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.