Navigant Research Blog

Where Does PACE Financing Stand Today?

— July 28, 2011

Since the Federal Housing Finance Agency (FHFA) announced it wouldn’t be backing PACE loans for residential projects a year ago, the buzz around PACE financing has died down. However, many don’t realize that this development only slowed commercial PACE financing by a small measure. In addition, a new initiative to rework PACE has been making its way through Congress, starting last week, which could revive PACE in the residential sector.

On the commercial side, a number of PACE programs have been and continue to be in operation in states that have passed enabling legislation for PACE financing. Several major cities, including Los Angeles, San Francisco, Washington, D.C., and Cleveland, as well as a number of smaller municipalities including Ann Arbor, MI and Northampton, MA, have enacted legislation to support commercial PACE. Although the specific financing schemes used in each (e.g., pooled bonds, owner-arranged financing, etc.) vary, PACE-backed efficiency projects are underway in the commercial sector despite the lack of FHFA support in the residential sector.

Back in July 2010, the FHFA’s announcement pulled the plug on residential PACE programs on grounds that PACE programs are too risky to back for a number of reasons. One reason is that they add to the number of obligations that homeowners must cover in the event of a default, thereby increasing the inherent risk of default. Advocates of PACE financing, however, argue that PACE financing actually reduces the risk of default because the programs are specifically designed so that utility bill reductions from efficiency and distributed renewable energy, in effect, leave homeowners with more resources for paying debt obligations than they would have without the PACE assessment. Still, FHFA is unlikely to be swayed without regulatory intervention and a more holistic look at the risks – real or perceived – of PACE financing.

The new bill has two main priorities. The first is to resolve one of the key legal questions: Is PACE financing a loan or an assessment? The answer, of course, is that PACE programs, though they provide financing, do not provide that financing via a loan but rather an assessment on a property owner’s property taxes. The main difference (in terms of risk) is that, in the event of a default, the PACE lien would not accelerate. In other words, if the PACE repayment period were originally 20 years but the homeowner defaults in their mortgage in year three, only the first three years’ worth of PACE payments would be due, not the remaining 17. The second priority is to limit or eliminate risk to Fannie Mae and Freddie Mac by demonstrating that PACE neither increases the risk of default nor reduces the ability of homeowners to address all of their debt obligations in the event of a default.

The PACE Assessment Protection Act of 2011 (HR 2599) was introduced in the House on July 20 by Congresswoman Nan Hayworth (R-NY), Congressmen Dan Lungren (R-CA), and Mike Thompson (D-CA). Advocates of PACE are optimistic that PACE’s bipartisan support will help move the bill through Congress over the next few months. Although the outcome is by no means certain at this point, we may see progress on residential PACE in a matter of months.

 

Sustainable Mobility for Generation Y

— July 27, 2011

I recently set out to look into all electric car sharing programs, like the one recently started in San Diego by car2go. After a little research into the program – run by a wholly-owned subsidiary of Daimler, stocked with Daimler Smart Fortwo EVs, and using ECOtality charging infrastructure – I became even more interested in the diversifying products of auto manufacturers. A number of auto OEMs around the world are starting to look like one-stop-shop transportation companies, investing in car sharing programs, transportation applications, and public transit. What are the catalysts for such diversification and what do these new mobility services achieve for auto OEMs?

If we follow the almighty dollar and look at the group with growing buying power around the world, it’s Generation Y. This tech-savvy and highly connected group is in the midst of starting their careers, something they are redefining with their own creativity. We (I say “we” because I too am a member of the Generation Y clan) sit on the cusp of change in countless sectors: the power industry, personal computing, and transportation, and others. We approach business and community in a different way than our predecessors – our childhoods spent online, texting, and chatting nurtured that. There is an expectation of choice and independence like never before. The transportation needs and desires of our demographic are a reflection of all these characteristics.

