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Decarbonizing the global economy requires replacing stuff that emits carbon dioxide with stuff that doesn’t. At its heart, this challenge is financial: All these high-emitting assets ― coal plants, gas stoves, airplanes ― were at some point financed into existence by investors seeking returns. Climate policymakers’ greatest challenge is not just figuring out how to phase out existing, dangerous capital investments in fossil fuels, but also how to finance into existence new, climate-stabilizing clean assets.
This is all much easier said than done. Central banks’ high interest rates are strangling clean energy and adaptation infrastructure investments in the United States and abroad. Recent struggles to develop offshore wind and small modular nuclear reactors in the United States exemplify how deeply hesitant private developers are to commit to long-term capital expenditures. Investors view these projects as too risky, their expected profits too low to meet their minimum return thresholds. Absent policies to stabilize supply chains and other factors affecting the financing environment for clean energy, the United States ― to say nothing about the rest of the world ― won’t meet its climate goals.
The Inflation Reduction Act is, to its credit, a paradigm-shifting attempt to finance better, cleaner stuff. One of the most potentially transformative initiatives in the IRA is, in fact, financial: the Greenhouse Gas Reduction Fund offers $27 billion in startup capital to state green banks, community development financial institutions, and nonprofits to lend to decarbonization projects primarily in vulnerable communities.
By any standard, the GGRF is an incredible infusion of cash into nascent sectors that might otherwise be neglected by mainstream investors, including community-scale renewable energy and building weatherization. Most of that cash was awarded in early April, including $14 billion divided among three separate clean energy financing coalitions made up of green banks, impact investors, and CDFIs; and $6 billion divided among various technical assistance providers for project development in low-income areas. GGRF funding recipients can use their awards to finance all kinds of community improvements ― not just through grants, but also through debt and equity. In the process, they will make a market for investments in local climate mitigation and resilience, particularly in vulnerable communities.
The GGRF is about more than simply using this seed funding to make private projects profitable. The truth is, there aren’t that many private investors rushing to structure local decarbonization projects ― not even because they don’t want to enter these market segments, but because they’re really just too busy to try anything unconventional. Some markets, like those for rooftop solar assets, are fairly standardized and liquid, insofar as investors can tranche and trade rooftop solar loans like government bonds or mortgages.
But the nascent markets for many other kinds of mitigation and resilience investments like home retrofits are illiquid. Making them liquid — and getting investors interested — requires GGRF awardees to underwrite, structure, and sequence project development themselves. They must set lending guidelines, standardize financial products, and create architectures for risk management where none exist.
If GGRF recipients build up significant financial and legal capacities to finance community decarbonization, not to mention the technical and regulatory expertise needed to coordinate state and federal funding sources in the process, then they will position themselves to help alleviate significant constraints on the flow of financing toward local decarbonization projects. This is how the IRA promises state and local governments the chance to provide unprecedented liquidity to green investments.
Cities and states currently get the liquidity they need to fund most of our public infrastructure and services through the American municipal bond market. Why not use this market to finance decarbonization, too?
It’s a good idea — except that municipal bond markets are dysfunctional. Cities and states rely heavily on private banks to structure their municipal bonds and sell them to private investors, and on credit rating agencies to certify them; these dependencies have historically forced local governments to tailor their bond issuances to the interests of a few private buyers, which are skewed against spending on longer-term priorities with lower expected returns.
Borrowing big is more often punished than rewarded, especially where governments already have smaller tax bases and less borrowing capacity. In 2018, the rating agency Moody’s downgraded Jackson, Mississippi on account of its “financially stressed” water system and its residents’ low average incomes, raising the city’s future cost of borrowing on bond markets. Last year, its water system spiraled into crisis on account of severe underinvestment, leading to a foregone conclusion: At a time when Jackson, a predominantly black city, needed more low-cost, long-term investment to fix its infrastructure, its government was structurally unable to raise enough of it.
Increasingly frequent climate disasters will set in motion the same process again and again across the country. Greater perceived climate risks are increasing municipal borrowing costs and insurance premiums, thereby driving investment away from vulnerable areas, preventing communities from investing in adaptation and resilience, and increasing their future vulnerability. Proactive disaster prevention policy requires breaking this financial doom loop.
