The story: “Duke Energy Progress issued $600 million in bonds to finance eligible green energy projects, including solar energy projects in North Carolina and South Carolina.” (Charlotte Business Journal)
What is a green bond?
A bond is a financial instrument an organization uses to borrow money. Companies (examples: IBM or Kimberly Clark) and governments (federal, state, city) are common organizations that issue bonds. Funds can be used to support a variety of needs.
Green bonds are earmarked for specific purposes that provide energy, sustainability or other natural resource benefits.
*Note that ECC is not a financial website or adviser and does not make any recommendation about finances or any financial benefit or risk. That is totally up to investors to research for themselves. This is just for general information about one aspect of the energy industry.
Green bonds have gotten more attention lately. “Green bond issuance spiked 120% to $93.4 billion globally last year, surpassing $155 billion in 2018. While the industry represents a lot of potential for growth, it also faces significant long-term risks,” said one financial writer.
Even at that $93 billion mark green bonds are a tiny part of the overall bond business.
“Even though green bonds represent a tiny proportion of bank borrowings, S&P Global Ratings expects that share to rise, supported by the fact that banks have a significant role to play in the transition to a low-carbon economy as key providers of funding,” said S&P Global.
Some familiar names in the Carolinas have tapped green bonds.
“Duke Progress can use its green-bond funding to build its own solar developments, purchase such projects built by other developers or pay for power purchases from independent clean-power producers. The funds also can be used for other clean-energy efforts, such as Duke’s plans to install hundreds of million of dollars worth of battery storage in the Carolinas over the next few years,” reported energy journalist John Downey of the Charlotte Business Journal.
Dominion Energy last year had an inaugural offering of green bonds. “The $362 million in privately placed bond proceeds will be used to reimburse Dominion Energy for previously deployed capital related to the acquisition, development and/or construction of 20 merchant solar projects with a total capacity of 574 MW of renewable energy. The projects – located in California, North Carolina, South Carolina and Virginia – are supported by long-term power purchase agreements with high-quality, investment-grade utility, municipal and corporate counterparties.” (Source)
Cities are in the act, too. “In December 2018, the City of Columbia, the state capital of the state of South Carolina, issued their first green bond. This was to fund the development of their storm water systems, in preparation for more climate change related adverse events.” (Source)
“Asheville is the first municipality in North Carolina to issue green bonds. Money from these bonds is being used to pay for infrastructure improvements and enhancements to protect Asheville’s water resources,” said Asheville City Source in 2015.
Green bonds are still new enough that they have some challenges. Said Forbes magazine, “It’s unlikely that you will be able to buy, say, an Apple green bond … since these bonds tend to be scooped up by institutional investors that can buy large blocks. Eventually, though, these big operators may pass along smaller lots to small retail investors like you and me. Two more caveats: 1) Green bonds are issued under voluntary standards. “For one, standards for issuing green bonds are still being worked out. There are several competing standards in the market currently. Issuers can adhere to the Green Bond Principles (GBP) on a voluntary basis. Climate Bond Initiatives (CBI) is another widely-used certification. But established ratings firms have been slow in moving the needle,” said a post in Energy Central. 2) This is still a small market, so the bonds are not extremely liquid (meaning you can’t necessarily sell them whenever you want).” That, from Forbes.
That was echoed in part by another publication. “But in reality, it has been tough for investors to find green bonds to buy — especially ones that meet the most rigorous standards,” said Barron’s magazine in February. “The Climate Bonds Initiative, which has a fairly high standard for sustainability, has publicly certified just $8.8 billion of U.S. bonds over the past three years. All of them were issued by government entities.”
There is also the question, What is green? The term is used so widely to label or promote a product or service that consumers may want to ask that question. Regarding energy and carbon, for instance, some people see how nuclear energy can increase carbon-free power, others may say that there is never a time that nuclear could be labeled as green or positive. What is green? Is green conservation? Hardening the electric system to storms? Helping homeowners with energy efficient appliances? Paying for stand-alone renewable energy systems for big data centers?
Responsible or green may also be in each investor’s personal interpretation. “Governments already do a lot of analysis on a project’s expected impact before it sells the bonds,” said one person in Governing magazine. The message seems to be that good homework is already done before issuing a bond, or it would not be issued in the first place. Whether that purpose aligns to a citizen of investor’s thinking is another.
As in so many things, consumers have to do their own careful homework. This is a complex topic. The energy industry, and the financial industry, have varied terms, processes, marketing efforts and people with deeply rooted ideas.
Once again, ECC or the author are not financial advisers nor are any items in this column any form of recommendation for or against any investment. Individuals should do their own homework.