California Center for Sustainable Energy

New clean energy loans offer great promise

In the sustainable energy business, we often talk about breaking down the market barriers to reach a green tipping point when the momentum for energy efficiency and renewable energy moves beyond trendy to become unstoppable. But there is always an elephant in the room – people still believe energy solutions, for home or business, cost too much. We think there is good reason to believe some California property owners can bag that elephant with property assessed clean energy ( PACE) financing programs.

Decreasing costs for renewable energy systems and substantial government rebates and tax deductions have gotten the ball rolling for clean energy investment in homes and businesses: in particular, renewable energy implementation has been growing in California by 30-50% per year for the last decade.  But the numbers are still small in absolute terms, with less than 1% of homeowners installing solar; and advanced energy efficiency retrofits still a novelty in most places despite their potentially compelling cost-effectiveness.  Energy-related home upgrades represent a great opportunity for most homeowners to save money every month and to e more comfortable in their homes at the same time—with a great return on the investment!  Focus groups developed by CCSE and others clearly indicate that broad availability of financing is critical for ramping up the building performance industry and triggering mass adoption of clean energy upgrades to our existing homes and buildings.

PACE financing for energy retrofits allows local government entities to offer loans to eligible property owners to finance energy efficiency improvements, renewable energy installations and water conservation measures through a voluntary assessment on their property tax bills. This assessment approach adds a powerful new option to the clean energy finance landscape and is likely to be a key enabler of retrofit projects to improve building energy performance statewide.  For cities and counties, this mechanism represents a large, independent private source of capital that can contribute centrally to improving the building stock and meeting mandated energy and carbon reduction goals.

CCSE has been working for the past two years to bring the PACE model to the San Diego region.  We successfully partnered with the leading firm in this arena, Renewable Funding, to develop winning proposals for programs that we expect will cover our region with PACE options this year. For the City of San Diego’s Clean Generation Program, CCSE also brought to the table the North American Development Bank (NADB), which provides low-cost finance to environmental infrastructure projects in the U.S.-Mexico border region. NADB is funded by the governments of the U.S. and Mexico and is a very secure source of capital – capital that is standing by to pay for energy-related property improvement projects and to create well-paying local green jobs in the process.

PACE has already hit a chord with local governments and the public. Half the counties in California either have such a program or are in the process of starting one. In Sonoma County, 800 solar and other projects have received nearly $30 million in financing.  PACE legislation has passed or is under consideration in 29 US states.  When PACE is combined with President Obama’s HOMESTAR energy retrofit initiative now moving through Congress, it should spark a nationwide bloom of so-called “building performance” upgrades – with all the jobs and economic activity that entails. And it will drastically cut energy use in many homes and businesses.

Designed properly, PACE programs can provide great public benefit with very low risk to local jurisdictions themselves.  While some programs have initially utilized general funds from the local government to get started, the trend today is to move towards capital markets, particularly the bond markets, for PACE program capital.  The local jurisdiction is not party to the transaction between the property owner and contractor, and need not be party to that between the financing agent and property owner.  It’s a win-win for local governments and property owners!

In the near term, the widespread rollout of PACE is not without its challenges. Fannie Mae and Freddie Mac, the underwriters of the vast majority of residential mortgages, have expressed concern over the relationship of the PACE assessment to the primary mortgage; clarification on this issue is forthcoming from FHFA, Fannie and Freddie’s regulator. It may be that widespread PACE roll-out is staged to ensure maximum learning from the first programs and allow full development of standards for projects to be funded through PACE. Such standards could be good for the building performance marketplace in that they would increase uniformity of these programs, set firm expectations on contractors, enable targeted messaging to interested property owners and facilitate the quality assurance process.

PACE can be a key mechanism for providing capital to property owners without affordable access to traditional financing – a large portion of the population in today’s economy – while helping to achieve energy savings, reduce use of fossil fuels, curb greenhouse gases and create a more sustainable environment. In the process, growth of the building performance industry and its related trades will create long-term, well-paying local jobs – critical for our economic recovery and long-term economic health.

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