Green Banks Get the Green Light Under the Inflation Reduction Act – Investopedia
On this week's show, it's not Build Back Better, but the newly-introduced Inflation Reduction Act bill of 2022 has some surprisingly positive developments for clean energy, climate technology, and green banking. We break down what's in the proposed bill and what the future of green banking may look like—if passed—with Reed Hundt, the co-founder, chairman and CEO of the Coalition for Green Capital.
The climate and tech spending deal announced last week by U.S. Senate Majority Leader Chuck Schumer and Senator Joe Manchin, now known as the Inflation Reduction Act of 2022, includes up to $370 billion in spending to help fight climate change. It would also impose tens of billions of dollars in fees on the fossil fuel industry in order to pay for some of that spending. The legislation, which may be voted on by the U.S. Senate as soon as this week, would reinstate and increase a long-lapsed tax on crude oil and imported petroleum products to 16.4 cents per barrel. That fee would be paid by U.S. refineries receiving crude oil and importers of petroleum products, according to the Congressional Research Service. The bill also includes a first time fee on methane emissions and increases in the royalty rate payable on oil and gas produced on federal land. Believe it or not, the proposed legislation actually receives some praise from the oil and gas industry. ExxonMobil CEO Darren Woods told analysts on the company's earnings call that it was "A step in the right direction." Well, maybe that's because the bill would allow more lease sales for drilling on federal land, as well as a separate future agreement to streamline environmental permitting for projects such as pipelines.
The proposed levy on imports is a revival of the Superfund tax, which was introduced back in 1980 and helped fund the cleanup of hazardous waste sites across the country. It previously mandated a 9.7 cents-per-barrel tax until it lapsed at the end of 1995. In addition to reinstating and increasing the tax, the Senate proposal would index the fee to inflation. The bill also proposes up to $385 billion in spending towards clean energy efforts. There's $160 billion in clean energy credits, $35 billion for individual clean energy incentives like installing solar panels in your home, $35 billion for clean manufacturing tax credits, $35 billion for clean fuel and tax credits like buying an electric vehicle, and another $120 billion in other climate and energy-related spending initiatives.
Investors took notice of these developments in a big way, putting up shares of solar companies, wind turbine manufacturers, nuclear and hydrogen fuel cell companies, and electric battery makers. Sunrun (SUN), the largest U.S. residential solar installer, saw its stock jump as much as 34% last Thursday, the most on record. TPI Composites (TPIC), which makes wind turbine blades, climbed as much as 38% in its biggest gain ever. Rooftop solar company Sunnova Energy (NOVA) surged as much as 41%, its largest intraday rise since March of 2020. Solar companies have faced wave after wave of policy, trade, and supply headwinds that have slowed development and weighed on the sector, but this bill—if approved—finally shined a little light on solar stocks. The proposed bill also buoyed shares of Constellation Energy (CEG), which operates nuclear reactors. Shares of fuel cell maker Plug Power (PLUG) jumped as much as 25%, while Fuelcell Energy (FCEL) gained as much as 20% last week. Wind farm developers also got a big boost from the pact with the revival of a key tax credit, after power development slowed earlier this year as companies waited to see if Washington would renew the program. Shares of the world’s largest wind turbine maker, Denmark’s Vestas Wind Systems (VWDRY), jumped as much as 20% last week on the news, its biggest gain in nearly a decade.
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Reed Hundt is co-founder, Chairman and CEO of the Coalition for Green Capital, a nonprofit organization that supports and advocates for green banks to invest in the clean power platform. Prior to founding the Coalition for Green Capital, Reed was chairman of the Federal Communications Commission (FCC) from 1993 to 1997. Since 1997, Reed has advised several venture capital and private equity firms, and served on more than two dozen for-profit and not-for-profit boards and commissions, including 19 years on the board of Intel Corporation (2001-2020) and seven years on the board of the Connecticut Green Bank (2011-2018). He also taught at Yale Law School and the Yale School of Management.
