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2.5
Property Assessed Clean Energy Financing
Description
A new structure to finance renewable energy and energy efficiency investments is the property assessed clean energy (PACE) program model. A PACE program seeks to address both the up-front cost barrier to solar and the hesitancy of homeowners to make long-term investments in their homes, given that many people move every 5 to 7 years.
In a PACE program, the city or county finances the up-front costs of the energy investment, either directly or as an intermediary for private investors. The property owner repays the loan over an extended period (10 to 20 years) through a special property tax assessment. PACE programs are modeled after traditional land-secured financing, so in order for this type of financing to work, local jurisdictions must have authorization to create a special assessment district or another mechanism that allows energy retrofits to be financed through property tax bills.
Most states already authorize municipalities and counties to create special districts to finance “public goods” such as street beautification or sewer-system upgrades. In most states, the most straightforward method is to amend an existing special district authority to allow clean energy projects on private property. Some states have opted to create a new stand-alone law. Cities and counties in some states also have specific “charter” or “home rule” authority and can authorize PACE programs via local ordinance. As of October 2010, 23 states plus the District of Columbia have enabling legislation that allows local governments to create clean energy financing districts. Hawaii also allows PACE based on existing law. For the most up-to-date information on states that authorize PACE financing, visit http://dsireusa.org/userfiles/image/summarymaps/pacefinancingmap.gif.
With enabling legislation in place, a clean energy financing district is created by a local government. Individual property owners then decide whether to opt in to the district to enable financing of energy improvements on their properties. Property taxes remain the same for those who decide not to participate in the program—this is a key element in the marketing of the program. Only energy improvements that are affixed to the property are eligible under PACE programs. If a participant in the clean energy financing district sells the property, the special property tax assessment typically remains with the property, although in some cases the transfer can be a negotiation point at sale.
Funding for a PACE program has taken a number of different forms in the handful of initiatives that have already been launched. Boulder County, Colorado, is using voter-approved bond financing; Berkeley, California, is working with a private investor; Palm Desert and Sonoma County, California, used general funds to start the program. It is likely that large-scale PACE programs will eventually be financed using private capital provided through the municipal bond markets.
The American Recovery and Reinvestment Act of 2009 (the Recovery Act) removed the federal government’s “anti-double-dipping” rule, which was introduced in the Energy Policy Act of 2005. This rule created uncertainty about whether a PACE program financed by tax-exempt bonds prevented the property owner from also taking the federal investment tax credit (ITC). Property owners now are allowed to claim both the 30% federal ITC and take advantage of “subsidized energy financing” that can be an element of a PACE program.
In May 2010, financial regulators including the Federal Housing Finance Agency (FHFA), Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) expressed concerns about pilot PACE financing programs. On May 5, 2010, Fannie Mae and Freddie Mac sent a letter stating that their Uniform Securities Instruments prohibit loans that have a senior lien priority to a mortgage. In response to these concerns, U.S. Department of Energy (DOE) and White House officials have met repeatedly with Fannie Mae, Freddie Mac, and the financial regulators as well as PACE stakeholders across the country. In addition, DOE issued updated guidance for pilot PACE financing programs on May 7, 2010 (see Additional References and Resources). As of August 2010, efforts were under way to address this issue through legislative action with the introduction of bills before Congress in support of PACE.
As a result of this regulatory uncertainty, most PACE programs in the country are on hold. That said, some local governments continue to offer PACE programs for residential projects (e.g., Sonoma County) and for commercial projects (e.g., Boulder County). Commercial PACE programs are not subject to the FHFA rulings. In addition, some communities are exploring second-lien structures as an alternative to priority-lien PACE programs.
The PACE financing model offers a number of benefits to solar energy system owners, including a long-term, fixed-cost financing option; an assessment tied to the property (instead of the system owner’s credit rating); a repayment obligation that can transfer with the sale of the property; and the potential to deduct the loan interest from federal taxable income as part of the local property tax deduction. The benefits of this financial model for local governments include meeting climate and energy goals with little to no liability or exposure to a municipality’s general fund. These programs do have administrative costs, but those costs can be included in a bond issuance and repaid by program participants. The program can be structured to fully leverage private investment, so a municipality or county can implement a PACE program with almost no budget impact.
