The Community Reinvestment Act (CRA) is a U.S. federal law enacted in 1977 to encourage financial institutions to meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods. Although the CRA is primarily focused on lending to support community development, there are new regulations that will expand CRA investment into renewable energy projects.
The Community Reinvestment Act and Renewable Energy Projects
Under the CRA, banks are assessed on their performance in lending and investments that benefit their entire community, including investments in projects that improve energy infrastructure and sustainability.
Banks are assessed a CRA Rating of:
Outstanding
Satisfactory
Needs to Improve
Substantial Noncompliance
A good CRA rating is important for banks as it will ease scrutiny from organizations like:
the Federal Deposit Insurance Corporation (FDIC)
the Office of the Comptroller of the Currency (OCC)
the Federal Reserve.
Maintaining a good CRA rating also increases a bank's chance for additional community funding opportunities and partnerships.
Understanding Renewable Energy Project Finance
Investment in the development of renewable energy projects is at an all-time high and is expected to continue growing for the foreseeable future. Each new project requires multiple investment sources and requires a unique financing model that is often characterized by its reliance on the project's future cash flows, rather than the companies' balance sheets. Typically, the financing for renewable energy projects includes a mix of debt, tax equity, and sponsor equity (cash).
The standard project financing structure of a renewable energy is:
50% debt
40% tax equity
10% sponsor equity.
Debt is usually provided by banks or specialized lenders and must be repaid with interest over time. Tax equity investors contribute capital in exchange for tax benefits like Investment Tax Credits (ITCs) or Production Tax Credits (PTCs), which can significantly reduce the effective cost of the project. Sponsor equity, or cash contributed by the project developer, constitutes a smaller portion of the total financing but is essential for covering project costs and demonstrating financial commitment.
The project's revenue streams, such as power purchase agreements (PPAs) with utilities or other customers, serve as the primary source of repayment for the debt and returns for the equity investors. This structured approach helps distribute financial risk and align interests among various stakeholders.
Benefits of the Community Reinvestment Act for Banks
The new CRA regulations provide a multitude of new investment opportunities for banks to improve their CRA scores. Now, when banks invest in renewable projects via tax equity investments, these investments will count towards their CRA rating to improve community infrastructure, which is important for their regulatory assessments and the public perception of their community involvement.
A strong CRA performance can also facilitate mergers and acquisitions, as regulators consider CRA ratings during their review processes. Banks can find and invest in both new projects to invest in and projects previously stalled due to a lack of funding within their community. These investments are a brand new opportunity for Banks to improve their CRA rating.
Benefits of the Community Reinvestment Act for Renewable Developers
For renewable energy developers, the CRA offers access to a pool of capital from banks looking to fulfill their CRA obligations. This is important because one of the most difficult components of project financing to find is tax equity investment. Many projects in the interconnection queue have their development stalled due to a lack of investment. The CRA provides a pathway for developers to tap into bank investments that are aligned with the goals of community development and sustainability.
IRA Energy Community Incentives for Renewable Developers
Additionally, there are tax incentives via the Inflation Reduction Act (IRA) and other local incentives for projects being developed in underserved and low-income communities. By aligning their projects with CRA and IRA, developers can unlock additional funding opportunities, build partnerships with financial institutions, and receive additional tax benefits on their projects.
States Where Renewable Energy Projects Can Benefit from the Community Reinvestment Act
The CRA applies to banks operating throughout the United States. This means that renewable energy projects in all states can potentially benefit from CRA-related investments and financing. However, the specific impact and opportunities can vary depending on the state’s policies and the local bank’s commitment to community development. States and areas with progressive energy policies or significant renewable energy initiatives, such as New York, Illinois, Maryland, Virginia, and New England might see more active engagement from banks in renewable energy projects due to the high level of interest and investment in these areas. Nonetheless, the CRA’s framework supports renewable energy projects in any state, provided the projects align with the broader community development goals set forth by the CRA.
How Does the CRA Work in Practice?
Stalled renewable energy projects present a great opportunity for banks and developers alike. These projects are stalled primarily due to a need for additional funding. Developers can see projects once thought to be severely delayed and give them new life with investments from banks looking to improve their CRA rating.
Using LandGate’s unique datasets, banks can find stalled projects in low-income communities with developer contact information. Project developers can understand which projects in development will be able to attract CRA-compliant tax equity investments from banks. Both banks and renewable energy developers alike can find brand new opportunities made possible by new regulations to the CRA.
