Heavy lifting requires leverage; so does solving climate change

May 23, 2016

The Next Idea

Climate change presents one of the biggest problems we have ever faced. It is literally as large as our planet. We must take action to address it or its consequences will intensify, growing more costly and increasingly affecting us all.

Fortunately, we know what to do -- transition to cleaner sources of energy to reduce our dependence on fossil fuels. Quickly.

In the electricity sector, this means rapidly tapping into renewable energy resources like wind and solar on a grand scale.

Although this shift requires big investments in our energy infrastructure, it is completely feasible with the technology we have now.

Michigan is no exception.

The state currently gets nearly 60% of its electricity from fossil fuels and emits more than 60 million tons of carbon from its electric power plants annually. Meanwhile, it is home to robust wind and solar resources that could replace most, if not all, of that fossil-fuel-fired electricity -- resources that remain largely untapped.

Tackling environmental problems is typically a one-track approach. Government regulations establish limits for pollution based on a balance of science and economics.

The EPA’s Clean Power Plan does this for carbon emissions from existing power plants, which are some of the largest contributors to climate change. States also have minimum standards to encourage utilities to invest in renewable energy.

Michigan’s standard currently requires utilities to achieve 10% renewable energy annually.

We need both of these, and they need to be stronger. But we also need more. We need large-scale, rapid, and voluntary investment by the private sector. We need the private sector to see investments in renewable energy as wise ones. And we need the private sector’s capital and ingenuity to make the switch to renewable energy quick, effective, and economically beneficial.

So how do we leverage private investment to solve a public problem?

We make renewable energy investments profitable and low-risk—a no-brainer.

So what’s the Next Idea?

The idea is to use public funds, not for direct incentives or subsidies, but in partnership with private capital, to make smart investments in renewable energy resources.

By “smart,” I mean projects that are both profitable and that measurably reduce climate-changing emissions.

These types of programs are generally referred to as “green banks.”

This isn’t an entirely new idea. Green banks are already operated on a small scale, often to drive investments in energy efficiency, in several states including Michigan. They can take a variety of forms, but share the goal of breaking down barriers to private investment in green products like renewable energy while tapping into the expertise of the private investment world.

The Michigan Saves program--initially funded by a grant from the Michigan Public Service Commission --has been operating a variety of programs that are attracting private investment in energy efficiency across the state.

Its residential energy efficiency program is leveraging private investment at a rate of 20 private dollars for every public dollar invested, driving more than $50 million in investments since 2010. It does this by providing a variety of services like administrative functions, protection against loan defaults, and the aggregation of smaller investments into products on a scale that attracts investors.

But what we need now is a green bank on a much larger scale to drive investments in the large renewable energy projects that will transition our electricity sector away from its fossil fuel dependence.

I’m not talking about energy-efficient windows and insulation (although we need those, too).

I’m talking about power-plant-size projects--dozens of them--that will reliably supply Michigan’s electricity demand.

The United Kingdom’s Green Investment Bank is a good example of how this can work on a grand scale and move green investments from the public to the private sector.

Begun in 2012, the bank has invested in 75 green infrastructure projects. Projects are assessed based on profitability and “green impact,” a measure of their ability to reduce greenhouse gas emissions or avoid landfill waste.

To date, the Green Investment Bank has leveraged 2.6 billion pounds into investments totaling 10.6 billion pounds. As a result of this success, the UK government will now shift the Green Investment Bank entirely into the private sector, selling off its stake to investors eager to move into this promising market.

The Bank is now looking to go global, investing in West African nations and India.

My organization, the Union of Concerned Scientists, started looking into this last year after learning about green bank programs in a few states like New York and Connecticut. And being the number-crunching wonks that we are, we developed a tool to estimate the potential for a robustly-funded green bank in Michigan.

Based on the performance of existing green bank programs, we estimate that Michigan could leverage about $100 million in initial public funding into more than $3 billion in clean energy investment over the next 15 years. That gets us to a scale necessary to drive the transition we need. And the beauty of it is that because green banks don’t give away the money -- they invest it -- the scale grows over time as the program becomes self-sustaining.

So maybe the idea isn’t new.

What is new is the ambition to take this to the scale necessary to compliment traditional environmental regulations and facilitate a fast transition to renewable energy.

As the need to address climate change becomes more urgent, we must take advantage of lessons learned and proven successes.

The consequences of not dealing with climate change are dire. But there are also opportunities to drive economic growth and create a cleaner, more sustainable and affordable supply of electricity.

As we’ve done time and again, we must turn challenge into opportunity, and a Michigan green bank could do just that.

Sam Gomberg is an Energy Analyst at the Midwest office of the Union of Concerned Scientists

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