Implementation Tips and Options
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Determine whether the local jurisdiction is authorized to create a special district within an existing state statute and whether an amendment to broaden the statute is necessary. As an alternative, a community might be able to bypass the special district process and pass an ordinance that enables citizens to add a line item to their property tax bill for energy efficiency and renewable energy loans, or tap other funds; for example, a solid waste fund to finance the program. Vote Solar’s Web site provides sample documents of enabling legislation (see www.votesolar.org/PACE.)
- Consider including an allowance for contracts for the production of clean energy at the property in enabling legislation so third-party financiers can qualify for PACE funding.
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Identify whether existing bonding authority is adequate to support a PACE program in the community. Other funding sources, including federal tax credit bonds like qualified energy conservation bonds (QECBs) and public–private partnerships might also be possible.
- Design a financing structure that yields enough revenue to cover the principal and interest payments to the investors/bondholders, the program administration costs, and a reserve fund to cover participant delinquencies. Be aware, though, that some homeowners will be able to finance their projects more cost effectively using other sources of credit, such as a home-equity loan.
- Assess the scope of work involved in the program and determine whether an internal or external organization is better suited to administer the program.
- Work with the program administrator to create a simple application process for property owners.
- Educate the solar industry about the program and engage industry in program marketing. Installers talk to potential program participants, so it’s important to ensure that installers know all the program details.
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Include energy efficiency measures as eligible projects in addition to renewable energy projects, and prioritize property owners who have received energy audits or have otherwise made informed decisions about the most cost-effective improvements to their property.
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Understand the alternative financing arrangements—such as leasing or power purchase agreements (PPAs)—that are available to potential participants. Be sure to educate potential participants on all financing options.
Examples
Babylon, New York: Instituting the Long Island Green Homes Retrofit Program
Using resources from its solid-waste fund, the town of Babylon on Long Island offers homeowners a residential energy efficiency retrofit program. A licensed green energy contractor inspects the home and recommends energy efficiency improvements. The city pays the contractors making the improvements when the project is finished. The repayment period depends on the size of the project and the expected energy savings. The city calculates the monthly assessment, which is billed to the homeowner, and includes an interest charge of 3% to cover administrative costs. The monthly payment is calculated so that it is less than the energy savings from the investments in the home. Solar energy projects are reviewed individually to see whether they qualify under the program. The city emphasizes that it is not making loans to homeowners but is instead reducing carbon emissions (which the city has classified as solid waste) via a benefit-assessment program. To learn more, go to http://ligreenhomes.com/page.php?Page=home. A case study is available for download at www.townofbabylon.com/uploads/pdffiles/CaseStudy_BabylonNYGreenHomes.pdf. Berkeley, California: Developing the BerkeleyFIRST Financing Initiative for Renewable and Solar Technology
Berkeley approved a financing program in September 2008 to allow residential and commercial property owners to pay for energy efficiency improvements and solar system installations as a voluntary, long-term special assessment on their individual property tax bills. Under the BerkeleyFIRST (Financing Initiative for Renewable and Solar Technology) program, the city funds individual projects from bonds it repays through special assessments on participating property owners’ property tax bills. Berkeley contracted with Renewable Funding, LLC, to maintain turnkey program administration. Renewable Funding created an information and application Web site linked to a database to facilitate program operation and evaluation. The BerkeleyFIRST pilot financed 13 photovoltaic (PV) installations and has been a model for similar programs around the nation. An expanded program that will serve all of Alameda County and include energy efficiency is in the works. For more information, visit www.ci.berkeley.ca.us/ContentDisplay.aspx?id=26580. Boulder County, Colorado: Establishing Boulder’s ClimateSmart Loan Program In November 2008, voters in Boulder County authorized the county to issue up to $40 million in bonds to offer special financing options for renewable energy and energy efficiency improvements to local residential property owners. This program differs from the Berkeley model in several ways. The repayment period is shorter—loans to homeowners are repaid over 15 years as a special assessment on the homeowner’s property tax bill. Boulder County is the first local government to issue federally tax-exempt as well as taxable bonds to finance a PACE program; other jurisdictions have used taxable bonds only. Boulder County also decided to aggregate applicants and then issue a large bond based on demand instead of issuing individual “mini-bonds” for each project as Berkeley did. Applicants must attend a workshop to learn about the program requirements and to receive information on energy audits and the benefits of investing in energy efficiency measures before renewable energy measures. A commercial program is under way and bonds are anticipated to be sold in late 2010.
