REQUIRED READING: Property Assessed Clean Energy (PACE) programs were designed to provide funding for energy retrofits and renewable energy projects around the country. Under a PACE program, property owners may opt in to a special program set up by state governments in which Clean Energy Improvement Districts (CEIDs) are created in order to issue bonds. The money raised from the bonds is loaned to residential and commercial property owners for the installation of approved clean energy equipment.
The PACE program loans are then paid back through special property tax assessment collections within five to 20 years, depending on the program, at an interest rate of between 3% and 7%. In return, the local government takes a senior tax lien on the property.
After the California State Assembly passed the first PACE program with A.B. 811 in 2008, roughly 20 states passed similar enabling legislation within two years. The PACE programs around the country were immensely popular because by providing up-front funding without the need for a private loan from a bank, one of the most substantial hurdles to making energy improvements to residential properties was removed.
However, on July 6, 2010, the Federal Housing Finance Agency (FHFA) – the federal regulatory agency that oversees Fannie Mae, Freddie Mac and the Federal Home Loan Banks – issued a statement urging state and local governments to stop their PACE programs. The following month, the FHFA announced that it would not support the purchase of mortgage loans from lenders ‘secured by properties with an outstanding PACE obligation unless the terms of the PACE program do not permit priority over first mortgage liens.’
In response, most local governments suspended their PACE programs out of concern that mortgages would not receive the backing of Fannie Mae or Freddie Mac and that their AAA bond ratings might be in jeopardy if they were to continue to raise bonds that the FHFA is clearly committed to opposing. Also, the U.S. Department of Energy redirected $150 million from federal stimulus funds that had originally been earmarked to encourage PACE programs around the country.Â
Nevertheless, there are alternatives available to government and private-sector PACE programs that achieve many of the same goals, without the same challenges presented by priority liens. One promising alternative is the Energy Efficiency Performance Bond (EEPB), which was recently developed in Gunnison County, Colo.
In 2007, Gunnison County developed an Energy Action Plan to lower county emissions 20% by 2020. As part of that plan, the county formed a task force to develop and recommend specific policy and regulatory changes to all aspects of county government and administration.
In 2009, county voters approved a PACE program, which was not implemented due to the FHFA's position against PACE. However, task-force members developed the EEPB for projects subject to the county's Special Development Project Regulations.Â
The purpose of the EEPB is to mitigate the emissions and energy impact from large-scale projects in the county. Under the proposal, projects large enough to be regulated by state and federal authorities and that would greatly increase carbon emissions in the county, would be subject to the EEPB requirement.
The EEPB is designed to meet a number of complementary objectives: incentivize the development of more efficient, lower-emissions projects; provide funding sources for public- and private-sector green projects; and motivate large-scale projects to regularly audit and mitigate energy consumption and emissions during operation. When the developer of a large-scale project, such as an industrial or extractive operation, applies for permits from the county, it would be required to submit an anticipated energy consumption report as part of the project-planning documents.
This energy consumption report would show the amount of annual carbon emissions (measured in tons) and the monetary value of the EEPB, which is established based on the market rate for a ton of carbon (or carbon equivalent). Thus, by creating a bond that is based on the initial energy consumption and emissions of the project, developers are incentivized to build highly efficient projects from the outset.
The bond is then held by the permitting authority in an interest-bearing account. The interest is shared by the county and the project developer to fund public infrastructure and green energy projects by the county and emissions reduction and efficiency improvements by the developer over the life of the project. This is designed to ensure that there is nexus between the holding of the bond by the county and the funding of emissions-reducing improvements to both the county and the large-scale project.
Under the EEPB model, projects are audited biennially to quantify the energy savings and emissions reductions achieved since project development, based upon the baseline established in the initial emissions inventory. If, for example, a project reduces its energy consumption and emissions by 15% in the first four years of operation, the county returns this 15% out of the original bond amount to the project developer.
The bond rebate system thus creates a financial incentive for projects to regularly assess performance under the bond and seek efficiency improvements, even after initial completion of the project. Under the county's projections, a project would recover the entire bond amount, plus interest, through efficiency improvements and emissions reductions over the life of the project.
EEPBs can provide funding for governments to improve the efficiency of their operations and fund infrastructure improvements with efficiency in mind. Simultaneously, the EEPB provides incentives to high-impact projects to improve the efficiency of their own operations.
The bonding scheme also removes much of the risk associated with environmental regulations, because project developers are able to anticipate the size of the bond they are required to post and are in control of the pace of improvements to begin receiving rebates on their bond. The interest earned on the bond benefits both parties and can be used to further improve projects and provide public benefits.
The EEPB concept can also be adapted for use in private-sector investments and derivatives markets. For example, the EEPB could be traded like a renewable energy certificate or carbon credit in private secondary investment markets. Investors can purchase shares of the total bond amount paid by the developer and recognize return on their investment based upon the emissions-reduction rebates earned over the life of the project. This adds another layer of incentive for the project to reduce emissions over the life of the project and increase returns for investors.
Private capital can also be used to post the bond, with the investors receiving a percentage of the return on the interest earned on the bond, as well as from the bond rebates earned through improved project efficiency. This will ensure that up-front funding to residential and commercial property owners for the installation of approved clean energy equipment can continue. Mortgages can thus be originated on these projects and sold into the secondary market without fear of FHFA intrusion.
The EEPB presents a unique opportunity for the public and private sectors to mutually benefit from large-scale projects, and to ensure that their environmental impacts are mitigated at every stage of the project. The model can also be adapted to regulate projects as diverse as housing developments, big-box retail stores or any similar development with a significant energy usage and emissions footprint. Thus, energy improvements at properties can continue without the burden of finding financing to meet the upfront costs of the projects, while avoiding the political squabbles that have served to halt the PACE program around the country.
David John Frenkil is publisher of EfficiencyLaw.com, a website that provides analysis on issues related to the energy efficiency and renewable energy sectors. He can be reached at frenkil@gmail.com. Phillip Supino is the sustainability coordinator for the town of Crested Butte in Gunnison County, Colo., and a sustainability and energy policy consultant. He can be reached at psupino@crestedbutte-co.gov.
