Keeping PACE with Energy Efficiencies

Someone recently said “energy efficiencies aren’t low hanging fruit, they are the fruit lying on the ground.” Then why don’t people retrofit their homes? There are a lot of reasons, but one of them is finding the money to pay for efficiencies up front. While innovative financing tools (like my favorite bond financing) can help, they are only part of the solution.

An article in the New York Times this week called “A Stimulus That Could Save Money” traverses a well worn path in the discussion of energy efficiencies, asking the question “what will make people retrofit their homes?” The article doesn’t have any shockingly new ideas, but the discussion does surface the concept of Property Assessed Clean Energy financing—or  PACE.

Now, sidestepping for a moment the obvious answer, “you can sell the energy efficient home for more money,” PACE is an interesting way of paying for the retrofits as part of regular property taxes. This is another version of “on bill” financing that puts the payments back on the owner’s property tax bill rather than on their utility bill.

PACE enables a property owner to pay for efficiencies over time, and if she sells the home, the new owner would pick up the payments as part of their regular property taxes. The program is funded and financed, typically, with bonds that are sold by local governments. PACE legislation allows bonds to be sold for this purpose and for a lien to be placed on property so the payments are attached to the property—not the owner.

New York State, with some fanfare, just this month passed PACE legislation and the Oregon legislature passed HB 2626 earlier this year, allowing PACE as a tool to create demand for retrofits.

Oregon’s legislation sets up the Energy Project Bond Loan Fund, and the Energy Revenue Bond Fund, allowing the state Department of Energy to sell bonds to finance local retrofits. In turn, the money generated from the sale can fund smaller loans, not to exceed $40,000 per project.

Oregon’s PACE program also provides funding of renewable energy projects, like solar, wind and geothermal, with money from these funds.

Since the legislation was just passed, it is going to be some time before we see how the program affects demand and whether it creates new jobs. California was among the earliest adopters of the program, passing their PACE legislation in 2008.

Now as much as I love the idea of government borrowing money using bonds to finance serious retrofits paid back on property tax bills (a twofer: debt and taxes!), PACE is not a silver bullet solution.

So far the California program started slow, inspiring only hundreds in a state with more than 5 million single family homes, to take on renewable energy and efficiency projects. And all 40 of the Berkeley residents participating in the program opted for solar panels, not efficiencies. There is nothing wrong with solar panels, but tricking out a house with expensive renewable energy equipment when the underlying house might be an energy hog doesn’t seem very smart. Nor is it a way to break through the static of multiple split incentives stalling demand for deep energy retrofits.

The California Institute for Energy and Environment (CIEE) produced a fine report earlier this year called Enabling Investments in Energy Efficiency: A study of energy efficiency programs that reduce first-cost barriers in the residential sector that studied a variety of financing tools intended to stoke demand for retrofits. Their work confirmed what we found (see our two pager on green jobs and energy efficiencies) when looking at how financing energy efficiencies can create green collar jobs: it is only one part of the over all solution. The CIEE concluded that:

• Financing is one of many important tools to overcome barriers to implementing improvements in energy efficiency. It is valuable, but not sufficient on its own.

• Conventional energy efficiency loan programs cannot address much of the need without significant public support.

• New mechanisms are being developed to address key barriers. While these innovations hold great promise, they currently have limited to no experience.

And the review further concluded that the various financing programs have shown “little success in addressing the financial barriers faced by those most in need of financing, including those with the highest energy cost burdens as a percentage of income, low or fixed incomes, poor credit, and those in rental housing.”

However, attaching the financing to the property might make these sources of funding more accessible to these groups because it would tie the lien to an asset, the house or apartment building, meaning that the owner’s or renter’s credit would be less important.

Oregon’s PACE legislation is also on the lookout for jobs, requiring that contractors hired “employ at least 80 percent of employees . . . from the local work force,” and it establishes basic requirements and standard qualifications for project managers. This is a critical component that can create new career ladder jobs.

PACE is a good idea, and Oregon’s legislation has elements that could create fair access to real energy efficiencies and green jobs. But innovative financing tools, in order to get the maximum benefit ought to be embedded in a broader energy efficiency strategy.

As we continue to refine our chart reviewing energy efficiency programs we’ve decided to add a question mark. The question mark means that the program or idea has promise in a specific indicator area, but hasn’t been around long enough to really prove itself.