In March 2009, more than 1,700 people attended program workshops. Boulder County held its first application round for the ClimateSmart Loan Program in April 2009. In the first round of funding, 393 residential projects were financed at interest rates of 5.20% and 6.68%, respectively, for the income-eligible (tax-exempt) and open (taxable) bonds. In October 2009, an additional 219 residential projects were financed at 5.8% and 6.8%, respectively. PV is the most popular investment, with 229 installations financed via the ClimateSmart program with $3.6 million in grant funds as of September 2010. After a successful first year, Boulder launched its first round of commercial PACE funding in January 2010. For more information, visit www.bouldercounty.org/bocc/cslp. Sonoma County, California: Implementing the Sonoma County Energy Independence Program
With $100 million in funding, the Sonoma County Energy Independence Program (SCEIP) gives residential and commercial property owners the option of financing energy efficiency, water efficiency, and renewable energy improvements through a voluntary assessment on their property tax bills. The program is similar to others in California but is the first to include water efficiency measures. Eligible equipment must be permanently attached to existing buildings; new construction doesn’t qualify. The special assessments are attached to the property, not the property owner—if the property is sold, the assessment stays with the property, although in some cases, the seller may need to pay off the lien as a condition of sale. Once the assessment contract with the county is signed, the interest rate is fixed for the life of the assessment; the county could reduce the rate, if possible, after negotiating long-term financing for the program. The SCEIP can be combined with utility and state rebates, but financing is available only for the post-incentive cost. Conversely, tax credits do not affect the amount of financing available. As of November 2009, the SCEIP had financed 355 energy efficiency and renewable energy projects, for a total of $14 million. More information is available at www.sonomacountyenergy.org/energy-improvements.php. Palm Desert, California: Putting an Energy Independence Program in Place Initiated with $2.5 million in the city’s general funds, Palm Desert’s PACE program makes loans for up to 20 years at an interest rate of 7% to property owners qualifying for energy efficiency and renewable energy investments. After fully allocating the initial funding, a second tranche of funding of $5 million was financed by a bond issued by the city’s Redevelopment Authority. A third phase was fully subscribed, with half of the funds financing PV projects and half funding energy efficiency projects.
Additional References and Resources
Web Sites
Vote Solar works with state and local governments to pass enabling legislation and clear the way for PACE financing programs. This Web site features case studies, legal analyses, and model requests for proposals (RFPs) for program administrators.
Publications
Lawrence Berkeley National Laboratory, National Renewable Energy Laboratory, Solar America Cities. April 2010.This policy brief analyzes one of the advantages of PACE, which is the option to transfer the special assessment from one homeowner to the next when the home is sold. This analysis focuses on the potential for the outstanding lien to affect the sales negotiation process, rather than the legal nature of the lien transfer itself. Middle Class Task Force, Council on Environmental Quality, Vice President of the United States; Executive Office of the President of the United States. October 2009.This report discusses the energy-saving and job-creation opportunities offered by a comprehensive and national energy efficiency retrofit program. PACE financing is cited as a primary mechanism to finance this initiative. Renewable and Appropriate Energy Laboratory (RAEL), University of California, Berkeley. September 2009.This comprehensive guide to PACE programs addresses topics such as financing, marketing, legal issues, and program administration. It also contains a number of helpful case studies. University of California, Berkeley. April 2009.The RAEL Financing Seminar held in Berkeley, California, featured experts on municipal financing of clean energy. Program managers from Berkeley, Palm Desert, and Sonoma County, California, and Boulder, Colorado, discussed their experiences with implementing clean energy financing programs, including PACE financing programs.
In this section, you’ll find information to help you:
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