A little-known source of clean energy funding could prove a crucial job-creation engine in the states, as federal support diminishes and they seek fresh growth drivers.

Every state can create clean energy funds, or CEFs, which are typically supported by a small surcharge on monthly electricity bills. So far 22 states have done so, generating $2.7 billion overall for the clean technology sector during the past decade. Most have used the money to install tens of thousands of solar panel arrays, wind turbines and biomass facilities.

But a few states have gone further by broadening investments to include technology research hubs, fledgling cleantech startups and green job training programs. The idea is to use the money, which today totals some $500 million a year, to help develop all the components of the clean economy and stimulate the creation of thousands of permanent local jobs.

The strategy is still experimental, but it could turn these CEFs into a major source of economic growth, according to new report published today by the Brookings Institution, a public policy group, and the Rockefeller Foundation, a philanthropic organization. The report outlines a four-part policy strategy for every state to adopt this “next generation” of CEF spending.

Clean Energy Funds were originally set up more than 10 years ago to help decarbonize state energy systems in the face of climate change. According to the report, the funds have already helped bring forward 72,000 renewable energy installations the country urgently needs.

But times have changed, said Mark Muro, a report co-author and director of policy for Brookings’ Metropolitan Policy Program. “Economic development has emerged as a parallel and complementary interest to carbon reduction … There’s been a sharpening concern that the country really needs to look to supporting the emergence of cutting-edge technologies” as a way to start new industries and create jobs, he told InsideClimate News.

According to the report, retooling these state-level funds “could not be timelier at this moment of federal gridlock and market uncertainty.”

Congress isn’t expected to approve new funding for green technologies in 2012 after the 2009 stimulus—which poured tens of billions of dollars into clean energy projects—dries up. And policymakers won’t likely reinstate key federal subsidies that lapsed at the end of 2011, including the Energy Department’s 1705 loan guarantee program, whose bankrolling of the now-bankrupt California solar firm Solyndra sparked a Republican-led effort to scale back President Obama’s green agenda.

“We all need to be thinking about where we are going to get policy and finance support for further economic development in clean energy,” Muro said. “As it happens, the clean energy funds are there and in a position to innovate.”

The Evolution of CEFs

The country’s first CEFs popped up in places with aggressive renewable energy goals, like California, Massachusetts and Rhode Island. Other states gradually followed suit, namely in the East Coast and Midwest.

They used the cash to get more solar panels on rooftops and wind turbines in the ground, which they hoped would help make renewable electricity as cheap as coal. Affordable clean power would have another benefit: it would unleash consumer demand for solar and wind, and spur new jobs in installation, manufacturing, among other areas.

But some states saw that the high cost of renewable power generation wasn’t the only obstacle to realizing the promise of the green economy. In order to build lasting cleantech industries, they’d have to subsidize research and development for new technologies, like advanced biofuels, electric vehicles and highly efficient solar panels, and eventually build a ready workforce and supply chain for manufacturing.

And so, starting a few years ago, a handful of states began experimenting with ways to transform their CEFs by linking the money to strengths in their economies.

For New York, that has meant sending some of its CEF money into its growing number of regional clusters, where high-tech companies, universities and research institutions that have similar industry focus share expertise. In 2009, the New York State Energy Research and Development Authority (NYSERDA), which administers the state’s CEF and other clean energy programs, saw a chance for those regional clusters to help a rising crop of clean energy startups become viable companies.

The Clean Energy Business Incubator program has given $1.5 million from the CEF to each of six business incubators, which assist cleantech entrepreneurs in organizing, staffing and funding new businesses. Together, the incubators work with around 70 companies, whose products range from analytical tools that measure wind energy resources to energy management systems and mounting devices for solar photovoltatic installations. The money gets doled out over the course of four years as companies pass certain milestones, like completing a business plan or attracting private investments.   

So far, participating companies have created several hundred new jobs, raised more than $40 million in private capital and attracted $11 million in federal funding, according to the Brookings-Rockefeller report.

“We have tremendous hopes for programs like the Clean Energy Business Incubator,” said Janet Joseph, vice president of technology and strategic planning at NYSERDA. “If these CEFs could be used to not just support [clean energy] resource acquisition, but also technology development and business development, I believe we would further accelerate the development of a clean energy industry.”

Massachusetts is also steering a chunk of its CEF dollars in this direction.

The state’s CEF was formed in 1997 mostly to finance renewable power installations and energy efficiency programs. The fund has since been absorbed by the Massachusetts Clean Energy Center, a development agency created four years ago out of Gov. Deval Patrick’s sweeping set of green economy policies.

The bulk of the roughly $22 million that the state gets from utility bill surcharges still goes toward that original mission. But the center is increasingly capitalizing on the state’s high number of research and academic institutions and strong venture capital community to drive clean economic growth in other sectors, said Kate Plourd, a spokesperson for the Clean Energy Center. (Paragraph includes correction added on 01/12/2012.)

“We really try to take this holistic approach so we’re getting [economic] benefits from all sides,” Plourd said. The goal is to support “long-term economic growth for companies that will eventually create more jobs in Massachusetts.”

Its catalyst program, for example, awards up to $40,000 in grants to researchers working on early-stage technologies, such as high-performance lithium-ion batteries used for energy storage or a process that turns algae into motor fuel. A second program provides seed venture investments of up to $500,000 for companies that are advancing a range of renewable energy technologies and tools to cut energy use and climate-changing pollution.

In total, these two CEF-funded programs in Massachusetts—along with grants to help existing companies grow—have awarded more than $8 million in equity investments, loans and grants to companies since early 2009 and lured almost $300 million in additional funds. (Paragraph includes correction added on 01/12/2012.)

State officials say the strategy is paying off. Massachusetts now employs more than 64,000 people at nearly 5,000 clean energy companies, according to the Clean Energy Center’s October 2011 green jobs count. The number of clean economy jobs jumped 6.7 percent from July 2010 to July 2011. Companies surveyed in that report expect another increase of 15.2 percent this summer compared to last year.

No research has tracked how many jobs the CEFs alone have created in the states.

A Brookings report from July 2011 found that 2.7 million Americans work in the clean economy, which spans industries ranging from natural resources conservation and wastewater treatment to renewable energy deployment and energy-efficient construction.

What’s the Hold Up?

Why aren’t other states using their CEFs for economic development?

“For the most part, this is just a relatively new idea that really needs to be explained, and the benefits of it need to be shown, said Lewis Milford, who co-authored the report and is president of the Clean Energy Group, a Vermont-based advocacy organization.

Recently, Republican-led efforts have tried to dismantle state-level green energy initiatives, such as renewable energy standards, which require utilities to get a certain percentage of power from renewable sources. Opponents say if clean energy technologies are viable they should be able to thrive in the free market without government intervention.

But when it comes to CEFs, Milford said he wasn’t aware of such partisan spats.

In fact, he sees an increasing interest from state officials who are looking to both boost their economies in the lingering recession and cushion themselves from the loss of federal clean energy subsidies. “States are looking at their own competitive advantage and asking, ‘How do we grow what we have?'” he said.

Corrections: An earlier version of this article stated that the CEF in Massachusetts was formed in 1998 and that the state spends $22 million annually in CEF money. The fund was established in 1997 and the utility bill surcharge generates $22 million on average each year, with a bulk of that going into the CEF.

The article also stated that the state’s CEF programs gave more than $20 million to companies since early 2009 and lured $17 million in additional equity investments, loans and grants. The programs have actually awarded some $8 million in equity investments, loans and grants to companies since that time and lured almost $300 million in additional funds. These corrections have been made.