As renewable energy and climate concerns mount, the U.S. is working to implement initiatives that will allow everyone to adopt green technologies. To propel this effort, the Obama administration announced the Clean Energy Savings for All Initiative this past summer, promising to promote energy efficiency and ensuring all American families have the choice to go solar.
With this initiative, the administration also expressed its unequivocal support for the expansion of property-assessed clean energy (PACE) financing as a tool for assisting local communities in meeting their sustainability goals. Named one of the top 20 “world-changing” ideas by Scientific American magazine, PACE is a simple and effective way to pay for a wide range of energy-efficiency, renewable energy, climate resiliency, and water conservation upgrades to residential, multifamily, commercial and agricultural buildings. Eligibility is based on the available equity in a property (among other factors) and not on the property owner’s FICO (credit) score, proof of employment, income or financial statements. PACE uses a tax mechanism so that property owners have no out-of-pocket costs, and payments are made through a special tax added to the property tax bill and repaid with terms of up to 30 years, depending on the service area and type of improvement. Furthermore, PACE financing may transfer with the property upon sale. State and local governments approve PACE financing to help create jobs, promote economic development and protect the environment.
The White House worked with the U.S. Departments of Energy, Housing and Urban Development, Agriculture, Health and Human Services, and Veterans Affairs, as well as the Environmental Protection Agency, to create the Clean Energy Savings for All Initiative. The initiative includes a goal of generating 1 GW of solar energy through low- and moderate-income families – enough to power roughly 700,000 homes – and PACE financing acts as a cornerstone for achieving this.
The administration also laid out new guidelines for PACE financing, clearing up a number of previously contended issues surrounding the status of PACE liens on Federal Housing Administration-insured mortgages. This vast support across government agencies ratifies PACE as a primary tool for local communities to adopt solar and energy-efficiency improvements.
Advances in solar financing
Over the last decade, two pivotal financing models, the power purchase agreement (PPA) and the lease, have fueled unprecedented solar energy adoption. GTM Research recently reported that solar accounted for 64% of all new electric generating capacity brought online in the U.S. in the first quarter of this year, and the report forecast that annual growth will be up over 90% from 2015. Yet, even with strong demand and record-low solar prices, many property owners still cannot afford the upfront investment to go solar. By some current providers’ own estimations, PPAs and leases allow homeowners to reap only 20% to 30% of the savings from third-party-owned solar systems, unless prepaid using PACE funds.
Although most residential solar financing is reserved for customers with FICO scores over 680 (SolarCity reported the average homeowner FICO score in its portfolio is 744), PACE approval is based on equity, not personal credit. Further increasing access and affordability, PACE may have lower payments than other finance options and can be paid over a longer period of time – up to 30 years in some areas. To some, the biggest benefit of PACE is the time property owners accumulate savings (some up to 30 months) and monetize their federal investment tax credits before making their first payment.
Although current PPAs and leases can fall short by limiting savings and restricting access to financing with FICO-based approval, PACE provides a powerful option: affordable financing to nearly all property owners.
Unlike previous financing mechanisms, PACE was built from the ground up to scale clean energy. In 2008, California passed the first PACE law to help achieve its climate goals. Since then, the popularity and adoption of PACE financing has accelerated dramatically. In 2016, PACE financing is projected to reach $1 billion in improvements throughout the U.S., and we expect to see an additional $2 billion in financing in 2017, presenting an opportunity for property owners to tap into vast amounts of capital. Simply by allowing PACE providers to leverage the city’s or county’s property tax collecting authority, government officials can open access to hundreds of millions in private capital for solar installations, as well as a wide variety of other climate and energy upgrades.
Contractors and solar providers have benefited from PACE, installing over $2.5 billion in solar energy, energy-efficiency and climate resiliency upgrades, creating 25,500 new jobs and generating $6.3 billion in economic stimulus across the country, according to market data from PACENation.
