Picking Up the PACE
A new finance model could help rev-up energy upgrades in buildings across the United States.
The American Recovery and Reinvestment Act (ARRA) of 2009 has to date provided about $31 billion for clean-energy investments, creating green jobs (see “Retrofit Revolution,” March/April 2010), weatherizing low-income homes, and supporting renewable energy. While the ARRA is a good start towards the transition to a green economy, it is limited in its scope. “We need financing from the private sector. The stimulus is an improvement, but it’s still not enough. Here enters the PACE (Property Assessed Clean Energy) bond,” says Jack D. Hidary, who serves on the national steering committee for PACENow.org.
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Though informed about the climate crisis, many well-meaning consumers are stymied by the up-front costs associated with energy upgrades on both commercial and residential buildings. PACE financing is a market solution to encourage such building retrofits. Recently named one of Harvard Business Review’s 10 breakthrough ideas of 2010 and Scientific American’s top 20 ideas that can change the world, the PACE model allows a city to lend money to property owners for energy-efficient renovations and renewable-energy installations. Participants pay the loan back through a premium on their property taxes, with the debt transferring to the new owner upon sale of the property.
Similar to land-secured financing districts where a local government issues bonds to fund public-purposed projects, streetlights, or sewers, for example, property owners benefiting from the improvement pay increased property taxes. Each program may vary from city to city depending on the participation of stakeholders, specific energy upgrades permitted, and tax exemptions, but they all employ a property tax lien as collateral to ensure loan repayment.
The City of Berkeley, California, successfully concluded the first national pilot program at the end of last year with 13 solar installations funded through this model. Currently, 18 states have legislation enabling the program and that number is expected to reach 25 by mid 2010. The largest to date launched in March with the San Francisco Sustainable Financing Program, through which over $100 million is available to both residential and commercial property owners for clean-energy improvements. Fourteen of California’s other 52 counties are expected to follow suit with similar programs by this summer.
Essentially making investments in energy efficiency easier, less expensive, and more effective, PACE bonds allow owners to finance energy upgrades with monthly payments that are less than the expected utility bill savings. For example, say a commercial building in New York has utility costs of $2,000 a month. The building is retrofitted using a $30,000 loan from the city’s PACE program to bring monthly utilities down to $1,300. Over 20 years, the owner pays back the loan through increased annual property taxes. Assuming an 8 percent interest rate, this means an additional $135 a month. Because the expense is less than the utility cost savings of $700, the owner is cash-flow positive.
“Structurally, the billing mechanism is strong because it attaches financing to the property itself, giving outside sources comfort that the loans will be repaid,” says Ben Hinkle of Metrus Energy, coauthor of a report outlining strategies for energy upgrades.
Right now, both state laws and local ordinances are needed to move the programs forward, with the city or regional entity responsible for raising the capital. The private sector can facilitate such endeavors on both ends. Companies like Renewable Funding LLC consult with governments in the adoption of PACE law, provide administrative support for participants, and ultimately supply the up-front costs. Homeowners can use the company’s Web site to calculate potential savings with energy upgrades, browse a list of contractors, and apply for PACE financing online. Pending approval and after contractor estimates, Renewable Funding provides the capital, either through individual “microbonds” or bundled together with other local participants into a municipal bond.
“It’s win-win for everyone involved,” says Cliff Staton of Renewable Funding. “The homeowner saves money while reducing emissions, the economy benefits from job creation with local installers, and municipalities can meet environmental goals.”
The Department of Energy has received $80 million of applications for PACE-type programs, with additional pilots encouraged through the Energy Efficiency Conservation Block Grant Program. Most existing programs are using federal stimulus dollars to get started, and pending legislation in Congress supporting federal guarantees and tax exemptions could help further.
Not everyone is excited about this new model. Mortgage lenders for one are concerned; if the home’s mortgage is greater than its value and the homeowner defaults, the lender is at risk for the payments. The White House released a “Policy Framework for PACE Financing” to help ensure that effective homeowner and lender safeguards are included in pilots.
If correctly implemented, PACE financing looks to be a powerful tool for municipal governments to stimulate the local economy with increased property values, lower utility costs, and job creation. Especially for homeowners wishing to reduce their impact, the expansion of programs such as the innovative PACE model will allow the retrofit and renewable energy industry to grow and prosper.
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