How the Fate of PACE Could Influence the Clean Energy Economy

GreenOrder

How the Fate of PACE Could Influence the Clean Energy Economy

[Editor's Note: This is the first segment of a three-part series about Property Assessed Clean Energy (PACE) financing.]

A form of financing for renewable energy and energy efficiency -- Property Assessed Clean Energy or PACE -- has been getting a lot of attention lately:

First because of the rapid adoption and implementation of PACE programs by cities and municipalities around the country, and more recently due to tensions with the mortgage industry -- namely a high profile debate between FHFA (the agency which oversees Fannie Mae and Freddie Mac), clean energy advocates, the DOE and the White House about the future of PACE and the programs impact on the mortgage industry. What is at stake is a set of ramifications that could determine the future of our clean energy economy.

PACE financing is a potentially revolutionary way to retrofit commercial, residential, and industrial properties with energy efficiency and renewable energy technologies. The program overcomes one of the largest hurdles to investment in clean energy -- the upfront cost.

The political battle over the fate of PACE will play out in the coming weeks and months. Regardless of the outcome, there will be significant implications for stakeholders across industries and economic sectors and many important lessons for businesses seeking to benefit from the transition to a clean energy future.

What is PACE?

PACE is a financing mechanism that allows qualified property owners the opportunity to borrow money, with little to no upfront cost, to install renewable generation, energy efficiency, and water conservation measures. The loan is paid back through a special assessment tax levied against the property, which is senior to the first mortgage.

What does this mean in practice? Any "back-taxes" associated with the assessment are paid back before the regular mortgage in the case of default. In cases where the property is sold before the end of the repayment period, the remaining obligation is transferred to the new owner in the same manner as property taxes.

If designed properly, with the appropriate safeguards in place, PACE should result in a net positive cash flow for property owners -- individuals should reduce their annual energy costs by more than the loan fees.


The Structure of PACE Programs

In 2008, the city of Berkeley, Calif., developed PACE to encourage the deployment of solar power in their community. Despite a few initial challenges and hurdles, PACE gained national attention and spread like wildfire.

Variations of PACE legislation have passed in roughly 22 states -- each structured according to the unique needs of the region and municipality it's implemented in. These differences range from property sector coverage and eligible measures (e.g. renewable generation, energy efficiency, and water conservation measures) to loan terms and underwriting criteria.

Tensions

Proponents of PACE see the program as a quadruple win -- a way of creating new jobs, accelerating America's movement toward energy independence, significantly reducing greenhouse gas emissions, and freeing up homeowner cash flow by lowering energy bills. The president's administration, including Vice President Joseph Biden, Secretary Shaun Donovan, and Secretary Steven Chu, have endorsed PACE and granted municipalities $150 million in stimulus funding.

Some in the mortgage industry, however, feel differently about PACE. Fannie Mae and Freddie Mac have challenged PACE programs and called into question the seniority of the loan. In letters sent (pdf) by Freddie Mac to mortgage lenders on May 5, they were quick to remind "Sellers/Servicers that an energy-related lien may not be senior to any Mortgage delivered to Freddie Mac ." This has essentially put a halt to all PACE programs and left several homeowners concerned as they can't refinance or sell their home without repaying their entire loan -- exactly what PACE is supposed to prevent.

Needless to say, this debate has become a contentious one -- on one side, a group of people passionate about finding cost effective solutions to our clean energy needs, and on the other, lenders still reeling from the subprime meltdown that resulted from poorly structured, easy credit. In an era where uncontrolled lending led to a massive financial collapse, there is a right, even a necessity, to carefully examine any new finance mechanism. There is also a need to recognize that our energy, environment and economic challenges are connected, and it is critical to create a systemic solution that satisfies a multitude of stakeholders over the long term.

Opponents also are concerned that early versions of PACE may not have enough safeguards in place. That said, the DOE issued PACE Guidelines (pdf) on May 7, 2010, that contain protections for lenders and consumers. Additionally, there have been whitepapers by clean energy advocates to address FHFA's concerns (pdf). While it is important to note that PACE is not the silver bullet, if PACE programs are structured properly to protect both mortgagees and mortgagors (e.g. savings to investment ratio is high enough, financing is reserved for high-value investments, retrofits are constructed as intended, etc.), the model has the potential to scale-up rapidly and become an important part of America's clean energy future.

If the regulatory structure can be adjusted to meet each side's needs, PACE might have far-reaching implications for many stakeholders. The next installment of this series will look at the risks and opportunities PACE poses for each group, including federal and state governments, city and municipality leaders, home and business owners, existing mortgage lenders, energy efficiency financiers, financial institutions, electric utilities, general entrepreneurs and local contractors.


Pete Atkin, a senior associate, and Corey Glick work at GreenOrder, an LRN company. GreenOrder is a strategy and management-consulting firm that helps companies achieve competitive advantage through environmental innovation.

Image CC licensed by TonyTheTiger at en.wikipedia.