Originally appeared in Solar Power World Magazine
By Glenna Wiseman
2013 is shaping up to be the year promise turns into reality for property-accessed clean energy (PACE) financing in the United States.
According to leading indicators and industry experts, accelerated adoption of commercial PACE (C-PACE), along with a residential PACE program moving past its pilot phase in California, is unlocking solar industry growth and markets previously lacking scalable financing programs.
“2013 is the turning point for PACE programs in America,” says David Gabrielson, executive director, for the national PACE information clearing house and advocacy group, PACENow.org. “2014 will be the break out year.”
Cisco DeVries, president & CEO of Renewable Funding and pioneer of PACE programs in the United States, said his company is seeing in 2013 is what it thought was possible all along: PACE is a powerful tool to reduce the cost of energy.”
As of July, 32 states have PACE legislation enacted, with 5 more exhibiting known interest. Thirteen of these states have active programs, with 13 more developing programs to move PACE financing into their communities. The total number of states now represents 80% of the U.S. population.
According to PACEnow.org’s June 2013 annual report, there was $100 million in project-activity financing for 25 projects in the commercial PACE market This figure does not include the August announcement by California-based Ygrene Energy Fund to fund $3.16 million in energy retrofits in Sacramento, Calif., in one project alone.
“Even better news,” the report adds, “is all operating programs, whether they have funded projects thus far or not, report substantial pipeline applications for PACE projects in the works.”
On the residential front, the most successful program to date is Renovate America’s Home Energy Retrofit Opportunity (HERO) program. According to the company’s Chief Marketing Officer Eric Rosenthal, the program has $70 million in actual projects funded, with many more homeowners who have applied and shown interest.
The private/public partnership model started with the Western Riverside Council of Governments (WRCOG), a program that currently covers 17 cities in Southern California. New council of government organizations including SANBAG and an accelerating number of cities are opting into the program, which by this fall will encompass 72 communities. HERO is open to all cities in the state.
PACE as a financing mechanism is an old idea with an energy twist.
PACE programs use a proven municipality financing tool — local governments provide or arrange for financing repaid with a property-tax-like assessment.
Early PACE models tied funding to a city’s general fund. PACE programs now open up vast amounts of funding through public/private partnerships, tapping into institutional-level funding organizations and financing large commercial programs and pooling projects into larger efforts.
PACE helps cities fulfill their climate action and sustainability initiatives.
For example, PACE in Milwaukee is part of the city’s new sustainability plan, ReFresh Milwaukee, which includes a pledge by the city for 5 million square feet of commercial building space to cut its energy intensity 20 percent by 2020. Reducing energy use and corresponding CO2 through PACE can help support climate action plans of cities across America.
PACE empowers cities with flexible options.
PACE offers jurisdictions flexible approaches to how it is adopted, administered and funded. No federal level approach is dictating the implementation of PACE on the city or state levels. For example, municipality leaders can choose a variety of options in service providers and funding entities. They can opt into existing council-of-government programs, which is the case for the HERO program, and they can choose open or exclusive funding territories.
Cost and time considerations for communities to adopt PACE are easing.
Early programs needed to invent each aspect of their community programs. Now a number of initiatives are in place (and others are in development) to ease the cost and time required to ignite a PACE program in a community.
PACE proponents are working on a number of approaches including “PACE in a box” to streamline city ease of adoption. Minnesota PACE, spearheaded by Jeremy Kalin, now running for secretary of state, offers such a program.
Texas, with retooled and approved PACE legislation on the books, is working to create “PACE in a box” standardized documents and city information to develop a turn-key PACE program.
“PACE in a box will provide a cafeteria style menu our jurisdictions can use to pick and choose how and what they want to adopt in their region,” said Stephen M. Block, Partner, Thompson & Knight LLP, the law firm working on the Texas program. Block said 100 stakeholders are teamed up in five working groups to determine best practices and create a workable structure for accelerated adoption of C-PACE in the 1,400 state cities.
Service providers including Renovate America, Ygrene, and Figtree Energy Financing are branding their PACE programs for marketplace adoption on the city level.
“Having access to PACE funding is a huge win for consumers, a win for local business and a win for municipalities,” said Rosenthal. “We are seeing a constant stream of articles from different states across America working to make PACE financing more vital. This demonstrates the demand for the program. What is vital is to have communities with multiple programs instead of one. Having open market PACE leads to a better market for consumers because they have choice.”
Examples of PACE financing momentum
Covering a wide swath of the state, CaliforniaFIRST, administered by Renewable Funding, is currently serving 14 counties and 126 cities. Since the program’s September 2012 launch, 120 commercial project applications have been received, representing $50 million in financing. Projects start at $50,000 and go up to $4 or 5 million.
C-PACE, Connecticut’s groundbreaking PACE model for commercial, industrial and multi-family property owners, includes a green bank, the Clean Energy Finance and Investment Authority (CEFIA), which administers the program. Since launching in late January, C-PACE as of Aug. 1 has approved 13 projects totaling $12 million and closed 5 transactions totaling $1.14 million.
