PACE Financing 101 and Status

Property Assessed Clean Energy (PACE) Municipal Energy Financing in the United States John Farrell, Director Energy Self-Reliant States and Communities program jfarrell@ilsr.org 612.276.3456 x210 Adapted from a presentation to the Smart Energy Dialogue Berlin | June 9, 2010 Photo credit: Flickr user OZinOH

PACE Financing• Overview• Rationale• Potential• ChallengesMunicipal Energy Financing: Lessons Learned h6p://bit.ly/munienergyﬁnance

Overview Sells bondsInstalls energy improvements Pays for property Pays with long-‐ improvements term property tax assessment Assesses property for cost plus interest

Overview PACE Process PACE program adver?sed

Overview PACE Process PACE program Informa?on adver?sed sessions

Overview PACE Process PACE program Informa?on Sign-‐ adver?sed sessions up

Overview PACE Process PACE program Informa?on Sign-‐ Energy adver?sed sessions up audits

Overview PACE Processy Retrofit s contract

Overview PACE Process Retrofit y Retrofit completed,s contract City pays

Overview PACE Process Retrofit Owner pays y Retrofit completed, assessment, s contract City pays enjoys energy savings

Rationale Financing Mismatch 5-‐6 years 5-‐6 years 10-‐15 years 5-‐6 years

RationaleSolution: Property Tied Financing 5-‐6 years 5-‐6 years 10-‐15 years

Rationale Information Disjointed State U?lity rebate rebate U?lity audit Energy Nonpro Star ﬁt ra?ng energy Federal guide tax credit

Rationale Solution: One-stop Shop U?lity State PACE program Federal Nonpro ﬁt

Potential PACE Status (2010) • 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

Potential PACE Status (2010) Spending in 2009 PACE Programs $40 Utility Energy Efficiency Programs $3,600 $0 $1,000 $2,000 $3,000 $4,000 Millions

Potential PACE Potential Future Spending? PACE Programs 2010 $300 PACE Programs 2011 $600 Utility Energy Efficiency Programs $3,600 $0 $1,000 $2,000 $3,000 $4,000 Millions

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

Challenges & Solutions Issue: Fannie Mae Objects Lender Letter LL-2010-06 May 5, 2010 TO: All Fannie Mae Single-Family Sellers and Servicers Property Assessed Clean Energy Loans 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

Challenges & Solutions Issue: Fannie Mae Objects Lender Letter LL-2010-06 May 5, 2010 TO: All Fannie Mae Single-Family Sellers and Servicers Property Assessed Clean Energy Loans 1. We don’t come second. 2. This isn’t a public good. 3. “We’re buried in a subprime mess. Nothing new, please.”

Challenges & Solutions Solution #1: Lawsuits • FHFA, Fannie, & Freddie sued by: • California Attorney General • Sierra Club • Sonoma County, CA • Town of Babylon, NYSmall victory: Aug. 31, 2011 ruling requires FHFA to start over with formal rulemaking

Challenges & Solutions Solution #2: Legislation • 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. Photo credit: Flickr user katieharbath

Challenges & Solutions Solution #3: Alternatives • 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

Challenges & 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. Savings

Challenges & Solutions Minimum Standards? • Minimum expenditures, e.g. $3,000 Energy savings Par?cipa?on$3,000

Challenges & Solutions Minimum Standards? • Minimum expenditures, e.g. $3,000 • Minimum energy savings, e.g. 10% Energy savings Par?cipa?on$3,000 10%

Challenges & Solutions Minimum Standards? • Minimum expenditures, e.g. $3,000 • Minimum energy savings, e.g. 10% • Efﬁciency threshold, e.g. EPA Yardstick Energy savings Par?cipa?on EPA$3,000 10% Yardstick

Challenges & Solutions Minimum Standards? • Minimum expenditures, e.g. $3,000 • Minimum energy savings, e.g. 10% • Efﬁciency threshold, e.g. EPA Yardstick • Retroﬁt Mandate to a min. standard Energy savings Par?cipa?on EPA Yards?ck $3,000 10% Yardstick mandate

Thank you!John Farrell Other Resources www.energyselfreliantstates.org •PACENOW.org jfarrell@ilsr.org •This report: johnffarrell 612-276-3456 x120 Municipal Energy Financing: Lessons Learned h6p://bit.ly/munienergyﬁnance

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PACE Financing 101 and Status

by John Farrell

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