The Story of PACE

August 11, 2013

Buying power from your utility is a simple, pay-as-you-go service. Most solar and energy efficiency projects, however, require homeowners to invest thousands of dollars up front and to maintain a long-term commitment to see a return on that investment. To see the depth of this commitment from a different perspective, how many of us would have cell phones if we had to buy 20 years’ worth of minutes up front? People are simply uncomfortable with pre-purchasing 20 years of electricity, even if it is a good deal.

At its most basic level, Property Assessed Clean Energy (PACE) is simply a use of state and local government authority to levy taxes and assessments. There are already 37,000 special assessment districts in the United States that fund everything from street paving to seismic retrofit. Using the same laws for sustainable energy improvements did not seem like a large stretch.

Though PACE’s conceptual step was small, the stakes were huge. In the last decade, state and local governments have set aggressive sustainability goals, including major reductions in energy use over the coming decades. To achieve these goals requires an investment of $280 billion by America’s homeowners and businesses. PACE was an important and promising tool to help property owners make these investments smoothly and affordably.

The Origination of PACE

PACE started with a big hole in the ground. A group of homeowners in Berkeley, California, had petitioned the city to have all their utility lines placed underground. As part of an “underground utility district,” the city pays the up-front cost, usually from a bond, and the benefited homeowners repay the cost via a line item on their property tax bill over a number of years. As chief of staff to the mayor of Berkeley, I was called in when a last-minute political issue arose regarding this new district.
While trying to solve this problem, I was struck that the same law could potentially be used to cover the up-front cost of solar and energy efficiency. If we use this tool to pay for putting poles and wires underground, I thought, why not pay for putting them on the roof? I initially called this concept a “sustainable energy financing district.” The concept is simple: allow property owners the chance to repay the cost of solar or energy efficiency as an assessment on their property tax.

Six months later, the San Francisco Chronicle’s banner headline read “Berkeley’s Radical Solar Plan.” With that, the concept of PACE went public —and my phone hasn’t stopped ringing since.

As Berkeley’s program got under way—selling out the available spaces in its pilot program in just nine minutes – State and local governments around the country responded by passing legislation, building programs. Local and state governments were leading a revolution in the way we pay for, use, and think about energy.

In October 2009, I joined Vice President Joseph Biden for a White House announcement of new rules for PACE as well as the approval of more than $100 million in grants to speed its deployment. This accelerated the already remarkable state and local government efforts to expand PACE. Today, 30 states have PACE-enabling laws, and millions of dollars in PACE financing has been transacted. PACE has proven, once again, how quickly state and local governments can help make change when provided the right tools.

But PACE is also a story of great frustration—of federal agencies working at cross-purposes, of regulatory intransigence, of an industry not quite ready for prime time, and of state policies that sometimes lacked context or flexibility.

Freddie and Fannie

In the summer of 2010, Fannie Mae and Freddie Mac, the government-sponsored enterprises that dominate the home mortgage market, directly challenged the position taken by the White House. They issued new lender guidance that deemed PACE a violation of a property owner’s mortgage contract—and therefore a possible default on their mortgage. Faced with the potential risk to homeowners (and voters), almost all local and state governments responded by putting their PACE programs on pause until the federal regulatory issues are resolved.

Meanwhile, a politically diverse coalition of local and state governments, federal agencies, private companies, and nonprofit organizations came together to demand that this position be changed and PACE allowed to continue. More than 40,000 organizations and individuals submitted comments to federal regulators in support of PACE. For many working to save PACE, this is about protecting an important clean energy initiative. But for many local and state governments, this is also about protecting their rights.

For the first time in history, Fannie Mae and Freddie Mac determined that they have the power to tell state governments what’s an allowable tax and what isn’t. This is part of the reason why the State of California, as well as a number of local governments, sued to block this action.

Today, the effort continues to resurrect residential PACE. And a few local communities have charged ahead with residential PACE in direct defiance of the directives from Fannie and Freddie. In the meantime, PACE financing for commercial properties has emerged as one of the hottest trends in energy efficiency finance.

Though residential PACE remains stalled, PACE for commercial properties, which operate outside the purview of Fannie and Freddie, helps solve several critical market challenges for energy efficiency projects. PACE can provide a secure, low-cost way for property owners to finance energy improvements over many years, making deeper retrofits cost effective. As a tax assessment, PACE can also help solve the split incentive between owners and tenants, as both the tax assessment increase (and energy cost decrease) can often be passed through as part of the lease.

