The $20B US ​‘green bank’ program just funded its first project

The Greenhouse Gas Reduction Fund, the national green bank program created by the Inflation Reduction Act, has gotten off to a slow start — but the money has started to flow.

In April, a handful of nonprofit consortiums were selected to administer the $20 billion program. These groups face a hefty mandate: to use that federal funding to spur $150 billion or more of private-sector investment in climate and clean-energy projects, mostly for underserved communities.

But it isn’t simple to put that money to work. The projects they back must comply with the Biden administration’s Justice40 Initiative mandates, meet federal domestic-content and buy-American provisions, and follow complicated data-reporting requirements. Their loans and investments must also simultaneously reach hard-to-serve markets and earn returns that can be reinvested into future projects — while tempting private-sector investors to join in.

The complicated regulatory and financial requirements are some of the reasons why it has taken months for the consortiums to start dishing out green bank funds. But somebody eventually had to go first.

That honor goes to Climate United, the consortium in charge of nearly $7 billion in federal green bank funding, more than any other group. On Tuesday, it announced what is both its first investment and the first project financed by the Greenhouse Gas Reduction Fund: a $31.8 million loan for Scenic Hill Solar, a Little Rock, Arkansas–based solar developer.

That money will provide pre-construction financing for solar installations that will help lower the utility bills and carbon footprint of the University of Arkansas System. At 66 megawatts across 16 sites, the project will be the largest commercial solar deployment in Arkansas and the fourth-largest university renewable energy deployment in the country.

This kind of climate lending has a track record to build on. Over the past 12 years, green banks — government-backed and nonprofit entities now operating in 17 states, which provided the model for the Greenhouse Gas Reduction Fund — have enabled nearly $22 billion in public-private investment.

Even so, this proven ​“green bank” model has attracted political attacks: Republicans in Congress have accused the Biden administration of planning to use the program’s $20 billion as a ​“slush fund” to benefit favored groups. Former president Donald Trump has said he will halt federal spending for programs under the Inflation Reduction Act if elected.

Bill Halter, the founder and CEO of Scenic Hill Solar and former Democratic lieutenant governor of Arkansas from 2007 to 2011, pushed back against these characterizations. ​“There’s nothing to that proposition. The beneficiaries of this are the University of Arkansas system, the students, the faculty, and Arkansas taxpayers.”

How the first project fits into bigger plans

Climate United, a partnership between investment firm Calvert Impact, multifamily affordable housing financier Community Preservation Corp., and community development financial institution Self-Help, is working with scores of partners to develop its large and growing pipeline of potential projects, CEO Beth Bafford said. Those include programs to support solar, efficiency, and electrification investments in single-family and multifamily homes as well as projects that help lower the cost of switching from fossil-fueled to electric trucks and buses.

Whatever the technologies involved, Climate United has pledged to direct at least 60 percent of its funds to low-income and disadvantaged communities, at least 20 percent to rural communities, and at least 10 percent to Native communities.

It’s also seeking lending and investment opportunities that can meet the multiple goals of the green bank program. The priority is reducing greenhouse gas emissions, but it also aims to promote economic development and worker training, support local businesses and communities, and lay the groundwork for the private sector to expand financing into realms it has historically avoided.

The Scenic Hill project hits those marks, Bafford said. The solar systems it’s building are mostly in rural areas and will employ hundreds of electricians, civil contractors, and construction workers and generate more than $120 million of direct economic development in Arkansas.

The solar power those projects will generate is expected to help the University of Arkansas save more than $120 million in energy costs over the next 25 years and displace fossil-fuel-fired power that would have produced an estimated 2.8 million metric tons of carbon emissions.

Climate United also hopes that this first-of-a-kind financing of the pre-construction expenses of mid-size solar installations — a category of costs that includes permitting and interconnection fees and which developers now pay for themselves — will help other private-sector lenders ​“reduce the delta between actual risk and perceived risk in the market,” she said.

But perhaps most fundamentally, Bafford said, ​“the Scenic Hill transaction was ready to go and needed the funding on a timeline we could meet — and could meet the requirements of the federal program.”

Finding projects that meet the green bank program’s rules

One of the program’s more challenging requirements is set by the Build America Buy America Act, part of the Bipartisan Infrastructure Law passed in 2021. The act requires certain federally funded infrastructure projects, including from the green bank, to use iron, steel, manufactured products, and construction materials produced in the U.S.

Scenic Hill is prepared for this, said Halter. In 2022, the company launched its supply chain initiative American Made, Arkansas Built, which includes U.S.-based companies such as panel manufacturer First Solar, solar tracker giants Nextracker and Array Technologies, inverter manufacturer Yaskawa Solectria Solar, electrical equipment provider Shoals Technologies Group, and steel pipe and tube manufacturer Zekelman Industries.

That effort began after the passage of the Inflation Reduction Act, which created lucrative tax credits for U.S.-based clean energy manufacturers as well as domestic-content requirements and incentives for clean energy projects seeking federal tax credits and funding. The goal was ​“to facilitate as much as possible raising the percentages of our projects’ domestic content,” Halter said.

Scenic Hill has also helped create solar construction and contracting opportunities for Arkansas companies ​“instead of bringing in all out-of-state partners to do it,” Bafford said.

Halter highlighted B&K Electrical Contractors, a Little Rock–based electrical contractor that Scenic Hill brought on for its first commercial solar projects with cosmetics manufacturer L’Oréal USA at facilities in Arkansas and Kentucky. ​“Now we use them on our projects, and they’ve been used by other solar developers in the state as well,” he said.

What makes this project transformational?

Given all the work that Scenic Hill has put into creating a growing commercial solar operation in its region, why does it need Climate United’s financial support? To answer that question, Bafford highlighted several challenges that Scenic Hill and other solar developers face in tapping into new markets.

One of the biggest challenges for developers of commercial and industrial solar projects is a lack of access to capital to finance those pre-construction costs, Bafford said. These include acquiring land, making deposits for solar panels and other equipment, and securing the interconnection rights to allow the solar power to flow onto utility grids. Developers typically pay for these costs out of their own equity capital.

“Right now, institutional capital is not supporting this stage of development,” she said. ​“Those are gaps that are putting smaller projects and smaller developers at a disadvantage in the market. We’re trying to show this is an investable activity.”

And what’s hard for solar developers nationwide is likely to be especially hard in Arkansas, which now ranks 27^th among states for solar, with just 1.35 gigawatts deployed, according to the Solar Energy Industries Association trade group. The state has relatively cheap utility electricity rates, making it hard for solar projects to compete economically. The vast majority of the state’s solar power comes from large-scale projects built under utility contracts, with relatively little coming from mid-size solar projects serving commercial, industrial, and institutional customers.

If it proves to be financially viable, the ability to borrow money to cover pre-construction costs could help boost commercial solar in Arkansas and beyond, Halter said.

“To the degree that you have to devote significant portions of equity capital to those expenses, well, you have two choices there broadly,” he said. The first is ​“do less of it — you’ll eventually run out of equity capital.” The second is to raise more equity, which is ​“harder to do and more expensive” for smaller-scale solar developers than it is for larger utility-scale clean energy projects.

That, in turn, ends up raising the cost for would-be buyers of power from these types of solar projects, he said. ​“If your costs are going up and availability of capital is going down, the only way that comes out on the other side is the electricity prices you’re charging your clients.”

Halter wasn’t ready to speculate on how the Climate United financing might change those dynamics for solar developers like Scenic Hill. However, ​“if the first mover on something like this succeeds, that does give more confidence to people coming behind,” he said. ​“What you’re wanting is for all of this to scale.”