How can we get banks to lend to green tech?

By Felix Salmon
September 26, 2010
William Wild has an intriguing idea which could be applied not only to new stimulus funds but even to energy-infrastructure funds left over from the first stimulus which haven't yet been spent.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

William Wild has an intriguing idea which could be applied not only to new stimulus funds but even to energy-infrastructure funds left over from the first stimulus which haven’t yet been spent. His premises are simple; here’s how I understand them.

  • It’s a good idea for the government to subsidize renewable-energy projects, but we want those projects to be viable, post-subsidy.
  • There’s lots of equity capital floating around the green-tech space, but precious little debt.
  • Increasing the amount of debt in renewable-energy projects won’t meaningfully decrease the amount of equity capital available. If anything, the opposite is true.
  • We need to get banks lending again, and it would be great if government subsidies could be leveraged with bank debt.

Wild’s proposal addresses all of these ideas, quite simply:

At least 70% of any project’s commercial capital (excluding the subsidy) should be in the form of non-recourse commercial bank debt.

It’s an intriguing idea. At some point, there’s enough government subsidy in the project that banks will be willing to lend into it. (The subsidy can be in any combination of debt, equity, or even outright grants: the only thing that matters from the banks’ point of view is that they’re senior to the government.) Since banks aren’t doing much lending into renewable-energy projects right now, this could help jumpstart a whole new set of renewable-energy groups within commercial banks, who would rapidly become expert on the economics of the sector, and help it to grow.

The big potential problem is that such a rule would delay green-tech projects unnecessarily, and even prevent certain interesting projects from happening at all. Banks are by their nature very conservative when it comes to things like this, and Wild’s rule would essentially give them veto power over any and all new projects seeking government subsidy. I’m not sure we want that. But I do like the idea of dragging them into the sector. It’s surely a much better use of their funds, from both a financial and a societal perspective, than subprime housing loans were.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
5 comments so far

I think you need to define “green tech” much more carefully. And “commercial banks”. For proven renewable generating technologies (onshore wind, some solar, biomass) the terms you describe are already available – mostly from non-US lenders. I’m note sure whether its necessary to cajole the US banks – which participate quite enthusiastically in the financing of the tax subsidies – into offering that kind of product. For less proven technologies asking anyone to lend to them without some kind of recourse is probably not going to happen.

There’s a lot of self-serving stuff being spouted by the renewable energy project developers about the current suite of subsidies – chief among them a cash grant from the treasury – being a necessary substitute for bank debt – which is nonsense. The grant was a necessary response to US financial institutions’ inability to monetise tax-based subsidies because of the damage that their subprime investments did to their profitability.

The best way to mobilise the flow of capital to the renewable energy industry is to stop subsidising it through the tax system, and make energy users subsidise it directly through higher rates, a feed-in tariff, or, yes, a carbon tax or cap and trade.

Posted by gringcorp | Report as abusive

Is this “nonrecourse” debt secured by something? Does it mean anything for unsecured debt to be “nonrecourse”? Does it just mean “subordinated”, possibly even to equity, or does it mean “optional” in some sense? (Is it kind of like an “income bond”?)

Posted by dWj | Report as abusive

gringcorp, while carbon taxes are indeed a better solution in economic theory, they suffer from a major credibility problem. The government cannot credibly promise that any carbon tax now enacted will remain in place throughout the payoff period of the green investment.

This is what justifies second-best approaches such as direct subsidies to renewable energy generation.

(explored e.g. here: http://www.knowingandmaking.com/2009/05/ pigovian-taxes-and-government.html)

Posted by LeighCaldwell | Report as abusive

How about having the US Navy stop patrolling oil shipping lanes. The price of oil will skyrocket, and everyone will want to invest in green energy. And we can also pull troops out of the middle east, saving even more money. The resulting cut in spending will allow us to give everybody tax cuts, and isn’t that the most important thing to do? Nobody in America should be paying taxes, so this looks like a win-win.

Posted by OnTheTimes | Report as abusive

Many, if not most, large-scale renewable energy project financing is now done with 30% government grant money and 70% nonrecourse commercial debt secured by the assets and cash flow of the project. What he is asking for is already occurring, but is set to expire this year.

Posted by Mustard | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/