Property Assessed Clean Energy Financing (PACE)
Financing energy efficiency upgrades with property tax-based repayment.
Property assessed clean energy (Property Assessed Clean Energy Financing) financing supports energy efficiency and renewable energy projects by providing up-front capital that is subsequently paid back through a special assessment on participants’ property taxes.
Despite demonstrated economic and environmental benefits from energy efficiency, the initial costs to buy new equipment or renovate buildings are often a major barrier to greater implementation. PACE financing allows property owners to benefit from energy savings immediately while spreading the cost of improvements over a number of years. The PACE model addresses and overcomes challenges that both borrowers and lenders have identified in seeking to use traditional finance mechanisms to fund efficiency improvements.
Financing from a PACE program is repaid though an assessment added to property taxes. Unlike charges levied by utilities or localities on all ratepayers, a PACE financing program is only paid for by those who actually receive efficiency upgrades or renewable energy equipment. Thus there is no cost to those who do not participate in the program.
A notable feature of PACE financing is that it is tied to the property itself, not the property owner. If the property is sold, payments stay with those receiving the cost-saving benefits of energy efficiency (subject to negotiation). This feature encourages energy efficiency improvements even if a property owner does not expect to remain in the property for the duration of repayment. This can be a disincentive to the use of normal loan-based financing.
PACE financing also provides structural advantages for lenders. PACE program stake precedence over existing mortgages so that in the event of a default, PACE lenders would recover funds before a mortgage lender. Thus the risk for PACE lenders is minimized. Existing mortgage lenders also may benefit, as reduced energy costs improve property owners’ financial position, making them better able to make payments. However, some mortgage lenders are concerned the PACE financings’ precedence could harm them in case of default, and thus have opposed PACE programs.
Establishing a PACE financing mechanism requires action on the part of states and localities, but may be helped by ancillary support from the federal government. States must first pass legislation allowing the creation of local lending agencies. The agency then sets the terms for the financing and capitalizes the fund through municipal bonds, state and federal grants, or other means. Once the program is in place, a local property owner may borrow from the fund, make efficiency upgrades, and make repayments through a property tax addendum. Because local authorities set the specifics of each program, terms and funding sources will vary across the country.
Recently, secondary mortgage entities Fannie Mae and Freddie Mac, along with their regulator the Federal Housing Finance Agency, have moved to block PACE financing programs. As a result of this action, the majority of residential PACE programs across the country have been suspended.
Federal Support for PACE
Although PACE programs are developed and administered at a local level and based on state-granted authority, certain federal government policies can further reduce the risk of default or support programs directly.
The February 2009 Recovery Act included funding for state energy offices that could be used to create clean energy revolving financing and loan funds that could employ mechanisms like PACE.
Federal credit support could reduce interest rates for municipal bonds by reducing lenders’ risks, making the program more cost-effective for property owners. In the House of Representatives, a bill by Rep. Steve Israel (D-NY), H.R. 3836, would provide such guarantees for financing programs like PACE. Comparable, though broader, legislation has been introduced in the Senate as S. 1574 by Senators Lugar (R-IN) and Merkley (D-OR).
The Clean Energy Deployment Administration (CEDA), proposed in both the House and Senate energy bills currently pending in Congress, is not specifically directed to support PACE bonds, but could be used to provide credit support or even, plausibly, to issue such loans itself.
Legislation from Senator Boxer (D-Calif.) in the Senate and Representative Thompson (D-Calif.) in the House seeks to resolve the Fannie Mae / Freddie Mac issue by directing the two entities to accept PACE-type financing programs in their mortgage underwriting standards.