Have high upfront costs derailed your renewable energy or energy efficiency projects?
Would receiving positive cash flow from day one make your clean energy project more attractive?
Are you worried that it may be difficult to recoup your investment in clean energy if you sell your property?
To resolve these issues and accelerate the implementation of energy upgrades to commercial and residential property, cities and counties across the nation are offering PACE, a new financing model for clean energy projects.
What is PACE?
William Dinkel: Could you please provide a brief summary of PACE programs for our readers?
Dennis Tsu: First off, PACE is an acronym for Property Assessed Clean Energy. The basic concept is to allow residential and commercial property owners to borrow money from their local governments to use for making energy efficiency or alternative energy improvements to their properties, and then to pay that money back through a property tax assessment over the useful life of the improvement.
WD: How does PACE financing differ from a traditional bank loan?
DT: If a property owner were to go to a large commercial bank today and say, “I want to borrow 500,000 dollars to swap out all the lighting systems in my big office building, and I can get a three-year payback on the investment,” the bank will then reply, “Okay, we will give you a three year loan.”
Then for the first three years of the life of those lights – which is typically about ten years – you haven’t made any money and you haven’t saved any money. You’ve saved energy, but all the energy savings you had is going to repay the bank loan. So, it’s not until year four that you start to see cash using a traditional bank loan.
One of the fundamental elements of PACE is that you can amortize the cost of the project over its anticipated useful life. You can take that half-million-dollar lighting project and amortize it over ten years, and your energy savings are going to be greater than your property tax assessment from the very start. So, you actually start generating cash in year one, instead of having to wait until year four.
In most of the projects we’ve examined, property owners can save money and immediately generate cash by taking advantage of PACE. In today’s economic environment, this makes PACE compelling.
WD: What are the rates charged on PACE financings?
DT: To give you some data points, Sonoma County is offering financing at about 7%. Placer County is at 7.25%. Boulder, Colorado, which has its own program that we’re helping to administer, is actually at 6.75%. San Francisco, for the package they’ve announced for the first set of loans, while they still have access to some stimulus funds through the federal stimulus package, their rate is going to be 7% for residential.
The rates are going to vary based on a number of factors – of course, the most important being the market conditions. But it’s also going to vary based on whether or not the city or county is willing to put their general fund at risk to guarantee the loans if they default. We anticipate there will be some variation in rates based on whether it’s a commercial set of properties that we’re financing or a residential set.
WD: Do you see these rates decreasing over time?
DT: The hope and the desire on the part of Renewable Funding, and I think of many municipalities, is that over time, as PACE financing becomes a well-accepted, well-understood financial instrument in the market, the interest rates on PACE loans will approach municipal bond rates.
WD: What happens when the property owner sells the property?
DT: The general rule is that the property tax assessment/obligation will transfer to the new owner of the property, just as any other property tax obligation would transfer. What this means is that any property owner (residential or commercial) is only paying for the improvement project for as long as they own the property. So, if you put in solar PV using PACE, which has a 20 year life, and you sell the property after 7 years, then you pay the property tax assessment for the first 7 years, and the new owners have to pay the property tax assessment once they take possession of the property (and get the benefits of the solar system).
WD: Can property owners combine PACE financing with other clean energy rebates, such as the rebates offered by Pacific Gas & Electric (PG&E) and Sacramento Municipal Utility District (SMUD)?
DT: The simple answer is “yes”.
So typically, we will tell the property owner to go apply to these rebate programs, get the rebate, and then use PACE financing to finance the balance that remains after the rebate. The one exception to that – the one big exception – is in solar, where we encourage property owners to finance the full amount of the solar project and then collect the 30% federal income tax credit. We don’t require them to deduct the credit from the amount financed. They may if they want to – and actually in the models I’ve run, it makes better economic sense for them to do it that way – but it’s really the choice of the property owner.
WD: Who has access to PACE programs?
DT: In California, there is both a statewide initiative that municipalities can join and individual programs.
- The statewide initiative – CaliforniaFIRST – is being administered by Renewable Funding and will cover 14 counties and 130+ cities in phase one, which will go live this summer. The commercial program will probably lag the residential program by a little bit.
- Independent of CaliforniaFIRST, San Francisco has a program (GreenFinanceSF) which is active today, and Los Angeles County and the City of San Diego are also starting their own versions of PACE programs, and they both plan to go live this summer.
WD: Are there plans to expand PACE to more areas?
DT: To my current knowledge, there are about a dozen additional counties in California that have said they want to participate in phase two of CaliforniaFIRST. So, by the first quarter of 2011, I’d say three quarters of California, if not more, will have a PACE program available to property owners.
The Department of Energy and the Office of the President and Vice President have been very supportive of PACE, and so we are hopeful that PACE financing will be available to the majority of American property owners by the middle to end of 2011, if not sooner.
WD: When should a property owner interested in PACE take action? And how?
Residential property owners should start applying through the process tomorrow – there’s no reason to wait.
In practical terms, a property owner can take action by learning more about any local programs and contacting his or her local PACE program administrator. For example, a commercial property owner in San Francisco should call me at Renewable Funding. It’s my job to help develop the pipeline of projects, and we’re currently working on the rollout of the commercial program for San Francisco.
I would encourage property owners not covered by upcoming PACE programs to talk to their local city governments – whether it’s the mayor’s office, the city council, or the board of supervisors, encourage your municipality to set up a PACE program. PACE is a funding option that should be made available to every property owner in the state, and across the country.
San Francisco Property owners in the city or county of San Francisco should go to www.greenfinancesf.org to learn about the program. Commercial property owners may contact Dennis Tsu of Renewable Funding at (510) 350-3730.
City of San Diego property owners will find informaton at the Energy Center website.
Other California property owners should visit CaliforniaFIRST website to determine if their communities are going to be part of the phase one rollout.The San Francisco Bay Area, Santa Clara, San Mateo, Alameda, Monterey, and San Benito counties are all part of phase one.
Other states should your city manager’s office or your elected representative to find out if a PACE program is underway. If not, let your local government representatives and officials know that you are interested in taking part in a PACE financing program.
Our Guest Blogger - William Dinkel
William Dinkel is an avid researcher and blogger on Green technologies and energy efficient solutions. Also a passionate sportswriter, William was published on the NYTimes "Off the Dribble" blog. William works at Hewlett-Packard in Silicon Valley, and holds a BS in Computer Engineering from California Polytechnic University, San Luis Obispo.
Our PACE expert - Dennis Tsu
Dennis Tsu is a consultant, assisting Renewable Funding in developing the market for PACE Commercial projects - energy efficiency and alternative energy projects on commercial (office, industrial, multi-family residential, mixed-use, hotel/lodging, etc.) properties. He has over 30 years of sales and marketing business experience, including several doing solar PPA development. He has a BA from Princeton University, and an MBA from the Stanford Graduate School of Business.
Part 2: PACE Financing - Accelerating Adoption