Guarantees can help ensure that doesn’t happen

Solar+storage systems provide an array of benefits to building owners of all kinds. They ensure buildings (and the people who use them) are prepared for the power outages that are becoming more frequent as climate change increases the risk of storms and wildfires. They reduce the carbon emissions that are contributing to climate disasters. Often, they also bring cost savings.

The outsized positives of solar+storage systems particularly benefit low-income communities, where many typically don’t have the resources to relocate or access alternative sources of electricity during power outages. But so far, deployment of these systems in these communities has been slow. One big reason is the upfront cost of installing a system.

The Kresge Foundation aimed at this problem in 2020. It committed $3.3 million to the effort, including a $3 million loan guarantee to support solar+storage projects in underserved communities in partnership with Clean Energy Group and NYCEEC. Clean Energy Group managed the overall effort and assisted with initial project outreach, engagement, and technical assessments, while NYCEEC evaluated projects and provided loans to finance these important projects.

This is one of the first examples of a foundation strategically using grants alongside social investments, such as guarantees to bring clean energy technologies to low- and moderate-income neighborhoods. But we need more of this. Four years into this work, NYCEEC has reflections that others investing in green energy might find illuminating, starting with the power of a guarantee.

Program design

NYCEEC is a nonprofit green bank with a history of supporting clean energy projects in the kind of neighborhoods most vulnerable to climate disasters.

To help more community organizations participate in the clean energy transition, NYCEEC launched an effort to provide loan funding for suitable solar projects. Kresge’s guarantee allowed us to make that happen. The guarantee covered losses of up to 50% on qualifying NYCEEC loans. Clean Energy Group managed the overall effort.

This guarantee gave us more comfort in financing these projects as it reduced our credit risk, allowing us to provide more debt or lower the interest rate. Those changes allowed more projects to become economically feasible. The COVID-19 pandemic certainly created delays, but in the end, we put the entire guarantee to use over a four-year loan origination period.

During that time, the $3 million guarantee supported 10 loans totaling more than $8 million. Ultimately, we expect it will mobilize over $96 million of capital (as NYCEEC loans fund only a portion of each project).

Examples of the guarantee at work

Each guaranteed loan supports decarbonization projects in communities where they’re most needed. Among them were two solar+storage projects at affordable multifamily housing properties in upstate New York. The Kresge guarantee backed a similar project for a community facility in Staten Island.

In response to the demand for our loan capital, Kresge agreed to amend the guarantee to support solar projects where storage was economically infeasible but where significant community benefits were still on the table.

NYCEEC completed two such transactions—in New York and Maryland—to finance solar and vital roof repairs for affordable multifamily housing. These repairs not only permit solar installations but should also increase building longevity.

“Flexibility like this is a strategic response to ensure Kresge’s guarantee generates the maximum positive impact in a world that constantly evolves,” said Joe Evans, portfolio director and social investment officer at Kresge. “The true measure of success lies not just in sticking to the original plan, but in the ability to pivot purposefully toward the most meaningful outcomes for communities and investors.”

We also used the loan guarantee to support deploying more innovative decarbonization solutions. This included a predevelopment loan for incremental upfront costs of building electrification and design work for a net-zero affordable housing project in upstate New York. This pre-development work is increasingly important, as building owners must get ready for financing by showing how they can feasibly put their loan to work.

The guarantee also supported loans to two innovative projects in New York City. The first will attach prefabricated wall panels to existing affordable housing, increasing the building’s energy efficiency and occupant comfort with minimal tenant disruption. The second involves modularized new construction for all-electric affordable multifamily housing, offering a template to construct green buildings more efficiently.

Two guaranteed loans involved novel applications of community solar to support both low and moderate-income communities in New York. The first will finance solar+storage and public EV charging. The solar installation will reduce electricity costs for residents through community solar subscriptions. The second transaction involved a large rooftop solar installation on a commercial property where community solar subscriptions will offer 40% or more of the energy generated to nearby residents. The energy from community solar projects will be supplied at low prices to nearby residents, many of whom are renters or otherwise unable to install solar.

What we learned

One benefit of the guarantee is it allows NYCEEC to underwrite a larger loan than might otherwise be possible. Where borrowers did not require larger loans from NYCEEC, the guarantee reduced the overall risk profile of NYCEEC. It should increase the availability or reduce the interest rate when NYCEEC raises capital. Because the guarantee also lessens NYCEEC’s credit risk, the guarantee allowed NYCEEC to price the loan with a lower interest rate to the borrower. For Kresge, offering a guarantee helps NYCEEC achieve its desired outcomes with no initial capital outlay.

Guarantees aren’t a silver bullet. For some projects, other factors outweigh the risk reduction of a guarantee. This is where grant support may be necessary. Additionally, a 50% loan guarantee may not attract new capital providers to a transaction because they may have difficulty evaluating the guarantee or may only be interested if the loan were 100% guaranteed.

For nonprofit lenders such as NYCEEC, overall funds availability may, at times, be a bigger constraint to lending than credit risk. A program-related investment (PRI) may enable more lending than a similarly sized guarantee in those cases. That said, the guarantee was an extremely innovative way to support Kresge’s strategic objectives. For NYCEEC, thanks to the Kresge guarantee, we deployed $8 million to support clean energy projects in underserved communities, which should mobilize over $96 million of project capital.

With a diverse pool of loans, credit issues or draws against the guarantee—even for loans supporting innovative technologies or under-resourced borrowers—are likely to be small relative to the guarantee’s overall impact. We’re proud of this work and grateful to Kresge’s partnership.

What’s clear is simple: Guarantees can be a valuable tool for foundations to assist mission-driven lenders like NYCEEC achieve their goals.