Traditionally, contractors have relied on debt-inducing financing methods, such as leases, PPAs or loans, to help property owners finance solar purchases. PACE now removes the debt factor from the “solar acquisition” equation by incorporating project costs into a recurring payment on the customer’s property tax bill. With minimal fees, no upfront costs and the easiest option for property transferability, PACE enables 100% financing for thousands of upgrades, including, but not limited to, solar, heating and air conditioning, roofing, insulation, LED lighting, water conservation and, in some markets, hurricane preparedness and seismic retrofits.
In states where financial incentives for solar are weak or non-existent, PACE has made installing solar financially viable and attractive. Contractors in states such as Florida have been able to expand their businesses exponentially by offering PACE financing to property owners who have shied away from using their personal credit to make renewable energy upgrades. PACE can generate a wealth of new business for certified contractors that have, as a result, hired new employees, been able to service new territories and offered new upgrades to current customers. For example, a roofing business can learn new skills and leverage PACE financing to offer solar in conjunction with its energy-efficient roofing products.
Although there were only a handful of active PACE programs in 2010, PACE is starting to sweep across the U.S. According to PACENation, programs are now operating in 19 states and the District of Columbia. Furthermore, 33 states plus D.C. have PACE-enabling legislation that approves PACE programs to operate.
For the last few years, PACE has operated without clear guidelines from the federal government. However, with the announcement of the Clean Energy Savings for All Initiative, a clear set of standards focusing on consumer protection has been put in place that will catalyze the adoption of PACE programs by local governments, making clean energy financing more accessible to their communities. The wide variance in PACE law, which has slowed adoption, is starting to narrow, and we expect to see many more states adopt and launch PACE programs in the next few years.
For the solar industry, specifically, the primary challenge to scaling adoption is overcoming the barriers put in place by utilities. Certain net-metering, time-of-use, feed-in tariff and other program restrictions dramatically diminish the value proposition to the property owner and make solar a less attractive option, whether financed via PACE or other mechanisms.
From California to Florida, communities are turning to PACE to help with their clean energy transition. For contractors, this has opened up new markets and unprecedented levels of financing. For elected officials, PACE is an engine for job creation, helping small businesses grow and providing economic stimulus at no cost to local governments. Most importantly, PACE provides nearly universal access to the benefits of solar and other eligible measures for property owners regardless of their credit score.
While continuing to expand regionally, PACE is also breaking into new markets and verticals after proving to be a valuable asset to catalyze the residential solar market. For example, commercial PACE (C-PACE) programs are building momentum across the U.S., offering affordable upgrades to commercial, industrial and multifamily properties – a massive market that has often been neglected but accounts for a considerable amount of the urban landscape.
The C-PACE industry has grown exponentially in the U.S., expanding into underserved markets with less than $5 million in financing in 2010 to $280 million today, according to PACENation. Commercial projects have a longer lead time than residential ones – which is why there has been less activity than in the residential market – but the PACE industry is moving to activate C-PACE at scale and provide financial banking to fund previously underserved markets, such as nonprofits, small (resi-mercial) projects and those who want to prepay third-party PPAs to lower their energy rates.
As the solar industry continues to realize the unique financing benefits of PACE, battery technology companies are also poised to leverage PACE to accelerate the adoption of energy storage. Every day, energy storage technologies are advancing, and as battery prices drop and utility rate structures evolve, we expect to see a massive uptick in adoption, at first in commercial and eventually in residential settings. PACE will play an ever-increasing role in all segments of energy storage and will help scale this industry by funding retrofits of existing solar customers, as well as by providing all of the benefits of financing hybrid and stand-alone storage projects.
With so many benefits, it is no wonder PACE has received bipartisan support at every level of government. As a cornerstone of the Obama administration’s Clean Energy Savings for All Initiative, PACE has also rightfully earned widespread support from local elected leaders across the nation, democratizing access to energy and water improvement measures previously only available to certain pre-qualified individuals. With this new breed of affordable financing, more property owners have gained access; contractors have grown and created new jobs; and communities have reaped the economic, environmental and development benefits that PACE provides.
Mark Colby is general manager of solar and energy storage at Ygrene Energy Fund, a provider of residential, multifamily and commercial PACE financing.