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Financing Clean Energy:PACE, Property Assessed Clean Energy
Nadia Ameli 27 th March [email protected]
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)