Hundt has written many articles and four books: A Crisis Wasted: Barack Obama’s Defining Decisions (Rosetta, 2019); Zero Hour: Time to Build the Clean Power Platform (Odyssey, 2013); The Politics of Abundance: How Technology Can Fix the Budget, Revive the American Dream, and Establish Obama’s Legacy (Odyssey, 2012); In China’s Shadow: The Crisis of American Entrepreneurship (Yale University Press, 2006); You Say You Want A Revolution: A Story of Information Age Politics (Yale University Press, 2000).
Mr. Hundt has a B.A. from Yale College (1969) and J.D. from Yale Law School (1974).
Inside the Inflation Reduction Act of 2022 is a provision for the creation of a national Green Bank, a program that would help launch and leverage private funding for clean energy projects. Green banks are banking institutions that use innovative financing to accelerate the transition to clean energy and to fight climate change; they've been around since 2009, but not on a federal level like a national green bank. This could potentially be a game changer for spurring new entrepreneurial and innovative ideas in climate technology and green energy industries. But just how would it work? Reed Hunt is co-founder, chairman and CEO of the Coalition for Green Capital, a nonprofit that supports and advocates for green banks to invest in the clean power platform. He's a Washington, D.C. veteran, having served as the chairman of the FCC from 1993 to 1997, and he served on the boards of companies including Intel and the Connecticut Green Bank. He is our special guest this week on the Green Investor. Welcome.
Reed: "Thank you very much."
Caleb: "Tell us a little bit more about the Coalition for Green Capital. I gave the broad strokes here, but give us a sense of what you actually do."
Reed: "What we do is try to create green banks in every state and sometimes more than one per state in the United States. We've been doing that for more than a decade. The genesis of the idea, politically, is that in the winter of 2008-9, I asked Larry Summers to capitalize a national green bank, and he said no."
Caleb: "He was secretary of the Treasury at that time?"
Reed: “No, Larry was a key economics adviser to the president-elect. And, of course, ultimately, you know, he played a big role in President Obama’s entire economic program. But I was on the transition team and I just asked him, “you know, would you make this part of the stimulus program?” And he said no. He said, “we have enough trouble with banks.” He was thinking of Lehman Brothers. I said, this is a good bank, not a bad bank. But he did say no. However, Congressman Markey and Congressman Van Hollen said yes, and they passed it out of the House. And then Senator Bingaman and Senator Murkowski, on a bipartisan basis, adopted the idea of a national green bank, and they passed it out of the Senate Energy Committee—that’s the same committee that Senator Manchin chairs at the present time. However, it was never put on the floor of the Senate for a vote, and so from 2009 to the present, people in Congress, particularly Van Hollen and Markey and Debbie Dingell, and previously her now-deceased husband, John Dingell—they fought to have this become a measure, a part of the overall federal program of expediting the move to the Clean Power Platform. They fought for it for 13 years, and now we’re at the doorstep of success.”
Caleb: "Let's get to what the IRA, the New Inflation Reduction Act, has in it for green backs. But just for our listeners, what are green banks? They're not like traditional federally regulated banks, but they are more like investment banks. Give us a sense of basically what they are and how they operate."
Reed: "So a bank makes investments and it takes deposits. Green banks don't take deposits, but they make investments. They loan money to a company that's installing solar rooftops, or they loan money to a consumer that wants to buy a heat pump. Or, they loan money to a developer that is building a microgrid so that if a big storm washes away the electrical system, there's a way to get it back online in that community right away. In other words, more than one thing, but all part of building a sustainable, cheap, clean power platform faster than the market is otherwise doing. That's what they do. And I can say that because we've been creating them with the help of foundations for more than a decade now, and we've created these green banks in more than 20 states. What we need to do is scalable them out, so that there are green banks in every single state, and scale them up so that they all have much more money to invest."
