The upfront costs of energy efficiency retrofits is one of the major barriers to adoption—especially in terms of residential properties, where homeowners might not recover their investment prior to selling. While commercial properties generally have a shorter return on investment (ROI) period, many businesses lack the capital to invest.

Enter PACE: Property Assessed Clean Energy financing.

Introduced in pilot programs back in 2008, PACE finances energy efficiency and renewable energy upgrades to both commercial and residential properties (though the requirements for homeowners is much different).

How does it work?

Eligible property owners with property located in an area covered by PACE legislation receive 100% financing for energy efficiency retrofits. The loan, which is provided by municipal governments from bonds purchased by investors, is paid back by the property owner through property taxes (assessed annually) over an assigned term (typically 15-20 years). Important to note is that the loan is attached to the property, not the individual. Accordingly, property owners only pay for the benefits they derive while they own the property and the remaining loan is transferred to the new owner upon sale.

Source: Unlocking the Building Retrofit Market: Commerical PACE Financing

Why?

According to PACE, the goal is to “help overcome the challenges that have hindered adoption of energy efficiency” and to help make the United States “more energy independent and secure while safeguarding our environment by reducing demand for fossil fuels.”

The major benefit of PACE financing is that it:

• Saves consumers money on utility bills—energy costs are simultaneously lower, provide property owners with net gains
• Results in no exposure to general fund as it is tax neutral
• Promotes local jobs

According to Pike Research, $2.5 billion will be invested annually in financing for retrofits in commercial properties through PACE by 2015. This would create “50,000 new jobs and prevent 8 million metric tons of carbon dioxide emissions.”

Is it working?

Commercial PACE, yes.

Currently, 31 states and the District of Columbia have adopted (or already had) legislation that enables local governments to offer PACE benefits to building owners. (see full list of PACE enabling statutes by state)

Residential PACE, no.

Back in July 2010, the Federal Housing Finance Agency (FHFA), suffering from the housing meltdown and already skeptical about the performance of retrofits and resulting savings, issued a statement that said PACE financing would pose substantial risks to lenders. They even advised Fannie Mae and Freddie Mac (two mortgage giants) to avoid buying mortgages for properties with PACE assessments. Many lawsuits from residential PACE supporters were filed to pressure FHFA into changing their position, but to no avail. The FHFA has placed extremely stringent requirements on residential PACE programs. As a result, most states are not financing residential PACE, though there are a few that are trying to adjust to FHFA guidelines (Vermont, Oklahoma, Maine, and Rhode Island). But according to Cliff Staton, executive vice president of Renewable Funding, the adjustments make the program less attractive to investors.

According to Unlocking the Building Retrofit Market: Commerical PACE Financing, “250 billion square feet of today’s US building stock will still exist in 2035”. They conclude that to “reach energy savings and greenhouse gas reductions goals, inefficiencies and energy usage in existing private-sector commercial buildings must be addressed.”

Is the PACE financing model up for the task?