I have good reason to believe auto manufacturers are paying attention. Gen Y’ers are an underlying force in the urbanization trend around the world, bringing with us a desire for personalization in the products and services we use, and the ability to share our experiences conveniently and constantly. While it seems daunting to design products and services that fit all of these criteria, it appears that auto OEMs are expanding their product lines and engaging with service offerings to do just that. From Toyota’s youth division to Ford’s partnership with Pandora, and BMW’s investment in transportation-related smart phone applications, auto manufacturers are attempting to dodge the bullet of obsolescence by embracing transportation in all its forms, and make them appealing to up-and-coming Gen Y consumers. This concept of transportation services – car sharing, parking assistance, and even city guides – looks like the commoditization of transportation, which will change the way we think about mobility, and particularly sustainable mobility. Or perhaps they are just playing catch-up with Gen Y’ers take on it.

So how do auto manufacturers make money if they don’t sell cars? Well, they’re not going to stop selling vehicles; they are going to offer a suite of transportation services to accommodate the wide variety of mobility needs that people actually have. BMW has committed significant resources, to the tune of about $100 million, to mobility services. This includes everything from electric vehicle car sharing to applications for mobile devices that support congestion mitigation and some that aim to diminish parking woes. Daimler’s car2go, which recently launched the first all electric car sharing program in the United States, is aiming to eventually make all of its car sharing programs interoperable, granting subscribers mobility across the country without any of the constraints of owning a vehicle.

These kinds of programs target inhabitants in what are quickly becoming the world’s mega-cities, where car ownership can be neither practical nor desirable. But where there are fewer personal vehicle sales, car companies are identifying other opportunities for revenue. Car sharing programs charge an annual membership and then for use by the minute or hour for service. In addition to this revenue stream, auto OEMs also gain a guaranteed customer for their vehicles (Daimler requires car2go to purchase the EVs in its fleet) and an audience for their other products, hybrids, electric vehicles, and ICE vehicles with more advanced features. Consumers gain risk-free opportunities to test new technologies. Perhaps by the time Gen Y’ers have kids or decide they need a vehicle, they will be more comfortable buying an all-electric vehicle thanks to their EV car sharing experiences.

If Gen Y’ers (or anyone for that matter) still decides to purchase a vehicle, they may make decisions based on which in-car services are available. Ford is integrating Pandora with ten of the company’s vehicles and two Lincoln products, so drivers can access their custom online radio stations and stream them in the vehicle. The same service is available in 2011 BMW models. At the 2010 Consumer Electronics Show, Ford announced the introduction of a Twitter application in its vehicles which the vehicle reads Tweets aloud to the driver. It appears that Ford is treating their vehicles as yet another platform for the internet and connectivity. While services such as these have yet to prove their full value, they are squarely aimed at the tendencies and preferences of Gen Y’ers.

Auto manufacturers around the world are also embracing other forms of more sustainable transportation. The market for electric, two-wheel vehicles is growing much more quickly in parts of Asia and Europe, and a bicycle sharing program with those could be a lucrative next step. The University of Tennessee has tested such a service. You will also find BMW involved with designing public transit systems through the design consultancy DesignworksUSA. (They have been tapped to design the future BART subway system in San Francisco). As transportation preferences change for Gen Y’ers and others across the globe, it appears that auto OEMs are positioning themselves to be go-to providers for all kinds of mobility needs, including sustainable mobility that might not involve traditional ICE vehicles. With public and private transportation accounting for roughly 20% of an average city’s greenhouse gas emissions, innovative approaches to transportation may also lead to partnerships with major cities around the world. Smart Cities projects around the world are demonstrating many variations of intelligent and sustainable transportation systems. This may be just the tip of the iceberg as far as the future of transportation goes – keep an eye out for Pike Research’s upcoming report on Intelligent Transportation Systems.

 

Has the United States Hit Peak Cars?

— July 27, 2011

We are in the midst of reviewing our plug-in electric vehicle forecasts, which means scouring data and news sources to get an understanding of how issues are playing out in the court of public opinion. It’s always the fun part of the job to learn what is “news” and what the public is talking about on forums and the like. One of the interesting trends that is getting more attention in the last year is a concept entitled “peak cars.” Over the years, we’ve heard a lot about peak oil, usually as an argument for electrification of the automobile, but now are we seeing peak in the number of cars in the United States?

