Federal Reserve Bank of San Francisco

Community Development

Bringing Down Green Financing Costs: How a State-sponsored Bank Might be the Key

Author(s):

March 2014

Community Development Investment Review

The costs of clean energy solutions are falling. As one example, solar panel prices are down more than 50 percent in the last three years. Costs of batteries, wind turbines, and fuel cells have also declined. As promising as that is, soft costs—installation, permitting, and financing—now account for nearly two-thirds of the cost of a residential solar system, and they have not declined. There is little hope of providing clean energy solutions at scale until the soft costs are brought under control. One promising innovation is a state-sponsored “green bank” to lower finance costs for the deployment of clean energy. Despite nearly record low interest rates, financing costs for the clean energy sector remain high—not for the largest, utility scale projects—but for smaller projects, including small business and residential. Because the ongoing costs of clean energy are very low, given that wind and sunlight are free, the solution to reducing clean energy costs is reducing the upfront costs. And costs are costs—whether they are hardware costs or financing costs. The key reason of why financing costs are high for clean energy is that the industry is financed in an old-fashioned, anachronistic way. The energy technology deployed may be 21st century, but the financing structures used are out of date.

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