By Ken Edelstein
Green Right Now
Soon after Aaron Mann and his wife bought a 3,500-square-foot home overlooking San Francisco Bay, a friend looked up from the driveway with envy.
He noticed that the house in the Berkeley Hills had south-sloping and west-sloping roofs, unobstructed by trees or other buildings. It would be perfect, he said, for photovoltaic solar panels.
The visitor planted an idea for the Mann family: Why not cut their power bills and reduce their carbon footprint by investing in a solar electric system?
On and off for the next couple of years, the Manns discussed their fantasy. But they never did anything about it; they couldn’t settle on a way to finance the solar panels.
Taking out a home equity loan was one possibility. But what if the Manns sold the house soon after the project was complete? They’d end up saddled with tens of thousands of dollars in debt for an improvement that wasn’t likely to boost their market value by anything near the amount they’d invested.
Paying for the project with cash would leave them with precisely the same problem.
“The person who’d be enjoying the benefit of the reduced electricity bills would pay nothing,” Mann lamented.
Then, in 2008, the city of Berkeley announced a pilot program for financing property owners’ clean energy projects. It sounded too good to be true: No upfront cost to homeowners. No cost at all to the city. You’d pay for your home improvement with a loan, but the debt would be carried by the property rather than by the current owner. Not only that, the program had a streamlined application process and was structured so that money wouldn’t wasted on shoddy work by bad contractors.
Not surprisingly, the concept that grew out of that pilot has become a high-powered public policy phenomenon. PACE financing – it stands for “Property Assessed Clean Energy” – is shooting like lightning through statehouses and city halls across the country.
“It’s one these ideas that, if it can be set up correctly, is win-win-win-win-win,” says Ryan Foshee, a Houston-based advocate for programs that make cities more sustainable. “The construction industry’s been hit so hard by the recession. This puts people to work locally. It promotes local investment. And it saves energy.”
PACE is the brainchild of Cisco DeVries, who three years ago was chief of staff to Berkeley’s mayor. DeVries had been charged with coming up with ways for the Bay Area city to meet an ambitious goal of reducing its greenhouse emissions by 80 percent.
At the same time, the city happened to be developing a property tax assessment district for a neighborhood that wanted to place its utilities underground. That scheme, common in California, called for Berkeley to issue bonds to pay for the utility line project, then for homeowners in the neighborhood to pay for the project gradually through special assessments on their property taxes.
“I was just trying to look at all kinds of options” to help homeowners pay for clean energy projects, DeVries recalls. “I had this sort of moment, where I said, ‘Jeez, if you can put the poles and wires underground,’” then why not use similar bonds to put solar systems on people’s roofs?
Stripped down, his idea was simple: A city or county issues bonds. Homeowners or commercial property owners apply for loans funded by those bonds. The loans must be used to invest in efficiency or clean energy projects. And the property owners pay back the loan over 15 or 20 years (with interest, of course) through a special assessment tacked onto their property taxes.
DeVries and his colleagues realized PACE needed to be more than just a financing mechanism. Clean energy projects have long made economic sense for homes, but few homeowners take the step of actually investing in them.
“I think it boils down to the fact that energy bills are not such a big factor in peoples lives that they’re going to do something about them,” says Merrian Fuller, a researcher at the U.S. Energy Department’s Lawrence Berkeley National Laboratory. Fuller, who’s tracked PACE closely since its beginnings in Berkeley, explains that people don’t have time to hassle on their own with details like choosing which precise technology to use, how to finance the project and which contractor to pick.
So DeVries and his colleagues spent a lot of time figuring out how to make everything easier, ranging from pre-approved contractors to standard, streamlined loan applications.
According to Mann, they succeeded. “It was a very elegant way to finance,” he says. In November 2008, his family became the very first participants of the pilot program. Mann estimates that the 32 panels on his roof have cut the family’s electric bills from around $4,000 a year to less than $300. In exchange, the family pays an extra $2,400 a year in property taxes, part of which is tax deductible.
PACE’s spread since the Berkeley pilot started has been remarkable. First it was picked up by other eco-centric pockets of the country. Boulder, Colorado’s ClimateSmart program is writing $1 million a week in loans. In California, San Francisco is about to implement its own program. Los Angeles County isn’t far behind, and a statewide consortium called CaliforniaFIRST is working with 14 counties to set up a joint PACE program.
It hasn’t hurt that the nation’s new energy secretary happens to be from Berkeley. Steven Chu, a Nobel Prize winning physicist, was director of the Lawrence Berkeley Lab (where Fuller works) before President Obama picked him to lead the nation’s push toward clean energy.
“I had the opportunity to brief him on PACE early on,” DeVries says, “and he was certainly an early supporter of the concept.
Millions in energy-related block grants under the president’s stimulus package have gone toward setting up PACE programs across the country, including $30 million in California alone. And more money appears to be on its way. Part of the federal dollars will be used to kickstart bond issues; part may be used to offset the loans’ underwriting costs (which normally would be passed on to the borrower in the form of administrative fees or interest rate surcharges).
The Energy Department also is in the midst developing standards for PACE programs, and Congress seems likely to approve credit guarantees that would lower the interest rates on the PACE program.
Meanwhile, local governments — and at least one entrepreneur — aren’t waiting around for the rules, grants and loan guarantees. That entrepreneur is DeVries, who left his city job to spend more time with his toddler while Berkeley was preparing for its first PACE bond offering in 2008.
After he left, he says, he kept getting more and more calls from advocates, bureaucrats and politicians, who wanted to know how to set up PACE programs in their own communities. So DeVries helped to start a company, called Renewable Funding, to help cities set up their PACE programs.
At least 16 states where laws might have conflicted with PACE already have passed legislation, designed to overcome legal hurdles that might make it difficult for local governments to develop their own programs.
Ryan Foshee, who works for an organization formed by mayors called the ICLEI-Local Governments for Sustainability, says he’s helping Houston, Dallas and three other Texas cities that have formed a “PACE Partnership,” which is working with the state government to develop PACE in Texas.
“Houston’s got what they call a straw man — the first chop at it,”” Foshee says. “It’ll surely be tweaked before they actually start up.”
There are variations off the original PACE program. Some fund the gamut of efficiency and clean energy projects. Foshee says the Texas cities are likely to concentrate on high-efficiency products and weatherization for both home and commercial property owners. And the Texas cities are planning to partner with local banks to offer the loans, rather than issuing bonds.
Another feature — workshops for property owners — has become part of most PACE programs since the Berkeley pilot. The idea, Foshee says, is to help participants “decide in an educated way” what they want to do.
Fuller stresses that the city’s objective isn’t to get more property owners to borrow money through PACE. It’s to help property owners actually reduce their energy bills and carbon footprint. So participants who plan to live in their homes for many years may use a PACE workshop to help them figure out that they can pay lower interest with a second mortgage.
“It’s about giving people options,” she says. “PACE is a stable financing platform from which to build around.”
- PaceFinancing.org — a project by Brigham Young University students to provide information on PACE funding opportunities in PACE-ready states.
- PaceNow.org — an information site with an archive of states’ enabling legislation and background on the history of PACE in various states.
- Database of State Incentives for Renewables and Efficiency — information about tax credits for many types of renewable energy sources, including PACE financing.
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