Cleantech Market Intelligence
2013 Shapes Up as a Big Year for PACE Financing
The last few years have been up and down for Property Assessed Clean Energy (PACE) financing, which allows building owners to finance energy efficiency and renewable energy projects through an assessment on their property taxes. Immediately following its inception in 2008, many states allowed PACE financing and dozens of jurisdictions launched programs. In 2010, however, the announcement that the Federal Housing Finance Agency (which administers Fannie Mae and Freddie Mac) that it would not back any mortgage where PACE financing with a priority lien was placed on the underlying property halted most residential PACE programs and dragged many commercial programs down with it. Although the FHFA is seeking public comment on its new rules, the residential PACE market has not rebounded, and the commercial sector remains a trickle.
This may change in 2013, primarily thanks to new market entrants that are helping municipal governments offer PACE programs. The market continues to be limited by the considerable up-front effort required on the part of municipalities. In a time when city budgets are shrinking, the professional resources required to get a PACE financing program off the ground can be hard to come by.
Move Along Please
In the last few years, however, a number of companies dedicated to PACE financing have emerged that aim to facilitate PACE financing by removing the administrative red tape (as we discussed in Pike Research’s recent webinar, Financing Energy Efficiency, which can be replayed here). For example, Ygrene Energy Fund recently launched Clean Energy Sacramento, a $100 million PACE financing program in Sacramento, and is in the process of launching similar programs in Georgia and Florida. Figtree Energy Financing, which is leading a similar project in San Diego, is eligible to administer similar programs in dozens of other jurisdictions throughout California. And Renewable Funding administers commercial and residential PACE programs around the United States (as well as a similar program in Melbourne, Australia), including the high-profile GreenFinanceSF PACE program. Although each of these firms has developed its own business model, they typically make money through a combination of per-building fees and through interest on the bonds issued by the PACE financier.
In addition to the reduced administrative burden on municipalities, “fully-funded” models such as Ygrene’s offer a number of other potential benefits. One is the accelerated pace of Ygrene’s model, which allows the municipality to release funds on a rolling basis, rather than waiting to pool enough projects before issuing a public bond.
“Many PACE models require property owners to arrange their own funding – a complicated and time-consuming process,” said Stacey Lawson, CEO of Ygrene Energy Fund, when I spoke with her recently. In addition, building owners face less risk in terms of interest rates under the fully-funded model, as the interest rates are known at the time that a PACE project is signed; in contrast, a building owner may not know the actual interest rate until months after agreeing to participate in a bond issuance, posing long-term risk.
Although the potential for PACE financing is easily in the billions of dollars per year, only about $100 million worth of projects was financed in 2012. The backlog of projects at many PACE financing outfits suggests that PACE financing could easily hit $250 million in 2013, which would be a major increase over 2012. Once the concept has been further tested and proven, expect to see a growing number of municipalities launching similar programs and relying on specialty PACE financiers to design and administer their programs.