of research at Sustainable Fitch, part of the ratings group.
The American Green Bank Consortium estimated that US$3.7 in private capital is typically mobilised for every US$1 of financing from existing state and local green banks for clean energy. “This ratio could well rise as the economics of renewables programmes becomes more favourable in the coming years,” Attwell said.