Caleb: "So the money comes from foundations, the money comes from private investors—is that the source of the capital?"
Reed: "Two kinds of money, Caleb—thanks for the good clarifying question. There's the money that's gone to the nonprofit Coalition for Green Capital to create the green banks, hire the first people, get things going. And, over the course of a decade, that's been about $30, $35 million by all the major philanthropic institutions in the country that have cared about the climate. So huge credit to all of them—I won't name them all—but huge credit to all of them. And then there's the money to invest. That's the problem—where do you get the money to invest? And so, in every way possible, we've tried to get that capital from state governments or frankly, wherever we can. Over the last decade, we've been able—collectively—the whole group of green banks has been able to get about two and a half billion dollars of public capital. Always, it's combined with private capital to have the aggregate investment be much bigger than the public money. We always want to have this be public-private investment. That is the way to expedite the move to the Clean Power platform. And so that two and a half billion has turned into almost ten billion of total investment over the decade, and all the investment has been profitable—not horribly profitable, not incredibly lucrative—because we're trying to have the Clean Power platform be really, really cheap, really affordable."
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Caleb: "So investors behind these banks expect to get their money back, just like a bank expects to get paid back on the loan?"
Reed: "They do. They expect to, and they have. The default rate is less than one-third of one percent."
Caleb: "So how do retail investors or our listeners participate in green banks? Can they participate? Is this available to accredited investors?"
Reed: "Yes. Some of the green banks have offered bonds that they can buy, so that when a green bank sells a bond, it's raising money for investment. And so that's one way they can participate. The second way they could participate is buying the heat pumps. So, you know, our target audience is primarily—and this is for all the green banks—it's primarily low-to-medium income households. About 70% of the American economy. If you have a really, really big house with a lot of room space, you can afford to put the solar panels on it yourself, and if you have a three car garage, you can probably afford to get the electric vehicle yourself. But if you're in the low-to-medium income category, about 70% or more of America, then what you need is for clean power to be delivered faster than carbon power, to be cheaper than carbon power, to be cleaner than carbon power, and in order to have it be affordable, you need investors to give you really good prices. And that's why we want public private investment, because it will offer these products at much lower prices."
Caleb: "So green banks can operate a little bit more efficiently since they don't have that regulatory oversight, at least not yet—we don't have a green central bank yet or an FDIC that oversees green banks. You know regulatory oversight very well—you served as the FCC chair, the Federal Communications Commission chair for many years."
Reed: "I know it very well. I've experienced it and I've done it."
Caleb: "What's the risk then, Reed—for more government involvement in green banks? Or if there is a federal green bank that oversees a lot of these other green banks, or is that just not the model you're envisioning if this comes to pass?"
Reed: "We've always embraced all the different green banks at the state level. And certainly, you know, the concept here embraces the idea that there will be complete transparency about all the investing, really great ethics. We will have an unpaid board. We are a nonprofit. We will be perfectly willing to be watched carefully by everybody, from you, Caleb, to anyone else that any government wants to name. This is supposed to be a public activity in the sense of being open and transparent, but not a federal government-run activity, because it's supposed to match up with the private sector and be as efficient and focused on the bottom line as the private sector is. It's just that when you start with government money, you want to get a return, but you don't want to maximize profits—you want to maximize the results."
Caleb: "Impact, as we say in the business, and impact when we're talking about green investing—sustainable investing—is reducing climate change and working on technologies for clean power and to transition the economy. So let's dig into the Inflation Reduction Act. One of the features inside of it is the creation of this Greenhouse Gas Reduction Fund, the GGRF. We love acronyms on this show—they're all over the place in this industry. But this fund could create a mechanism to disburse up to $27 billion to clean energy technologies without undergoing that laborious review that the EPA has to go through, if they're reviewing projects. Inside of that, is that where the opportunity is for green banks or for a national green bank?"
