Property Assessed Clean Energy, or PACE, has taken off like wildfire since the concept was first introduced in Berkeley, Calif. in October ’07. PACE allows private property owners to pay for energy efficiency and renewable energy projects through an addition to their property tax bill, overcoming the high upfront costs that prevent most property owners from investing in such retrofits.

PACE financing has the capacity to be transformative: property owners realize immediate savings on their utility bills with minimal money down; local green jobs are created through increased demand for retrofitting goods and services; and greenhouse gas (GHG) emissions are dramatically reduced. With America’s building stock responsible for approximately 40 percent of its demand for energy, these kinds of improvements have the potential to get us significantly closer to our GHG reduction targets. Recognizing the potential of this model, Scientific American magazine recently named PACE one of the top 20 ideas that can change the world.

States around the country are recognizing the potential of PACE. Over the past 18 months, 16 states have adopted legislative changes to allow municipalities to use property taxes as a vehicle for private property improvements of this kind. In California, PACE financing can even be used for water conservation improvements. While many states and municipalities are just beginning the process of designing their programs, several cities and counties around the country already offer PACE financing to their residents, or are well on their way.

The majority of municipalities participating in PACE are in California, which has laws in place to require GHG reductions. In addition to Berkeley, the City of Palm Desert and the County of Sonoma have launched programs. San Francisco will launch in early March. Those will be followed by over 200 more jurisdictions by this summer, including Los Angeles County, the City of San Diego, and 14 counties working together as part of the California Statewide Communities Development Authority program. Areas that have launched PACE financing have seen a high level of interest among property owners. In Sonoma County, over 1,000 applications have already been received.

The beauty of PACE is that it supports individuals who want to reduce their personal carbon footprint but might otherwise not have the resources to do so. By making reasonably-priced financing available to homeowners around the country, PACE is tapping into a pent-up demand for these services and quickly sparking increased demand for everything from tankless water heaters to insulation to solar panels and technicians who can install them.

President Obama’s proposed “Cash for Caulkers” [pdf] program further encourages local governments to adopt the PACE model. This initiative aspires to retrofit 100 million homes and generate a million new jobs while reducing U.S. GHG emissions by 5 percent over the next 20 years. These incentives are expected to greatly increase the demand for energy retrofits and PACE financing.

Cash for Caulkers would allow eligible homeowners to reduce the cost of energy efficiency retrofits by up to 50 percent; used in concert with PACE financing (where available), that means a homeowner could make energy efficiency improvements with virtually no out-of-pocket costs, pay half-price for those improvements, and pay off the remainder through a 20-year assessment on their property tax bill — while saving money on their utility bills.

PACE is one example of how well-designed public-private partnerships can stimulate economic growth by supporting individual efforts to change energy consumption patterns. As America races to address climate change, all signs point to its tremendous expansion.

Buying power from your utility is a simple, pay-as-you-go service. Solar and energy efficiency projects, on the other hand, require tens of thousands of dollars up front and a long-term commitment to see a return on investment. Put another way, how many of us would have cell phones if we had to buy 20-years of minutes upfront? People are simply uncomfortable with pre-purchasing 20-years of electricity, even if it is a good deal.

We can turn our homes and business to clean energy quickly, but to do so we need to make paying for solar and energy efficiency projects in our homes and businesses much more like paying our utility bill. Under a plan proposed by Mayor Tom Bates, the City of Berkeley is now pioneering what many experts believe may be just such a solution: Berkeley FIRST.

Berkeley’s program launches on Nov. 5 and it has generated a great deal of discussion and interest. This is a short summary of how it works.

Berkeley FIRST

Berkeley FIRST (Financing Initiative for Energy Efficiency Renewable and Solar Technology) allows property owners to install solar systems and make energy efficiency upgrades with no upfront cost.

Berkeley pays the upfront costs through the issuance of a new kind of municipal bond. The bonds are repaid from a new line item on participating property owners’ property tax bills over 20 years. Participating property owners pay for only the costs of their energy project.

The program is 100% “opt-in” and property tax expenses remain unchanged for those who choose not to participate.

The result: solar and energy efficiency projects are paid for over a long period of time, in bi-annual installments. The interest rate is fixed. Property owners do not need to access their own capital or credit. And if the owner sells the property, the repayment obligation transfers along with the property itself.

How does it work?

Berkeley FIRST is just a new twist on a common method of financing improvements in communities. California, like most states, has long provided cities and counties with the power to pay for certain projects such as sewers, parks, and the undergrounding of utilities by passing the cost directly on to the property owners that benefit from the project.

To do this, the city creates a “land-secured” financing district that includes the properties that would receive a benefit from the project. It then sells bonds to cover project costs and the property owners who receive a benefit — connection to the municipal sewer system, for example — pay back the costs through an addition to their property tax bill.

Berkeley created a slightly modified version of this type of finance district — in their case, a Mello-Roos Community Facilities District — that allows for the financing of energy efficiency and solar projects on private property. The California legislature has now authorized all cities and counties to follow suit using a similar type land-secured finance district, called a Contract Assessment District, with the passage of AB 811. The City of Palm Desert has created its own innovative new solar and energy efficiency financing district using this method.

(Many other states have similar laws. Vote Solar has put together useful information and resources on the program, along with a review of relevant state laws in 20 other states that might want to replicate the model.)

There are a couple other significant changes to the usual financing district. First, the Berkeley FIRST program is entirely voluntary. You only pay additional property taxes if you “opt-in” and you only pay for the cost of your project. Second, the City is a private financial partner to handle the financing and bond purchase for lots of small projects instead of the usual one large, expensive project.

Property owner experience

The process for a Berkeley property owner is fairly straightforward. They apply to the program online through a dedicated Berkeley FIRST website. Assuming they are not late on taxes or in foreclosure, the property owner then receives a reservation for funding. They have nine months to install their solar system and return to the website to request a funding. After signing forms and providing documentation, the check is issued to the property owner. Behind the scenes, a tax lien is placed on the property and a small bond is sold to provide the funding necessary to pay for the project.

The City contracted with Renewable Funding to finance and administer the pilot program. (Full disclosure: I now work with Renewable Funding though not directly on the Berkeley program.)

Who is next?

The takeaway message is that there is no reason for your community to wait. Berkeley and Palm Desert are underway with exciting new financing programs. San Francisco and Boulder County, Colo., are in the process of adopting their own programs, with at least two dozen more in the wings.

A study soon to be published by a team from the UC Berkeley Renewable and Appropriate Energy Laboratory found the potential for this type of financing to go national — investing $240 billion in renewable energy and energy efficiency, reducing 37 million metric tons of CO2, saving homeowners an average of $190 a year, all at no net cost to government.

Let’s get started!