Emerging Finance Models for Resilient Infrastructure

With recent announcements from New York and New Jersey, we now have two emerging finance models to fund community level, climate resilient infrastructure. That’s good news, as we must raise billions of dollars in needed investments to shore up threatened public infrastructure and install cleaner resilient power technologies in critical facilities around the country.

The models came from two levels of government – one state and one municipal. Both are leaders in resilient power planning and climate adaption: New York City and the State of New Jersey; and both were hammered by Superstorm Sandy.

Last week, New York City Comptroller Scott Stringer announced a truly significant advance in the area of financing for resilient infrastructure. Stringer released a multi-billion dollar “Green Bond Program for New York City” that is likely to become a model for the country.

This announcement comes a few months after the state of New Jersey launched its New Jersey Energy Resilience Bank, a way for the state to help finance local resilient power projects like clean water and wastewater treatment, affordable housing projects and other critical public and private facilities.

Both approaches have their own strengths, and both will be valuable in accelerating the resilient infrastructure investment needed at the community level around the US.

In the green bonds plan for NYC, Stringer proposes to use bonds issued by the city to finance post-Sandy reconstruction efforts and other infrastructure investment. This would likely include water and power infrastructure projects in places like public housing and wastewater facilities.

The plan notes that a large portion of the city’s capital infrastructure needs, perhaps up to $25 billion, could be financed through these green bonds.

This move is part of a trend to use infrastructure financing for new clean energy and power resiliency purposes. Clean Energy Group has been at the forefront of this effort through its Clean Energy and Bond Finance Initiative and Resilient Power Project.

The NYC plan (http://comptroller.nyc.gov/wp-content/uploads/documents/Green_Bond_Program_-September.pdf) does a great job of outlining the progress that cities and other public entities already have made in using green bonds to finance infrastructure. The extended quote below shows how the NYC plan captures the rapid progress in the green bond market in the US:

Green bonds expanded to the United States municipal bond market in July 2013 when the Commonwealth of Massachusetts sold $100 million of fixed rate new money bonds to help finance environmentally conscious public projects. Proceeds from the bonds will pay for improving water quality, increasing energy efficiency, and clearing pollution. The Commonwealth’s issue of 20-year bonds was well received, with orders from 154 individual investors and 29 institutions, including several investors participating in the transaction mainly because of the “green” aspect.[i] This is particularly notable because the Massachusetts bonds were tax-exempt and thus had a smaller natural pool of green investors from which to draw. More recently, in June 2014, the New York State Environmental Facilities Corporation identified $213 million of bonds to finance 128 drinking water and wastewater projects as Green Bonds.[ii]

In July 2014 the District of Columbia Water and Sewer Authority sold its inaugural Green Bond issue of $350 million. The taxable financing was the first independently certified Green Bond issuance in the U.S., obtaining a sustainability opinion from an independent party. The transaction generated more than $1.1 billion in orders during the sale, and demand for the bonds allowed the Authority to upsize the transaction by $50 million, while maintaining pricing levels throughout the order period.[iii]

Green Bond issuance grew in September 2014, with the State of California conducting its inaugural Green Bond sale and the Commonwealth it’s second.

According to the State of California’s preliminary prospectus, it intends to finance projects that will provide air pollution reduction, clean water and drinking water, energy efficiency and conservation in public buildings, and other environmentally beneficial projects.[iv] The Commonwealth of Massachusetts took a more focused approach in its second Green Bond issue. According to their preliminary prospectus, they will use the $350 million Green Bond sale to help pay for a marine terminal in New Bedford, Mass. to support the construction of offshore wind projects. They will also use proceeds for clean water, energy efficiency, river revitalization and open-space protection efforts[v], similar to their initial issue.

Across the globe, the market for Green Bonds is booming. As CNBC recently reported, so far in 2014 more than $19.9 billion in Green Bonds have been issued worldwide, compared with $10.9 billion for all of 2013. By year-end 2014, that number is slated to be $40 billion, according to the Climate Bonds Initiative. As of July 1, 2014, the U.S. Green Bond market has hit $3.24 billion, and even bigger deals are anticipated.[vi]

In response to this emerging opportunity, institutions have set aside money dedicated to Green Bond investments. Large U.S. asset managers like TIAA-CREF, BlackRock, and Deutsche Asset and Wealth Management have recently begun to seek out green investment opportunities. In addition, other U.S. domestic investors focused on promoting socially responsible investments have started to purchase Green Bonds. Funds manager report that individual investors are also interested in this market segment for direct purchases. We believe that if more product is available in the tax-exempt market, the awareness and appetite will grow.[vii]

This NYC action is a critical step to advance clean energy and climate finance. It brings together two worlds, bond finance and power resiliency, and shows how one can finance the other, which is needed as we move forward with climate mitigation efforts and resilient power strategies.

It also confirms two complementary models for climate resiliency finance that are emerging.

With this green municipal bonds effort, we have a model for cities to follow to fund resiliency projects with bond finance.

And we now have a new model at the state level, with the creation of the New Jersey Energy Resilience Bank, a new $200 million effort to finance resilient power projects at public and private facilities.

With these two models in place – and the expectation for more finance innovation to come – it will be possible to generate billions of dollars to fund climate adaptation and resiliency projects.

The future challenge, which CEG is taking up with its Resilient Power Project, is to accelerate the adoption and use of these models in many other states and cities around the country.

ENDNOTES

[i] Massachusetts Goes ‘Green’: http://online.wsj.com/news/articles/SB10001424127887324563004578525762271478512

[ii] New York Selling $213 Million in “Green Bonds” for 128 Drinking Water, Wastewater Projects.

[iii] Barclay’s Capital Case Study “DC Water and Sewer Authority’s Ground Breaking Inaugural Century Bond Issuance: Emailed July 14, 2014.

[iv] State of California, September 11, 2014, $2029 billion Preliminary Prospectus: http://munibase.elabra.com/SeptGO14POS/docs/pos.pdf

[v] The Commonwealth of Massachusetts, September 9, 2014, $350 million Preliminary Prospectus: http://www.massbondholder.com/sites/default/files/files/MA%20GO%202014%20Series%20E%20POS%20%28Green%29%20unsecured.pdf

[vi] Constance Gustke, A scarce global resource fighting climate change, CNBC: http://www.cnbc.com/id/101796340

[vii] Office of the Comptroller, City of New York. “A Green Bond Program for New York City.” September 24, 2014.