Financing Clean Energy:PACE, Property Assessed Clean Energy

Nadia Ameli 27 th March 2012nadia.ameli@feem.it

Barriers to Energy Efficiency

1

� Lack of information

� Uncertainity about the energy savings

� Split incentives

� Transaction cost

� High upfront cost

“The Energy Efficiency Gap”

• Creates financing district & approval process

• Provides upfront capital• Attaches repayment

obligation to the building

• Identifies work & chooses contractor

• Repays financing as a line item on the property tax bill

• Repayment obligation transfers with ownership

€ Upfront

€ Repayment obligation

Financing Clean Energy: PACE

Operating Model

Property Owner

Step 4Loan goes to property owner

Local Government

Debt Service Reserve Fund

Step 1Local government establishes clean energy assessment district

Contractor

Banks

Step 6Owner receives and pays tax assessment for 10-20 years

Step 5Installation

and payment

Step 2Property owners voluntarily opt in to program

Step 3.bGovernment arranges financing

terms with Banks

Step 3.aDSR fund set up to attract

lenders for leverage

PACE provides a new opportunity

BENEFITS

� New source of capital for EE/RE improvements

� Longer repayment period – Up to 20 years

� Obligations transfer with property - build green equity

� Reduced transaction costs – Often an easier process than applying for a home equity line or second mortgage

� Information from a trusted source – State and local govts are a trusted source of info and can enable residents and businesses to take action

PACE financing authorized by the state*

www.dsireusa.org / February 2012

CA: 2008

NM: 2009

CO: 2008

WI: 2009

ME: 2010

VA: 2009

OK: 2009

TX: 2009 LA: 2009

IL: 2009OH: 2009NV: 2009

OR: 2009NY: 2009

NC: 2009

FL: 2010

HI: Existing Authority

DC

MN: 2010

VT: 2009

MD: 2009

GA: 2010

DC: 2010MO: 2010

NH: 2010MI: 2010

MA: 2010WY: 2011

CT: 2011

NJ: 2012

28 States + DC authorized PACE

Examples of PACE in action in the USA

Program launched

Source of capital

Financing mechanism

Collection mechanism

Eligible measureResult as of august

2009

BERKELEY(CA)

November 2008

Micro bond sold to financial partner

Special tax Propertytax bill

Solar PV 38 projects$28,000 ave/per $1M committed

PALM DESERT

(CA)

October 2008

City’s general fund; Redevelopment Agency Bond; financing partner

Assessment Propertytax bill

Energy efficiency,Solar thermal, Solar PV

206 projects$36,000 ave/per $7,5M committed

BOULDER COUNTY

(CO)

April 2009

Country issues bonds

Assessment Propertytax bill

Energy efficiency and renewable

393 projects$19,000 ave/per$7,5M committed

BABYLON(NY)

August 2009 Municipal solid waste revolving fund

Assessment Separate bill Energy efficiency, Solar thermal, solar PV

169 projects$7,100 ave/per $1,2M committed

Source: Guide to Energy Efficiency & Renewable Energy Financing Districts – 2009 (RAEL by Merrian C. Fuller, Cathy Kunkel, Daniel Kammen)

PACE reduces risk for Banks

PACE Program Data Defaults

City(1) Homes $ Milion Homes (1)

[number]Program

[%]County(2)

[%]

Babylon 403 3.6 0 0.0 5.4

Boulder 632 10.1 1 0.2 1.3

Palm Desert 240 5.5 0 0.0 3.8

Sonoma 1,290 34.5 1 0.1 3.3

Total 2,565 53.8 2 0.1 3.2

� 0.1% default rate in PACE programs vs 3.2%in program counties� Only 2 defaults in 2,565 PACE homes vs 82 on same number of non-PACE homes (3)

Note: (1) Program Administrators(2) McDash Analytics, LLC(3) County default rate (3.2% * 2,565 Pace program homes = 82 Expected Defaults)

Mortgage Default Rate with PACE is 1/30 th of Non-PACE homes

Potential Issues

• Limits on What Can Be Funded – Must be fixed to property and last at least as long at the financing term; potential limitations if required to be “cash flow positive”

• Cost of Setup – Often administratively difficult to set up, especially for limited government staff

• Scale – A city, town, or small county is probably too small to bring down costs; fix costs need to be spread over hundreds or thousands of assessments each year

• Access to Convenient Funding – Importance to bring down cost of capital

Sample Program Budget

560'000 $ESTIMATED TOTAL COSTS

370'000 $• FINANCE SERVICES(Legal and financial expenses, tax collection)

160'000 $• ADMINISTRATION SERVICES(Customer service, review application, marketing)

30'000 $•PROGRAM DESIGN AND PREPARATION FOR LAUNCH(Program design, application processing system)

12 M $Funding Required

800Projects

15'000 $Average project value

Fannie Mae and Freddy Mac

User-friendly tool: PACE Calculator

Italian Calculator estimates the cost or saving to invest in efficiency and solar or other renewable

Helping homeowners understand the financial impacts of financing solar PV, solar thermal, and energy efficiency.

http://rael.berkeley.edu/financing-italy-IV

On-bill financing (20 states in USA)

Strengths

• The utility incurs the cost of an efficiency or renewable improvement and the customer repays the investment through a charge on their monthly utility bill

• Allows for a streamlined process as utilities already have a billing relationship with their customers, as well as access to information about their energy usage patterns and payment history.

• Typically enjoys lower default rates due to the association with the customer’s utility bill.

Weaknesses

• Utilities are often reluctant to take on role of financing entity; potential exposure to consumer lending laws and alterations to billing systems are required

• Can be extremely complicated to set up

• Limited to shorter term financing

• When liability cannot transfer to new owners, homeowner must pay off entire loan upon sale of property, which could result in not all of the energy savings being realized

Conclusions: Opportunity PACE in Europe

13

•The rate of innovation in clean energy in the EU has not kept pace with initial goals, so new tools are needed

• PACE provides a logical and analytically simple new tool

• PACE integrates key externalities to make clean energy financing more attractive:

It builds clean energy capital in property value

It forces an integration of energy efficiency and renewable energy planning

Appendix

14

Homeowner Protection

15

• SIR > 1 (Savings to Investment Ratio)

• Financing should be for high value investment

• Assuring that the Retrofit is Constructed as Intended- List of projects based on energy audit- Licensed contractors or installers- Quality assurance program (review upon completation)

Basic Rule: “pay for itself” principle

Lender Protection

16

• Reserve Fund

• Length of time (PACE assessments should not exceed the life expectancy of the energy investment)

• Size of Financing Relative to the House Value (10%)

• Clear title (Applicants must prove they are the legal owners of a property)

• PACE Financing only where no current default

• No Negative Equity Financing (current estimate of appraised value. No “underwater” - mortgage on the property is greater than the current value of the house)