It doesn’t help that municipal bonds are a volatile asset class, seeing sharp price drops and prolonged sell-offs during periods of market uncertainty and, lately, rapid interest rate hikes. Their dependence on risk-averse private buyers is a primary culprit. Indeed, private investors’ muni bond fire sales at the start of the pandemic nearly broke this market. Had it not been for the Federal Reserve’s emergency creation of the Municipal Liquidity Facility, which committed the Fed to buying muni bonds that no other investor wanted to hold, cities and states would not have been able to fund crucial social and community services, pay employees, and undertake necessary capital investments. The mere announcement of this backstop program preserved cities’ ability to raise debt during the first phase of the pandemic, but Congress forced it to wind down at the end of 2020.
That’s a shame: Absent this kind of backstop for public bond markets to stabilize local governments’ long-term borrowing costs, policymakers literally cannot secure the liquidity they need to keep their climate promises. There really is no way to flood-proof New York, storm-proof Miami, summer-proof Amtrak, or manage wildfire out West without the long-term public debt finance that would allow states and cities to spend responsibly and consistently on resilience.
This is a problem not just for long-term adaptation and resilience investments, but also for the mitigation investments the IRA is designed to facilitate. Considering that green banks, state financing authorities, and public-sector power developers will have to issue considerable amounts of debt to accelerate the deployment of renewable energy ― and especially because no comprehensive decarbonization program can neglect public housing or schools, which finance themselves via municipal bonds ― state and federal policymakers should not let their investment priorities fall victim to the whims of our illiquid, volatile public debt markets.
Where climate mitigation is concerned, there are some provisions of the IRA that demonstrate how rewiring the financial system to power decarbonization works in practice. Tax credits that pump a functionally unlimited amount of money into private and public clean energy development allow developers to take on more debt at better terms, facilitating greater investment. (Bonus tax credits for investments in disadvantaged communities should help mitigate against geographic biases, too.) And expanded lending authority at the Department of Energy makes financing higher-risk, longer-term decarbonization investments of all kinds vastly less expensive. The United States has seen over $200 billion in new decarbonization investments in the past year, suggesting that, despite the lack of finalized regulations on tax credit financing and “chaining,” a set of provisions that could allow public and nonprofit entities to engage in tax credit financing of private projects, the Biden administration’s political down payment on decarbonization is already paying off.
Not in every sector, though. Private investors are fickle, risk-averse, and face considerable restrictions on where they can put direct money. The developers they finance, particularly those behind the most ambitious decarbonization projects, are under similar pressures. As Ørsted, the world’s leading offshore wind developer, retreats from projects in the U.S. and elsewhere, its CEO has admitted that “what our investors need” is for Ørsted to “create value.” If expected returns aren’t high enough, then its projects won’t pencil out. Time is of the essence; this outcome shouldn’t be acceptable.
New York’s recently passed Build Public Renewables Act mandates that New York’s public energy authority build renewable energy itself for just this reason — its proponents doubted that relying on private developers made good business sense. But it may not have passed without the IRA’s financial firepower behind it. The IRA allows the public sector to access many of the same decarbonization incentives it gives private firms, balancing the playing field and empowering transformative public sector policymaking.
The public sector can also compete against risk-averse private lenders to finance project development — public financing authorities can lend for longer, on cheaper terms, and with a higher risk tolerance than most private lenders could. By offering cost-share agreements, low-cost construction loans, equity injections to buy out troubled projects, or even by building up critical component stockpiles, the public sector can set the pace of the transition.
To that end, the IRA empowers state and local governments and community lenders to seed ambitious decarbonization projects of all types and sizes where private investors alone might hesitate. This brings us back to the GGRF and all it could do for local decarbonization ― and to carveouts in the Department of Energy’s lending authorities which enable state green banks to pass on extremely low-interest loans to eligible project developers. So long as public and private entities take the effort to access them, these programs create considerable liquidity for ambitious mitigation programs and resilience investments.
