The New York Green Bank that opened for business in February could broaden the potential rooftop solar market in New York through the use of credit enhancement to allow systems put on the roofs of homeowners with FICO scores slightly below 650 to be financed.

The bank could also be a source of equity, loans or guarantees for other types of clean energy projects. It is expected eventually to have up to $1 billion with which to work. Financing terms are expected to be at market rates, but the bank is authorized to offer below-market terms in certain cases.

The bank is in discussions about potential deals, but no transactions have been announced. It is a New York government entity and the largest institution of its kind in the United States. Clean energy advocates in New York hope it will have an equally large impact on the energy market.

Its goal is to reduce both actual and perceived risk in the clean energy market. It hopes to spur capital markets for the clean energy sector by using public funds to leverage private sector capital, ultimately reducing the cost of capital for these projects and increasing investor confidence.

The bank officially opened for business on February 11, 2014. The New York State Energy Research and Development Authority — “NYSERDA” for short — issued a request for proposals through its NY Green Bank division outlining the project application process.

Eligible Projects

Any project seeking support from the Green Bank must fulfill two basic requirements. First, it must be a “clean energy project.” Second, it must use commercially-proven technologies. Examples of proven technologies provided by the Green Bank include “solar, wind and other renewable energy generation technologies; residential and commercial/industrial energy efficiency measures; electricity load reduction; and on-site clean generation.” This list is not exhaustive, and the request for proposals indicates that the Green Bank will entertain a variety of proposals.

Industry participants as well as financial institutions and third party capital providers are encouraged to submit proposals, either alone or as part of a team. Proposers must have experience in similar energy transactions.

Projects with structures that are likely to be replicated will be favored in the selection process. This is an integral part of the Green Bank’s goal to increase activity in the clean energy market. Further selection criteria include the following: transaction credit, financing and risk-to-return considerations, the potential contribution to financial market transformation and the expected clean energy outcomes.

The Green Bank has been capitalized with an initial $210 million, and its eventual capitalization is expected to be $1 billion. Its goal is to become self-sustaining, primarily by reinvesting its returns.

Private financing is a required component of any project seeking Green Bank support. The Green Bank is flexible about how that financing is structured and the role that the Green Bank itself plays. For example, it could serve as a coinvestor with the private sector or provide direct loans or credit enhancements. It could also provide assistance to entities funding loans or PPAs related to the project. However, it will not provide funding for project development or the general business operations of entities.

For the most part, credit risk taken on by the Green Bank will be compensated according to market standards. However, in some circumstances the bank will consider accepting a lowerthan-market liquidity premium if the project and its support of the project would “provide material benefits to market expansion and future liquidity.” Although examples of these benefits are not provided, the Green Bank has continually affirmed its dedication to removing financing barriers for green energy projects.

Some of the current financing barriers identified by NYSERDA include underdeveloped secondary markets, high upfront costs and de-prioritization. These and other financing barriers have led to financing gaps, such as in the financing of projects with medium credit quality. A Booz & Company study commissioned by NYSERDA suggests that the Green Bank has the financing and informational tools to reduce these financing gaps and expand the market.

Potential Benefits

One part of the renewable energy market that may benefit from Green Bank lending and credit enhancement programs is distributed generation. Energy efficiency projects may similarly benefit. For example, distributed solar deals typically require residential participants to have a minimum FICO score in the high 600s. Through methods such as credit enhancement, providing warehouse financing and direct lending and investing, the Green Bank could potentially lower that minimum to slightly below 650, expanding the number of eligible New York households by approximately 880,000.

Similar market expansion could be possible for the commercial sector. The Booz & Company study notes that the Green Bank could potentially cover an additional 4% to 8% of businesses by incorporating more of those within class 3 of the Dun and Bradstreet commercial credit score. The study also notes that a goal of providing Green Bank credit enhancements for clean energy projects across a broader tier of creditworthiness will help build a track record that will lead the private sector to expand its current coverage.

Besides the reduction of financing gaps, other potential benefits from the Green Bank include increasing standardization of deal terms, growth across multiple market segments and an increase in distributed generation, such as distributed solar, due to more flexible financing options. Energy efficiency should also experience a boost if the Green Bank is able to reach segments of the market that the private sector has not yet been able to address.