Municipal Energy Financing is Expanding: Is It Working?
Twenty states now allow cities and counties to finance energy efficiency retrofits and on-site renewable energy generation, with property owners repaying the loan with a property tax assessment. Five municipalities launched Property Assessed Clean Energy (PACE) programs in the past two years and these programs have spent $37.5 million to help enable close to 2,000 voluntary residential retrofits.
These early programs have provided key lessons for expanding PACE, from broadening access to financing for retrofits, aggregating programs across larger jurisdictions to lower costs, and maximizing the savings from energy efficiency investments.
Access to long-term, lower cost financing is the greatest promise of PACE. While interest rates have yet to beat rates for prime borrowers, PACE provides an investment tool for those who may lack access to affordable private loans, who want longer loan terms (15 to 20 years), or who want to be able to transfer the loan and the improvements to the next property owner. More access to finance means more energy savings in the community.
PACE programs are also learning that aggregation matters. While local administration can provide a good “strangle effect” – if there’s a problem, you have someone nearby to strangle – aggregating bonds at the county, regional or state level can reduce overhead and interest rates. Already, California is opening a regional borrowing pool for PACE programs and the Colorado legislature is considering a statewide PACE program.
PACE also offers an opportunity to maximize energy savings and cost efficiency. The trick for PACE is the balance between energy efficiency and on-site renewable energy. Solar photovoltaics (PV) are the sexy seller of PACE, but are much less cost effective energy savings (or carbon reductions) than efficiency measures. Some programs have now set qualifiers of 10% energy savings in order to access financing for solar PV, but this target is poorly considered and too low.
The longer terms and transferability of PACE financing mean property owners should be required to complete all improvements with a payback of 10 or even 15 years. An alternative qualifier would be to complete all energy savings improvements whose payback is half their useful life. A city with a strong commitment to energy savings and greenhouse gas reductions – not to mention increasing jobs and property values – could even require homes to complete these improvements as a condition of sale, and also provide the financing.
Let’s not forget that long finance terms mean the energy savings of these retrofits exceeds the loan payments – property owners would be required to save energy and money.
PACE is not only a tool to maximize energy efficiency gains, but to do it cost effectively. The federal weatherization program appears at first glance to far outstrip PACE, serving 6,000,000 homes in 2008 while PACE programs are only nearing 2,000 properties served. But every dollar spent on federal weatherization comes from government. Each dollar spent in a PACE retrofit is 1 cent government overhead and 99 cents private capital.
Furthermore, PACE allows city and county governments to become a hub in a comprehensive community-wide energy self-reliance program. Administering a PACE program puts the city at the center of energy policy, financing, contracting, and coordination. Banks, contractors, unions, code and permitting agencies and equipment suppliers are integral participants in a PACE program.
A PACE program can invest in energy efficiency in both thermal and electrical energy. It can invest in renewable energies that cut across household uses (e.g. solar hot water heaters, solar PV, geothermal, biomass heaters). A PACE program, in other words, can bring the pieces together, a first step in comprehensive planning. Indeed, Sonoma County (and Minnesota in its enabling ordinance) allows for the financing of level 2 energy chargers for electric vehicles, bringing EVs, with their potentially revolutionary potential to build a distributed generation and storage capacity to urban areas, into the equation.
PACE programs are still in their infancy, and emerging programs will need to apply the lessons of broadening access to financing, aggregating bond issues, and maximizing efficiency. But the promise of PACE is enormous. It puts a half trillion dollar municipal bond market at the service of energy efficiency and on-site renewable energy. And it offers a chance to put municipalities at the center of their energy future.
Find out more about the lessons learned in early PACE programs from Municipal Energy Financing: Lessons Learned, from the Institute for Local-Self Reliance.