But the GGRF does not target larger infrastructure improvements, and the IRA’s other grant programs for adaptation and resilience, however ambitious they may be on the scale of U.S. history, are also wholly inadequate. If policymakers and legislators want to make nationwide climate adaptation feasible, they will still have to fix public debt markets.
Maximizing the potential of the IRA to replace bad assets with better ones requires giving local and state governments the chance to throw money at mitigation and adaptation problems that money can actually solve. Leave the financial system as is, however, and the private investors that mediate it will steer the benefits of decarbonization and adaptation toward the communities wealthy enough to make doing so a good investment. Meanwhile, the communities experiencing climate disasters first and worst ― spread across underinvested rural and urban pockets, here and globally ― will struggle to secure the long-term financing they urgently need both to lessen their contributions to climate change and also to prepare for its inevitable effects.
The financial status quo forces a kind of trickle-down decarbonization that is wholly inadequate to the scale of the climate challenge. Responsible climate policymaking, then, requires the elimination of this liquidity constraint everywhere, to the greatest extent possible, and the creation of coordination mechanisms to ensure that what people need is what gets built. Public liquidity is, without a doubt, a public good.
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A conversation with VDE Americas CEO Brian Grenko.
This week’s Q&A is about hail. Last week, we explained how and why hail storm damage in Texas may have helped galvanize opposition to renewable energy there. So I decided to reach out to Brian Grenko, CEO of renewables engineering advisory firm VDE Americas, to talk about how developers can make sure their projects are not only resistant to hail but also prevent that sort of pushback.
The following conversation has been lightly edited for clarity.
Hiya Brian. So why’d you get into the hail issue?
Obviously solar panels are made with glass that can allow the sunlight to come through. People have to remember that when you install a project, you’re financing it for 35 to 40 years. While the odds of you getting significant hail in California or Arizona are low, it happens a lot throughout the country. And if you think about some of these large projects, they may be in the middle of nowhere, but they are taking hundreds if not thousands of acres of land in some cases. So the chances of them encountering large hail over that lifespan is pretty significant.
We partnered with one of the country’s foremost experts on hail and developed a really interesting technology that can digest radar data and tell folks if they’re developing a project what the [likelihood] will be if there’s significant hail.
Solar panels can withstand one-inch hail – a golfball size – but once you get over two inches, that’s when hail starts breaking solar panels. So it’s important to understand, first and foremost, if you’re developing a project, you need to know the frequency of those events. Once you know that, you need to start thinking about how to design a system to mitigate that risk.
The government agencies that look over land use, how do they handle this particular issue? Are there regulations in place to deal with hail risk?
The regulatory aspects still to consider are about land use. There are authorities with jurisdiction at the federal, state, and local level. Usually, it starts with the local level and with a use permit – a conditional use permit. The developer goes in front of the township or the city or the county, whoever has jurisdiction of wherever the property is going to go. That’s where it gets political.
To answer your question about hail, I don’t know if any of the [authority having jurisdictions] really care about hail. There are folks out there that don’t like solar because it’s an eyesore. I respect that – I don’t agree with that, per se, but I understand and appreciate it. There’s folks with an agenda that just don’t want solar.
So okay, how can developers approach hail risk in a way that makes communities more comfortable?
The bad news is that solar panels use a lot of glass. They take up a lot of land. If you have hail dropping from the sky, that’s a risk.
The good news is that you can design a system to be resilient to that. Even in places like Texas, where you get large hail, preparing can mean the difference between a project that is destroyed and a project that isn’t. We did a case study about a project in the East Texas area called Fighting Jays that had catastrophic damage. We’re very familiar with the area, we work with a lot of clients, and we found three other projects within a five-mile radius that all had minimal damage. That simple decision [to be ready for when storms hit] can make the complete difference.
And more of the week’s big fights around renewable energy.
1. Long Island, New York – We saw the face of the resistance to the war on renewable energy in the Big Apple this week, as protestors rallied in support of offshore wind for a change.
2. Elsewhere on Long Island – The city of Glen Cove is on the verge of being the next New York City-area community with a battery storage ban, discussing this week whether to ban BESS for at least one year amid fire fears.
