June 21, 2010

In the commercial building sector, energy efficiency retrofits are a highly effective approach for reducing energy consumption and costs while also mitigating greenhouse gas (GHG) emissions.  However, the energy retrofit market in privately owned buildings is limited by capital constraints, short planning horizons for property owners, and split incentives between owners and tenants.  Property Assessed Clean Energy (PACE) financing is emerging as an important tool to overcome these barriers in the market for commercial building retrofits.  PACE programs create voluntary tax liens on private property, to secure financing for retrofits.  The liens are paid off over 5 to 20 years, usually on the property tax bills.

According to a new report from Pike Research, PACE programs will continue to proliferate in the United States, and by 2015 investment in PACE financing for commercial buildings will total $2.5 billion annually, under a baseline forecast scenario.  This level of investment would result in the creation of 50,000 new jobs, and would mitigate almost 8 million metric tons of carbon dioxide (CO2) emissions, equivalent to taking 1.7 million cars off the road for a year.   In an aggressive forecast scenario that contemplates a stronger legislative push for PACE at the federal and state levels, annual investment and the benefits associated with PACE would be more than triple the baseline amounts.

“PACE programs are gaining momentum around the country, and they represent a very promising mechanism for overcoming many of the barriers to energy efficiency retrofits for commercial buildings,” says managing director Clint Wheelock.  “The majority of buildings would benefit from energy retrofits, with neutral to positive cash flow in addition to the other environmental and social benefits.”

However, Pike Research’s analysis indicates that several key challenges remain for PACE proponents, mainly stemming from the fact that this is a new and rapidly evolving financial tool.  Primary mortgage lenders are concerned that PACE liens would hold a superior position to their own loans.   In addition, when a property changes hands, the mechanisms for transferring the PACE lien are still relatively untested.  And it is also unclear, under generally accepted accounting principles (GAAP), whether a voluntary PACE lien would be treated as a loan or as an assessment lien for purposes of evaluating a business’s debt position.  The outcome of these and other important questions will have a significant impact on the ultimate level of acceptance of PACE as a financing tool for commercial building retrofits.

Pike Research’s study, “PACE Financing for Commercial Buildings”, explores the potential for PACE programs to address many of the critical barriers in the market for renewable energy and energy efficiency retrofits in privately owned commercial buildings.  The report includes two five-year market forecast scenarios, with an analysis of the national, state, and local politics and the marketing/sales challenges that will influence which scenario is realized.  An Executive Summary of the report is available for free download on the firm’s website.  

Pike Research is a market research and consulting firm that provides in-depth analysis of global clean technology markets.  The company’s research methodology combines supply-side industry analysis, end-user primary research and demand assessment, and deep examination of technology trends to provide a comprehensive view of the Smart Energy, Clean Transportation, Clean Industry, Corporate Sustainability, and Building Efficiency sectors.  For more information, visit www.navigantresearch.com or call +1.303.953.9765.