The good news is that communities of like-minded folks, as I write in today’s Clean Break column, are taking the green energy funding challenge into their own hands. Several community co-ops have emerged that plan to issue “Community Bonds” as a way to raise cheap debt financing for local renewable-energy projects. SolarShare is doing it for solar PV installations. ZooShare is doing it for a biogas facility at the Toronto Zoo. WaterShare plans to do it for small hydro projects. Others are emerging, most learning from the early pioneering work by the Centre for Social Innovation in Toronto. It’s an innovative approach to a big problem, and it’s a positive story for green energy that could gain momentum as the first few projects of this type show success. Their approaches may differ slightly, but for the most part, if you’re a not-for-profit community co-op you can seek approval from the Financial Services Commission of Ontario to issue private bonds to people within your community or social network. You can even make these community bonds RRSP-elligible, making this a very attractive investment for citizens looking to put their money back into their own communities and, even better, support green energy projects at the same time.

It’s no secret that smaller community renewable-energy projects have had a difficult time raising capital from the usual suspects. Banks aren’t interested, and if they are, they charge interest rates that can make a project uneconomic. You’d think that in Ontario, where the feed-in-tariff program guarantees electricity payments over 20 years for renewable-energy developers, the banks would be more willing to lend. But the credit crunch persists. Community bonds have emerged as a way to go directly to local supporters of projects, and those local supporters in return get a decent return on their investment. The power of social media makes connecting with the community that much easier.

ZooShare plans to offer an annual rate of return of 6 or 7 per cent for community bonds that can be redeemed after seven years. Bonds can be purchased in $500 or $5,000 units, depending on an individual’s relationship with the zoo or distance from it. SolarShare is eyeing bonds that would pay 5 per cent annually over five years and could be purchased in $1,000 units. Both have figured out how to make these bonds RRSP-elligible, meaning they could be purchased through a self-directed RRSP account and the buyer could shift existing investments in that account to community bonds.

Now, there are always hiccups. The financial services commission has been slow to approve these community bond issues, as this is new territory for the commission and, from what I hear, they lack the budget to devote too much attention to it. This is where government could and should step in to help grease the wheel, so to speak. Also, banks are largely ignorant about these bonds and are unlikely to make them available to their customers, at least initially. There is a learning curve here for the large financial institutions to overcome. Credit Unions will, as usual, likely be the first to give their customers access to these bonds, and eventually one of the more progressive and sustainability minded big banks will move to distinguish itself by doing the same. Citizens who want to purchase these bonds, at the same time, will have to make some noise and push their banks to get on board. It won’t be easy, and it will take some time. Again, a little nudging from the government would help.

These community bonds, it’s important to keep in mind, aren’t as secure as your typical government bond. There’s no physical assets backing it or government purse, just a 20-year power purchase agreement with the Ontario Power Authority. Projects could fail. There is some risk. That’s why SolarShare, for example, doesn’t plan to sell bonds until it a project is built and operational. The bond issue, instead, will raise money to pay off bridge financing and other loans to get the project up and running. This significantly reduces risk for the community bondholders.

This kind of creativity is to be applauded. Community bonds solve a big problem. Another great approach is to allow homeowners to pay for solar PV systems through their property taxes. This is essentially what was done through the hobbled Property Assessed Clean Energy (PACE) program in the United States. Under this program, municipalities raise money through a bond issue that funds the installation of PV systems on residential rooftops or geothermal heat pump systems. Homeowners participating in the program gradually pay back the cost and interest of the system through their property taxes. No upfront pain. It’s another terrific idea, one largely ignored in Canada.

There’s still a chance to get our act together. Government green bonds, green banks, community green bonds, and PACE style programs could all be created and put to work across Canada, had we the vision and will to pursue them.

Sounds like something Ontario could use, because even though our new Green Energy and Green Economy Act is an ambitious and progressive piece of legislation, and even though a newly proposed feed-in tariff program offers a huge incentive for developers, I’m still not convinced there won’t be a capital constraint that will ultimately slow down development. This is particularly true if, as the Ontario government has said, it wants to encourage community co-op and First Nations projects. I would even argue the federal government should consider creating such an institution, but that is not likely to happen under our current Conservative government, so no point in asking.

The Center’s John Podesta and Karen Kornbluh argue that the creation of such a bank is critical if we are to transition to a clean-energy economy and create the green jobs that will drive growth in the coming years. “It would enable clean-energy technologies—in such areas as wind, solar, geothermal, advanced biomass, and energy efficiency—to be deployed on a large scale and become commercially viable at current electricity costs,” they write. “Currently, both Congress and the American public are focused on proposed caps on carbon emissions and requirements that utilities increase their use of renewable energy and invest in energy efficiency. But far less public attention has been paid to the specific policies that will drive new capital investment into clean-energy technology. A Green Bank would facilitate the flow of private capital into renewable energy and efficiency projects on the drawing boards today.”

Fact is, clean energy deployment is suffering under the recession, and even upon recovery there’s no guarantee credit markets will loosen up. A green bank would ease the credit crunch, allow for predictable financing for large-scale projects, help clean-energy developers develop a financing track record, and by spurring more deployment would justify the huge investments required in the transmission system.

Ontario, like the U.S., is focused heavily on investment in renewable (clean) energy and establishing a cap-and-trade system that would mesh with those being developed by other provinces and states and, ultimately, the national system that would emerge in the United States. And, like the U.S., there’s not a heck of a lot of attention on the difficulty of raising capital. In a recent interview with Ontario Premier Dalton McGuinty and his Energy and Infrastructure Minister, George Smitherman, I raised the capital issue as a potential concern. Smitherman more or less dismissed it as unnecessary. The recession was temporary, he said, and the program incentives that would emerge out of the Green Energy Act would be enough to encourage development.

I think he’s seriously underestimating the situation out there, especially if the province imposes domestic content rules. Most economists will tell you that even when the economy recovers it will be a different economic environment. Credit will still be tight, and small developers that don’t have healthy balance sheets or a track record simply won’t be able to raise the capital they need. In the end, this means community co-ops and aboriginal projects lose, small developers lose, and only premium projects backed by large multinationals move forward. It would be a shame to put all this enabling legislation in place only to see projects stymied by an overcautious banking community. By creating a green bank, and arming it with capital raised through the issuance of green bonds, the transition to a green-energy economy could be rapidly accelerated.

The Center for American Progress describes what a green bank should be designed to do: In addition to direct financing of certain projects, “the Green Bank should also facilitate private-sector investments, not crowd out private investors. The bank should work  closely with private banks to provide loan guarantees, credit enhancement, and other financing tools to stimulate private-sector lending and investment in projects that cannot access commercial financing on economically feasible rates and terms.”

The center proposes that the bank initially have $10 billion for funding, and up to $50 billion over five years. The capital would be leveraged at a 10-to-1 ratio to provide loans, guarantees, and credit enhancement to support up to $500 billion in private-sector investment in clean-energy and energy-efficiency projects.” Scaled down for Ontario’s purposes, I’d peg the initial number at $400 million and $2 billion over five years, perhaps partly supported by an auction of carbon allowances and money raised through a green bonds issue.

Any thoughts?