C-PACE funding entity Clean Fund expects to invest about $100 million over three years in the Milwaukee PACE program alone. Milwaukee is one of several cities around the country Johnson Controls has targeted for energy-saving projects in the commercial building space, according to PACENow.org.
As of July 31, cited Energy Manager Today, Clean Energy Sacramento (administered by Ygrene) has closed $4.2 million in projects over the past 90 days and has received over $10 million in pre-approved applications. These numbers were confirmed by Ygrene’s Jason Mittelstaedt, senior vice president of marketing, who joined the company from the high tech industry.
PACE versus traditional financing
There is an important difference between PACE and traditional forms of financing solar including power purchase agreements (PPAs). In PACE programs ,the building finances the retrofits and energy generation ,not the individual or company’s balance sheet. This means the financing travels with the property.
According to the Urban Land Institute, February 2013 report on commercial PACE, this structure offers significant advantages over other financing options. These advantages include:
- Zero up-front cash investment
- Immediate positive cash flow
- Long-term financing (up to 20 years)
- PACE assessment stays with the property upon sale
- Ability to pass payments through to tenants
- Low interest rates
- Higher rents and greater long-term property value because of energy efficiency
- Preservation of borrowing capacity through off-balance–sheet financing
Whole building energy solution approach
PACE opens the door to where energy policy has been leading the whole country — to the whole building approach, DeVries says. While technologies eligible for individual-program financing varies by each program’s guidelines, generally building retrofits include a range of energy and water conservation technologies and energy generation including solar photovoltaic and thermal.
Setting the PACE for Solar Installers
PACE funding can be leveraged to grow solar installation businesses, offsetting what nearly 10% of U.S. installers say is their toughest barrier: consumer access to loans or credit.
What is the size of the commercial market? The Department of Energy has cited figures estimating nationwide there could be $2.5 billion to $7.5 billion worth of commercial PACE financing potential per year by 2015. PACE financing funds hover around 30 to 50%, typically dedicated to solar installations and varies depending on local solar economics and viability.
Of particular interest to the solar industry is the impact of PACE on the commercial mid-market buildings, appropriate for 50 to 200 kW size solar installations. This segment of the market, lacking scalable funding mechanisms similar to residential leasing, was formally the “doughnut hole of lost opportunity,” according to DeVries. With PACE funding applicable to a wide range of property size, this barrier is removed.
“The solar industry needs to understand their market has just grown by 5X,” says John Kinney, CEO of Clean Fund. “Until now, only about 20% of the market could qualify for both debt financing and tax equity. Acceptable long-term financing is simply not available if you aren’t part of a municipality, university, school or an investment-grade credit-commercial building.
With PACE, the industry opens up the other 80% of the market that is not investment grade. Commercial Real Estate (CRE) owners are adept at creating structures that shield them from liability so many credit worthy buildings could never be investment grade credit. These CRE owners have little motivation to install solar when their tenants are responsible for building expenses, since solar reduces utility expenses and, therefore, reduces what is paid to the owners. By coupling the repayment obligation with building expenses through property taxes, there is a perfect alignment of interest. Whoever pays for utilities is likely to also be paying for property taxes, Kinney says.
“Solar sales teams should be taking PACE to a whole new class of customers where the viability of a project is based on property value, not credit analysis,” says Derek Brown, Clean Fund’s managing director and former solar industry executive.
Brown’s advice to solar installers working to leverage PACE for commercial sales growth includes:
- Find a capital provider within your PACE area and determine their funding requirements.
- Combine local-program qualifications with those of the funding entity. Brown explained he has one qualification sheet commercial sales reps can use to qualify customers based on both the program’s parameters and those at Clean Fund.
- Explore building added value improvements to integrate into the PACE loan. His example: Upgrade the roof with Cool Roof technology while installing the solar power system to increase the return on investment of the project.
Installers and property owners alike can participate in Ygrene’s new agent referral program. “The objective of the referral program is to involve and compensate the real estate community to encourage referrals for property retrofits,” Mittelstaedt said. “PACE can fill the financing gaps in states where PPAs are not applicable. The growth of solar has been tied to third-party PPA financing. PACE & Ygrene can be used to finance PPAs with lower interest rates than traditionally seen on PPAs.”
On the residential side, solar-installation firms are integrating PACE funding into overall financing packages. In the HERO
communities, installers are using program funds to pre-pay third party-lease financing. This package empowers homeowners with a hybrid approach, integrating the best features of both approaches into one package.
“PACE is an option to be worked into each vertical industry’s process to mitigate disruption and increase sales,” Rosenthal says ”For example, PACE is a terrific way to fund pre-paid leases in the residential solar market. It is also a great way to finance the entire system.”
Accelerating PACE adoption suggests drill-down articles for the solar industry including the commercial PACE market, the role storage plays in the commercial PACE arena and a closer look at residential PACE adoption.
Please feel free to email the author at GWiseman@Identity3.com with any requests or suggestions.
Featured photo: Prologis Inc. San Francisco headquarters 200 kW solar power system. Funding: Clean Fund.