Recently, the The New York Times had an article on European cities rejecting cars of any type. Many cities in the United States are also looking to remove cars from specific parts of the city whether that’s through tolls or turning roads into pedestrian avenues. Bill Ford, Executive Chairman of Ford Motor, recently spoke at a TED conference on the change to mobility that will have to include a variety of modes and connected cars. Even Detroit (aka Motor City) is updating our public transportation options.

It makes sense that at some point there will be just too many cars to physically fit within the finite space of a city (I realize this may strike Texans as a foreign concept, but ask anyone in Manhattan and they will know what I am talking about). The Earth Policy Institute argues that the United States has already hit peak cars and the decline is the result of a saturated market with five cars for every four drivers. A study by Lee Schipper and Adam Millard-Ball suggests that despite growing GDP per capita in developed nations, motorized travel peaked in 2003.

The question though remains what does this mean for the automotive industry? Leaving drivetrain aside for the moment, the challenge to an automobile company regardless of the energy source, is sales. If they don’t move metal, they don’t make money. Can big automotive companies still make money if we’ve seen peak sales in the United States at 17 or 18 million vehicles per year?

This is essentially a question of where the peak actually is and, perhaps more importantly, how far below peak is stable sales. To date, U.S. light duty vehicle (LDV) sales peaked in 2000 with 17.4 million vehicles (though 2006 was close with 17.1 million). The number of LDVs in the United States has continued to climb through 2008 (latest data available) with 238.4 million LDVs. So, while the sales of vehicles peak, that number does not necessarily represent the peak number of vehicles in the country.

There are a lot of pieces that come together attempting to calculate whether we have hit peak vehicles in the United States (global is a whole different ball of wax, so we will leave that for another day). With such a precipitous sales fall and climbing vehicle scrappage rates, it should not be surprising to see the overall fleet slip lower. The question is whether it will stay lower.

So what is driving the scrappage rates? Are these being driven by a more urban population that no longer needs vehicles or is it being driven by something else? While it’s not hard to imagine a small nation or a specific area hitting peak cars, what would it mean for automakers, if the majority of the United States has hit peak cars?

 

Findings of the Institute for Building Efficiency’s Energy Efficiency Indicator 2011 Study

— July 26, 2011

Johnson Controls’ Institute for Building Efficiency recently published the results of its 2011 Energy Efficiency Indicator study. The annual report, now in its fifth year, takes the pulse of the energy efficiency industry by surveying nearly 4,000 efficiency sector professionals, many of them at the C-level, but covering all levels including facility managers and building owners. In all cases, the respondents have budget responsibility for their organization’s facilities and their job responsibilities must include reviewing or monitoring energy usage and/or proposing/approving efficiency initiatives.

Across the board, the study finds that interest in and priority placed on energy efficiency and energy management is on the rise worldwide. The specific way in which those priorities are manifested, however, can vary considerably from one region to another. For example, respondents from North America cite energy cost savings, incentives/rebates, and enhancing brand and public image as the key factors that influence their energy efficiency decisions. Respondents from China placed more emphasis on increasing energy security and complying with energy and efficiency policy.

Although the drivers for efficiency may vary from region to region, there was consensus among the study’s global respondents as to the specific measures that will have the greatest increase in market adoption over the next ten years. Not surprisingly, efficient lighting technologies topped the list overall, followed by smart building technologies and solar PV systems. The latter two categories, interestingly, had a slight edge over efficient lighting from the perspective of respondents from China.

In contrast, the barriers to efficiency appear more firmly entrenched. About half of the survey respondents cite financial challenges – lack of funding to pay for improvements (30%) and insufficient payback/ROI (19%) – as the top barriers to pursuing energy efficiency as usual. However, the survey showed that awareness of energy efficiency and technical expertise remain significant barriers in China and India.

Overall, the report shows that progress is being made on energy efficiency worldwide. A growing number of organizations are establishing business lines around efficiency, increasing hires to perform efficiency-related functions, and leveraging the multi-pronged benefits of efficiency including cost savings and improving public image. However, without significant energy price increases on the near-term horizon, energy policy remains one of the key tools that would change the game on efficiency, and few respondents worldwide report that their efficiency efforts are connected to energy policy, with the exception of China. Still, energy policy may join the other drivers in the next decade, particularly in Europe as well as smaller geographies such as California and Australia, in promoting efficiency on a broader basis.

 

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