Reed: "Yeah, that's right—you've got it exactly right. The bill, if it's passed—and prayers are going up—pours the money into that fund at the EPA, then the EPA pours money out. And, that's the technique—it's designed in the statute to be done as fast as possible. And I hope so, because the green banks that now exist have $21 billion of backlog unfunded projects. Why? They don't have enough capital. Give us the capital; let us start building the Clean Power Platform."
Caleb: "You watch this industry very carefully—you've been around Washington for a long time as well—but you've also seen what's been going on in the economy and the super-cycle for commodities right now, raging high oil prices. They've come down a bit by now, but we've seen this sort-of return to oil. We thought we were at peak oil, and that has taken a little bit of the spotlight off of clean tech, a lot of the spotlight off of green technologies. The stocks in those sectors had a very tough year given the rise in oil prices. Has any of the funding appetite for green banks, the companies they fund, or the entrepreneurship dried up amid the super-cycle for fossil fuels?"
Reed: "So rising private sector interest rates and rising costs threaten to slow the move to the Clean Power Platform—no question about it. And since we started this whole concept 13 years ago, we've enjoyed 13 years of very low interest rates and ever-declining costs for goods and materials. And if we are at the inflection point and we're going to see a change in both of those positive trends, all the more reason for public-private investing, because, the one thing that is absolutely clear to everyone, is we have to keep up the speed and accelerate the rate of building the Clean Power Platform. We have to reduce the emissions going into the air and we have to expand the benefits of the Clean Power Platform to low-to-medium income households. And so because those are necessities, we have to put even more wind behind the era of public-private investment."
Caleb: "The private part seems so key to this because private investors expect a couple of things: efficiency, returns, and transparency in the businesses that they operate—not exactly what you get when you're working through the government, per se—so I can see why that private capital is so important here. And you're out in California right now. There's a lot of private capital looking to put money into green tech, climate, tech, and two ways to combat climate change. But if they don't have the right vehicles to do it, they may turn against it."
Reed: "You got it exactly right. I'm convinced from experience that this is a crucial move. This public private investing capacity is a crucial move, not just in the United States, but really in every other country and nation-state in the world. Green banks are the way to move much more quickly to the Clean Power Platform."
Caleb: "Which countries are doing this better, more efficiently, or have more well-tuned systems for green banks right now?"
Reed: "If this bill becomes law, the United States will jump into the forefront of the move to the Clean Power Platform in the global competition, to create a different underpinning for all economic and social activity. We did that before—I was there. That was in the communications and technology space. In the 1990s, we led the move to digital cellular and to the Internet, to digitization of all information. And our great companies and our tremendous people had careers and wealth creation and tremendous benefits for the whole economy because we led that move—but we shared all those technologies with the rest of the world. Well, we want to do the exact same thing here. We want to lead the move to the Clean Power Platform, have many, many companies, many, many people become the leaders, share all the benefits of this transition with the rest of the world, and—frankly—leave the world a better place for the next generation than we found it."
Caleb: "So if the IRA, the Inflation Reduction Act, passes the House and is signed by the President, is this the game changer a lot of people have been hoping for, especially in the world that you operate in now, in green banking? And if so, how is that going to change the way you operate through the alliance?"
Reed: "It's actually not going to change the way that we operate, because we've been trying so hard to get the capital to scale out and have green banks in every place in the United States and to include community development, finance institutions, and other nonprofit lenders. With the fundamental principle being, we will be partnering with private investors everywhere for more than one reason. But the most important reason is that's where we get more bang for the buck. But the other reasons are that private sector investors, you know, bring innovation and have a lot of focus on efficiency in their investment. So this is a happy marriage—this public-private investment concept—it just needs to be celebrated with extra public money."
Caleb: "Let's hope, fingers crossed, that this does pass and this money does come through and it becomes more available to form more green banks, and that the green banks already out there are able to scale up a little bit. What do the next five-to-ten years look like then for green banks? How will they have evolved, if this is working the way you and your partners in the coalition envisioned it?"