Although there have been a number of big announcements regarding commercial PACE, the market is still just getting started. In total, $30 million in projects have been financed in the United States, with an announced pipeline of over $100 million more. In addition, four additional states—from Texas to New Jersey—have passed state enabling legislation in 2013 and are moving forward with new commercial PACE programs.

While this story is in large part about PACE, it is important to note that PACE is not the only financing solution with traction or promise. In fact, great strides have been made in the past few years with other types of financing, including utility on-bill financing and unsecured residential financing. State and local governments—as well as utilities—are increasingly empowered to drive financing innovation as a tool to reduce energy use and create jobs.

For example, the WHEEL program (Warehouse for Energy Efficiency Loans) is the first national-scale residential energy loan finance program in the United States. State, utility, and local government sponsors provide credit enhancement, and WHEEL provides low-cost capital to fund loans. This program, developed by the Pennsylvania Treasury, the Energy Programs Consortium, Renewable Funding, and Citigroup, recently got started in two states and has the potential to revolutionize low-cost unsecured lending for energy-efficient home improvements.

Other states are implementing utility on-bill financing, tax equity financing, and other efforts that are tailored to the local market. Regardless of the type of financing, a number of important lessons have been learned in the trenches.

The result, six years after the news broke in Berkeley, is a mixed bag. We have all learned some good lessons, and we’ve built the infrastructure for success. In short, we are ready for clean energy finance to go to scale—as long as we understand the rules of the road.

Every financing effort—successful or not—teaches us something for the next one. The success of energy efficiency financing will, in large part, be a reflection of our ability to learn from our experiences. Having spent the last seven years doing daily battle in this effort, I can offer a few lessons about clean energy financing:

  • Financing does not drive demand, program design does. Financing is an important tool, but by itself it does not generate demand for energy efficiency projects. Put another way, financing is only useful if it helps solve a problem for a property owner. Though energy efficiency is an old concept, it is a new “product” that has yet to gain traction with the majority of people. The most important aspect of a financing program is not its type—PACE, unsecured, on-bill—or even the interest rate. It is far more important that the program is designed around the needs of contractors and property owners at the time they are considering a potential project.
  • Innovation is great, but we need standards. Elected and other leaders, quite naturally, like to be able to announce “firsts.” What is needed now, however, is a lot of “seconds,” “thirds,” and “fourths.” Financing works when we achieve scale with a defined set of standards—and when we have the data to prove our theories. There are many ways for local and state governments to innovate, but I suggest using an existing financing tool rather than trying to create a new one. With volume, we all benefit from lower costs.
  • Look to capital markets, not just credit unions. A number of financing programs have made use of local banks and credit unions as a source of capital and/or direct loans. My firm has helped set up and run several of these, and we are big supporters of local lending institutions. However, we have set large multi-billion goals for energy efficiency across the country, and we simply cannot get to that scale relying only on local financial entities. At some point soon, we need the scale, low cost, and execution capabilities of the capital markets. Regardless of the initial source of capital, I strongly recommend that all programs going forward be set up with appropriate standards, underwriting, and management to allow for immediate or longer-term capital markets access.

It is more than six years since I first wrote a memo proposing the PACE concept in Berkeley. Today, as the CEO of a company dedicated to helping our nation finance an energy transformation, I have a better sense of what works and what doesn’t. There have been successes and setbacks. But we can all take great pride in the speed with which the nation has embraced PACE—and other financing innovations—as tools to reduce energy use and create jobs. Local and state leaders grabbed hold of the idea and used it to help solve problems in their local communities. Regardless of the outcome of the regulatory debates in Washington, we’ve proven that financing works, that we can make great change quickly, and that local and state governments can lead. Now it is up to us to make good on that promise.

Cisco DeVries is President of Renewable Funding, which designs, administers and finances clean energy programs. Previously, as Chief of Staff to the Mayor of Berkeley, he envisioned and led the initial development of BerkeleyFIRST, the model for Property Assessed Clean Energy Program (PACE) programs. DeVries also served as an appointee in the administration of President Bill Clinton, serving as an aide to the U.S. Secretary of Transportation and the U.S. Secretary of Energy.