3. Garrett County, Maryland – Fight readers tell me they’d like to hear a piece of good news for once, so here’s this: A 300-megawatt solar project proposed by REV Solar in rural Maryland appears to be moving forward without a hitch.
4. Stark County, Ohio – The Ohio Public Siting Board rejected Samsung C&T’s Stark Solar project, citing “consistent opposition to the project from each of the local government entities and their impacted constituents.”
5. Ingham County, Michigan – GOP lawmakers in the Michigan State Capitol are advancing legislation to undo the state’s permitting primacy law, which allows developers to evade municipalities that deny projects on unreasonable grounds. It’s unlikely the legislation will become law.
6. Churchill County, Nevada – Commissioners have upheld the special use permit for the Redwood Materials battery storage project we told you about last week.
Long Islanders, meanwhile, are showing up in support of offshore wind, and more in this week’s edition of The Fight.
Local renewables restrictions are on the rise in the Hawkeye State – and it might have something to do with carbon pipelines.
Iowa’s known as a renewables growth area, producing more wind energy than any other state and offering ample acreage for utility-scale solar development. This has happened despite the fact that Iowa, like Ohio, is home to many large agricultural facilities – a trait that has often fomented conflict over specific projects. Iowa has defied this logic in part because the state was very early to renewables, enacting a state portfolio standard in 1983, signed into law by a Republican governor.
But something else is now on the rise: Counties are passing anti-renewables moratoria and ordinances restricting solar and wind energy development. We analyzed Heatmap Pro data on local laws and found a rise in local restrictions starting in 2021, leading to nearly 20 of the state’s 99 counties – about one fifth – having some form of restrictive ordinance on solar, wind or battery storage.
What is sparking this hostility? Some of it might be counties following the partisan trend, as renewable energy has struggled in hyper-conservative spots in the U.S. But it may also have to do with an outsized focus on land use rights and energy development that emerged from the conflict over carbon pipelines, which has intensified opposition to any usage of eminent domain for energy development.
The central node of this tension is the Summit Carbon Solutions CO2 pipeline. As we explained in a previous edition of The Fight, the carbon transportation network would cross five states, and has galvanized rural opposition against it. Last November, I predicted the Summit pipeline would have an easier time under Trump because of his circle’s support for oil and gas, as well as the placement of former North Dakota Governor Doug Burgum as interior secretary, as Burgum was a major Summit supporter.
Admittedly, this prediction has turned out to be incorrect – but it had nothing to do with Trump. Instead, Summit is now stalled because grassroots opposition to the pipeline quickly mobilized to pressure regulators in states the pipeline is proposed to traverse. They’re aiming to deny the company permits and lobbying state legislatures to pass bills banning the use of eminent domain for carbon pipelines. One of those states is South Dakota, where the governor last month signed an eminent domain ban for CO2 pipelines. On Thursday, South Dakota regulators denied key permits for the pipeline for the third time in a row.
Another place where the Summit opposition is working furiously: Iowa, where opposition to the CO2 pipeline network is so intense that it became an issue in the 2020 presidential primary. Regulators in the state have been more willing to greenlight permits for the project, but grassroots activists have pressured many counties into some form of opposition.
The same counties with CO2 pipeline moratoria have enacted bans or land use restrictions on developing various forms of renewables, too. Like Kossuth County, which passed a resolution decrying the use of eminent domain to construct the Summit pipeline – and then three months later enacted a moratorium on utility-scale solar.
I asked Jessica Manzour, a conservation program associate with Sierra Club fighting the Summit pipeline, about this phenomenon earlier this week. She told me that some counties are opposing CO2 pipelines and then suddenly tacking on or pivoting to renewables next. In other cases, counties with a burgeoning opposition to renewables take up the pipeline cause, too. In either case, this general frustration with energy companies developing large plots of land is kicking up dust in places that previously may have had a much lower opposition risk.
“We painted a roadmap with this Summit fight,” said Jess Manzour, a campaigner with Sierra Club involved in organizing opposition to the pipeline at the grassroots level, who said zealous anti-renewables activists and officials are in some cases lumping these items together under a broad umbrella. ”I don’t know if it’s the people pushing for these ordinances, rather than people taking advantage of the situation.”