PACE Financing 101 and Status

Municipal Energy Financing in the United States

John Farrell, DirectorEnergy Self-Reliant States and Communities program

[email protected] x210

Adapted from a presentation to the Smart Energy DialogueBerlin | June 9, 2010

Property Assessed Clean Energy (PACE)

Photo credit: Flickr user OZinOH

• Overview• Rationale• Potential• Challenges

Municipal  Energy  Financing:  Lessons  Learnedh6p://bit.ly/munienergyfinance

PACE Financing

Installs  energy  improvements

Sells  bonds

Pays  for  property  improvementsPays  with  long-­‐

term  property  tax  assessment

Assesses  property  for  cost  plus  interest

Overview

PACE  program  adver?sed

PACE ProcessOverview

PACE  program  adver?sed

Informa?on  sessions

PACE ProcessOverview

PACE  program  adver?sed

Informa?on  sessions

Sign-­‐up

PACE ProcessOverview

PACE  program  adver?sed

Informa?on  sessions

Sign-­‐up

Energy  audits

PACE ProcessOverview

Retrofit  contract

Energy  audits

PACE ProcessOverview

Retrofit  contract

Retrofit  completed,City  pays

Energy  audits

PACE ProcessOverview

Retrofit  contract

Retrofit  completed,City  pays

Owner  pays  assessment,  

enjoys  energy  savings

Energy  audits

PACE ProcessOverview

10-­‐15  years

5-­‐6  years 5-­‐6  years

5-­‐6  years

Financing MismatchRationale

10-­‐15  years

5-­‐6  years 5-­‐6  years

Solution: Property Tied FinancingRationale

U?lity  rebate

State  rebate

Federal  tax  

credit

Nonprofit  

energy  guide

U?lity  audit

Energy  Star  ra?ng

Information DisjointedRationale

U?lity

PACE  program

Federal

Nonprofit

State

Solution: One-stop ShopRationale

• 21 states• 4 established municipal programs• Almost $40 million spent• 2,000 properties served

Legend

Recently  enacted  PACE  laws

Pre-­‐2009  statutes  suppor?ng  PACE

PACE Status (2010)Potential

PACE  Programs

Utility  EnergyEfficiency  Programs

$0 $1,000 $2,000 $3,000 $4,000

$3,600

$40

Spending  in  2009

PACE Status (2010)

Millions

Potential

PACE  Programs  2010

PACE  Programs  2011

Utility  EnergyEfficiency  Programs

$0 $1,000 $2,000 $3,000 $4,000

$3,600

$600

$300

Future  Spending?

PACE Potential

Millions

Potential

Challenges & Solutions• Challenge: Fannie Mae objects• Solutions• Lawsuits• Legislation• Alternatives• Challenge: Participation v. Energy Savings

PACE loans generally have automatic first lien priority over previously recorded mortgages. The terms of the Fannie Mae/Freddie Mac Uniform Security Instruments prohibit loans that have senior lien status to a mortgage. As PACE programs progress through the experimental phase and beyond, Fannie Mae will issue additional guidance to lenders as may be needed from time to time.

Lender letter: http://tinyurl.com/3y2g4mw

Lender Letter LL-2010-06May 5, 2010

TO: All Fannie Mae Single-Family Sellers and Servicers Property Assessed Clean Energy Loans

Issue: Fannie Mae ObjectsChallenges & Solutions

1. We don’t come second.2. This isn’t a public good.3. “We’re buried in a subprime mess. Nothing new,

please.”

Lender Letter LL-2010-06May 5, 2010

TO: All Fannie Mae Single-Family Sellers and Servicers Property Assessed Clean Energy Loans

Issue: Fannie Mae ObjectsChallenges & Solutions

Solution #1: Lawsuits• FHFA, Fannie, & Freddie sued by:• California Attorney General • Sierra Club• Sonoma County, CA• Town of Babylon, NY

Small victory: Aug. 31, 2011 ruling requires FHFA to start over with

formal rulemaking

Challenges & Solutions

• The PACE Assessment Protection Act of 2011• Fannie Mae and Freddie Mac must revise

their lending standards to conform with Department of Energy PACE Guidelines from May 2010.

• FHFA, Fannie, and Freddie may not discriminate against any borrower in a community with a PACE program.

Solution #2: Legislation

Photo credit: Flickr user katieharbath

Challenges & Solutions

• On-bill financing • Utility finances improvements• Utility ties billing to the meter instead of

individual• “Pay As You Save” (now defunct)• Drawbacks• Requires utility participation• Utility billing system may need upgrade

Solution #3: AlternativesChallenges & Solutions

Solution #3: Alternatives• Junior liens (e.g. Maine) • Does not come before mortgage in event of

default• Still tied to property tax bill• Drawbacks• No secondary market• Can’t transfer between owners?

Challenges & Solutions

Solution #3: Alternatives• Subsidized home retrofits• E.g. weatherization • Drawbacks• Who pays for subsidy?

Challenges & Solutions

Solution #3: Alternatives• Loan loss reserves• Can insulate lender• Drawbacks• Who pays for reserve?

Challenges & Solutions

Solution #3: Alternatives• Loan insurance • Insulates lenders• Low cost• Drawbacks• Offered to FHFA, but rejected• No private market right now

Challenges & Solutions

Issue: Participation v. SavingsChallenges & Solutions

• Minimum expenditures, e.g. $3,000

$3,000

Minimum Standards?

Energy  savings

Par?cipa?on

Challenges & Solutions

• Minimum expenditures, e.g. $3,000• Minimum energy savings, e.g. 10%

$3,000 10%

Minimum Standards?

Energy  savings

Par?cipa?on

Challenges & Solutions

• Minimum expenditures, e.g. $3,000• Minimum energy savings, e.g. 10%• Efficiency threshold, e.g. EPA Yardstick

$3,000 10%EPA

Yardstick

Minimum Standards?

Energy  savings

Par?cipa?on

Challenges & Solutions

• Minimum expenditures, e.g. $3,000• Minimum energy savings, e.g. 10%• Efficiency threshold, e.g. EPA Yardstick • Retrofit Mandate to a min. standard

$3,000 10%EPA

YardstickYards?ck  mandate

Minimum Standards?

Energy  savings

Par?cipa?on

Challenges & Solutions

John Farrellwww.energyselfreliantstates.org

[email protected] x120

Municipal  Energy  Financing:  Lessons  Learnedh6p://bit.ly/munienergyfinance

Thank you!Other Resources•PACENOW.org•This report: