Washington is again pulling back on clean energy economic development. New funding solutions seem unlikely, and existing financial supports appear tenuous, given that many of the federal tax incentives, subsidies, and loan guarantees made available through the 2009 stimulus law and elsewhere are set to expire.

All of which raises a daunting question: If the country is to take advantage of the economic, environmental, and health benefits of clean energy, how will its development be financed, its emerging companies be supported, and its markets be structured—and who is in the best position to decide and act?

States to the Rescue

There is actually a promising partial answer to that question. With federal clean energy activities largely on hold, U.S. states hold out tremendous promise for the continued design and implementation of clean energy solutions and economic development. State governments led the nation’s initial responses to the challenge of energy system transformation a decade ago and since then have developed a broad array of cleantech development tools, ranging from financial support tools and net metering to incubators, cluster supports, and workforce training.

Among the states’ initiatives, meanwhile, the nearly two dozen state-side clean energy funds (CEFs) stand as one of the most important clean energy forces at work in the nation—yet they remain little-known.

To date, over 20 states have created a varied array of these public investment vehicles to invest in clean energy pursuits, with revenues often derived from small public-benefit surcharges on electric utility bills. Over the last decade, state CEFs have invested over $2.7 billion in state dollars to support renewable energy markets while leveraging another $9.7 billion in additional federal and private sector investment, with the resulting $12 billion flowing to the deployment of more than 72,000 projects in the U.S., ranging from solar installations on homes and businesses to wind turbines in communities to large wind farms, hydrokinetic projects in rivers, and biomass generation plants on farms.

State CEFs have played an equally important role in expanding opportunities in energy efficiency. Ratepayer-funded energy efficiency spending grew from $1.7 billion in 2004 to $4.4 billion in 2009, with approximately 55% (or $2.4 billion) of program budgets devoted to incentives for utility customers and the rest going toward program design and implementation, evaluation, measurement, and verification.

In terms of their focus, CEFs have tended to engage primarily in individual project financing and deployment through the use of rebates, grants, and performance-based incentives that have directly subsidized the installation of clean energy technologies.  In addition, many state programs have also leveraged their CEFs for project financing and deployment through the use of leasing programs, project equity investments, revolving loans, on-bill financing programs, and credit enhancement tools such as loan loss reserves, interest rate buy-downs, and loan and performance guarantees.

In short, for most of the last decade, state CEFs have served the nation and its regional and state economies as a critical and innovative source of much-needed public capital supporting the installation of clean energy technologies in American regions.

For all the good the funds have achieved, project-only financing—needed as it is—will not be sufficient to drive the growth of large and innovative new companies or to create the broader economic development taxpayers demand from public investments. Also needed will be more focus on the deeper economic development work that can create a foundation to grow whole new industries.

Newer State Programs

Without a doubt, the impacts of state project finance are significant and have been vital for the growth of the clean energy industry in the U.S. The prices of renewable energy technologies like solar and wind have come down in part through the sheer volume of project activity. However, it is becoming clear to many states that to truly grow the clean energy enterprise they must do more than just help bring down the costs of clean energy technologies through project financing. This recognition has resulted in a new generation of state programs, spearheaded by several of the state clean energy funds that go beyond project finance.

All of which points to a new brand of fund activity. Along these lines, increasingly ambitious efforts in a number of states have featured engagement on at least three major fronts:

  • Cleantech innovation support through research, development, and deployment (RD&D) funding
  • Financial support for early-stage cleantech companies and emerging technologies, including working capital for companies
  • Industry development support through business incubator programs, regional cluster promotion, manufacturing and export promotion, supply chain analysis and enhancement, and workforce training programs

On the cleantech innovation front, a few funds—such as California’s through its Public Interest Energy Research (PIER) program—have supported cleantech RD&D efforts. PIER, for example, funds basic and applied research on topics ranging from work on electricity grid improvement and building and lighting technologies to industrial process improvement, energy storage, renewable technologies, and other areas.

In like fashion, a few states have used their CEFs to make equity investments in solar, wind, and bioenergy companies and also provide working capital for expanding growth companies. The Massachusetts Clean Energy Center’s Investments in the Advancement of Technology program, for example, makes venture capital equity investments in promising early-stage companies that are developing and commercializing new clean energy technologies.

And for that matter, some state CEFs have been providing industry development support in a variety of ways, whether through the development of business incubator programs, such as those run by the New York State Energy Research and Development Authority; workforce training programs, such as the California Clean Energy Workforce Training Program; or initiatives focused on clean energy industry supply chains, such as those maintained by Ohio’s Advanced Energy Fund.

All of which suggests that the next era of state clean energy fund leadership is coming into focus, thanks to existing fund experimentation. What is needed now is a new, creative period of expanded CEF focus on clean energy economic development and industry creation to complement and build upon project financing for the installation of clean energy technologies. Such work could not be timelier at this moment of federal gridlock and market uncertainty.

Lewis M. Milford is nonresident senior fellow at the Metropolitan Policy Program of the Brookings Institution in Washington, D.C. Mark Muro is senior fellow and policy director at the program. Jessica Morey is a consultant with the Clean Energy Group. Devashree Saha, is a senior policy analyst for the Metropolitan Policy Program. Mark Sinclair is executive director, Clean Energy States Alliance. This article is based on a report, “Leveraging State Clean Energy Funds for Economic Development,” by the Bookings-Rockefeller Project on State and Metropolitan Innovation.