The Environmental Protection Agency and dozens of key allies are scrambling to stand up a $27 billion plan to create a major new market for green financing – on deadline.
The clock is ticking on the Greenhouse Gas Reduction Fund, one of the biggest opportunities for community-level climate impact — and community finance — in decades.
The EPA and groups selected in April to manage and distribute the three distinct tranches of GGRF funding are racing to finalize the complex agreements so that money can be safely flowing by September 30, a statutory deadline for the GGRF program as well as a potential safeguard against potential clawbacks from a future US Congress or administration.
The legislative and legal attack against climate action generally and President Biden’s Inflation Reduction Act increase the headwinds and risks. The GGRF is among the IRA’s largest direct expenditures, though small in relation to the law’s tax credits and incentives. Republicans have promised to slash the program. EPA head Michael Regan was grilled by the House Oversight Committee this month about what the majority charged was an abuse of authority “to advance a radical climate agenda.”
Jitters have mounted among practitioners eager to get going. “There are so many factors that are a little terrifying that we don’t control,” Justice Climate Fund’s Amir Kirkwood told ImpactAlpha.
Kirkwood took over leadership this month of the coalition of community lenders and minority depository institutions that are ramping up to expand green lending with nearly $1 billion under the GGRF’s Clean Communities Investment Accelerator. A half-dozen or so organizations will disburse the accelerator’s $6 billion in technical assistance and training as well as financing to community lenders and banks to prepare them to take on green lending.
Two other GGRF tranches, the $14 billion National Clean Investment Fund and the $7 billion Solar for All, focus on creating a green lending ecosystem. With a focus on underserved communities, the GGRF envisions a broad-based green transition that will leverage private capital to amplify its impact at least seven-fold.
“For us, it’s be ready tomorrow,” said Kirkwood. His mandate from his board: get the EPA agreement signed, “and be in a position where things can move forward.”
Market demand
The Greenhouse Gas Reduction Fund’s ambitious goals are to get households, businesses, schools, community centers and municipalities to undertake green upgrades that save them money on heating, cooling and transportation; reduce emissions; and contribute to cleaner air and healthier environments.
First, low-income households and cash-strapped organizations and municipalities have to decide to upgrade in the first place. Green purchases are, after all, mostly discretionary. Getting a heat pump might be efficient, and even economical, but it’s not required, even when the old boiler goes out. It’s still easier to go to Home Depot and buy the same oil furnace, says Eric Hangen of the University of New Hampshire.
“Pulling people off that default behavior” will be among the biggest challenges, says Hangen, co-author of “Enhancing the Greenhouse Gas Reduction Fund.” which outlines ways for catalytic funders, impact investors and philanthropists to participate in the anticipated new wave of financing. Many homeowners, renters and small businesses in low-income communities have limited cash flows with which to repay a loan, even to reduce energy costs.
“It’s not only a finance problem,” Hangen told ImpactAlpha. “It’s about a whole lot more than that.”
ReWiring America, part of the Power Forward Coalition, a recipient of the $14 billion National Clean Investment Fund, has emphasized consumer education. It has created tools, such as an incentive calculator, that help renters and homeowners identify tax incentives and rebates for switching to green upgrades including heat pumps, EVs and solar, and find suppliers.
Among the solutions that need investment: trusted community advisors and navigators that people can turn to to help them through that whole journey, says Hangen. An example of such “boots on the ground,” he says is CDFI NeighborWorks, which created a program in western Vermont called Heat Squad that sends home energy advisors to customers’ homes to walk them through energy assessments, calculate savings, and find contractors.
Permanent takeouts
The report, from the Impact Finance Center at the Carsey School of Public Policy, found “financing and other investment opportunities at all stages of technology, program, and project development and implementation related to GGRF.”
That’s another way of saying, financing gaps remain all over.
For example, many structures will need roof repairs before solar panels can be installed, but such non-climate-related projects can’t be financed with GGRF funding. There are limits in how GGRF funds can back small business creation and growth. Financial institutions may need short-term bridge financing as contracts are finalized. Credit enhancements, such as first-loss capital or guarantees, can support projects in risky or climate-vulnerable locations and may be necessary, for example, for credit unions not familiar with commercial financing.
“There will be CDFIs at all levels looking for enterprise-level investment,” says Hangen.
There may even be opportunities for direct investments into individual projects. Hangen and his co-authors envision a number of scenarios, including holders of donor-advised funds providing recoverable grants for pre-development of local renewable energy projects. Local companies might like to purchase voluntary carbon offsets from projects “that they can actually see from their office window,” the report notes.
Other opportunities: bringing in healthcare funders who want to support the benefits of cleaner air and water from GGRF projects, and generating carbon credits to offset some of the costs of green projects.
The secondaries market could give investors access to pooled loan funds with secured cash flows that have been securitized by community lenders so they can recycle their capital for further lending
Projects could combine traditional and philanthropic sources during construction to lower the cost of capital; risks would be lowered by the guarantee of a later refinancing with GGRF funds.
Dueling priorities as green infrastructure projects meet prevailing wage requirements
Hangen argued for “rethinking the private-public partnership.” Given the challenges of federal contracting, Hangen suggests the lending institutions deploy the federal financing for post-project refinancing and “takeouts,” and find private capital for construction and bridge financing for projects. The simpler requirements of private lenders could spur the velocity of projects, with a ripple effect on the pool of contractors able to participate.
Flexible, timely financing from impact investors will be critical to the success of the GGRF, the report concludes. The GGRF’s financing tools are powerful, but fractured.
“What is in short supply is the ‘glue’ to put these pieces together in support of a comprehensive strategy at the community level.”
Direct Pay
Another provision of the tax-incentive heavy Inflation Reduction Act aimed at an inclusive transition is a “direct pay” option for non-taxable entities. Direct pay enables, for the first time, tax-exempt organizations such as nonprofits, state, local and Tribal governments, publicly owned utilities, and rural electric cooperatives to get direct cash payments for federal tax credits they generate through eligible clean energy projects.
However, the tax incentives are payable after the investment has been made, meaning investment is required up front. And the direct pay process is complex and requires administrative resources many local governments and nonprofits don’t have.
A new report by Rochdale Capital and National Bankers Association Foundation offers a template for non-taxable entities looking to tap into direct pay for green projects.
A Turnkey Model for Leveraging Direct Pay to Advance Solar and Renewable Energy Finance provides detailed financial modeling templates to help developers estimate costs, revenues, and risks, and improve their project planning and management.
“This is the report that GGRF awardees should have read before they got the money,” Rochdale’s John Holdsclaw told ImpactAlpha.