Reed: "I'd see two things. First of all, we would see that products like heat pumps wouldn't be a little bit weird, kind-of hard for consumers to assess, but instead they'd be flying off the shelves at Home Depot. We wouldn't see that it's only really well-off people that have, you know, the latest model of Tesla. We would see instead that people with lower incomes that drive a long way to work would be the ones who would get the tremendous savings from having an electric vehicle. In other words, a much wider base for consumers to enjoy the cool and cheaper and cleaner products that are the piece parts of the Clean Power Platform. So that would be the first thing. And in that sense, exactly like when I was at the FCC and there were a total of zero digital cell phones in the United States, and within ten years, the penetration rate was more than 60%, and in 15 years it was 95%. So that's exactly what we want to see for all of the piece parts of the Clean Power Platform—tremendous consumer take-up across the entire geography and across all income levels."
"And then the second thing that we want to see is that the private sector investors would just clamor to be part of these deals, so that the total amount of investment on an annual basis in building the Clean Power Platform would go up by hundreds of billions of dollars per year. We have that financial capability in the United States. We showed that in building the fiber optic highways and the digital cellular networks and the facilities to build cell phones—we did all that in the 90s—we did it all basically from scratch because private sector investors and innovators said "This is going to work." Well, we want the same thing on the investment side to occur in building the Clean Power Platform."
Caleb: "So without getting too political, I know you study the law—you're a lawyer. But you also know how Washington works—you know how these bills are created. Was there anything in this bill besides the, you know, the potential provision for green banks, for a national green bank, that surprised you in terms of compromise, given where we were and where we might be, if this is indeed signed?"
Reed: "Well, like everybody else, I was I was surprised that Build Back Better wasn't dead the way we read in the newspaper. I mean, it certainly is true that Senator Schumer and Senator Manchin and Senator Sinema, you know, were keeping their own counsel. So that part I was surprised by. But the part that's been pretty consistent over the years is the leadership of Van Hollen and Markey and Dingell and others to create a green bank, because that bill was passed three times in the House of Representatives."
Caleb: "So it may finally come to pass. This may be something that we that could be a reality as soon as this year, potentially, or in 2023."
Reed: "If the law is signed by the president, you know, next week, nothing is stopping the government from acting right away."
Caleb: "Well, I got to ask you to go out on this. You were, of course, the chair of the FCC. You're a trained lawyer, been involved with several corporate boards. What brought you to the Coalition for Green Capital—to this movement—given where you were in your career? This is something you've been involved with for, you know, over a decade right now. Why did you turn to this?"
Reed: "A friend of mine since ninth grade is Al Gore. And—this is way back—back in 1991 he asked me if I had any comments about a draft of the book he had written called Earth in the Balance. And then I found myself in 1992 at the first Earth Summit in Rio de Janeiro, and he got a phone call from the presidential nominee, Bill Clinton. And the next thing you know, the two of them were a ticket and then they won. And then in January of 1993, I chaired the committee that drafted the first carbon tax in the United States, which was called the British Thermal Unit Tax. And we got it through the House and we did not get it through the Senate. And ever since that day, you know, just a whole bunch of us that go back that many years have been trying to figure out how are we going to do the things that Al was writing about in that book. And then later, a movie and an Oscar; you know how are we going to actually make this transition happen before it's too late to stop catastrophic climate change? And so we've just been thinking about it and thinking about it. And in terms of the Green Bank concept, it's been 13 years of advocacy by really hundreds of us who have been involved in this."
Caleb: "Well, it'll be so fascinating to see how this plays out. Reed Hundt, the co-founder, chairman and CEO of the Coalition for Green Capital. Thanks so much for joining the Green Investor. Good to speak with you."
Reed: "Thank you, Caleb. Great questions. Thank you."
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