Property Assessed Clean Energy (PACE)

Introduction

Buildings account for approximately 70% of electricity use and 40% of greenhouse gas emissions in the United States, and offer significant opportunities for energy savings and GHG emissions reductions through the installation of energy efficiency retrofits and small renewable energy systems.  

Property Assessed Clean Energy (PACE) legislation — first introduced in Berkeley, CA in 2008 and since adopted by 21 states — addresses these opportunities while overcoming several recognized barriers to their implementation: high first costs, high transaction costs involved in deciding on and financing projects, and payback times that often exceed expected occupancy.  

Based on the concept of special municipal tax districts, PACE districts are established by local governments to issue loans to residential and commercial property owners who want to make voluntary energy efficiency retrofits or install small renewable energy systems. The loans generally originate from municipal bonds or other similar municipal capital sources. Loan payments take the form of an assessment added to the property tax on the building, typically with a 20-year payoff period.  

PACE legislation offers several advantages to property owners over other types of financing (such as home equity loans):

• the upfront cost of the retrofit project is greatly reduced
• the timing of payments on the loans is matched with the timing of benefits received from the project
• the payback period is much longer
• loans take the form of a transferable lien on the property, enabling the payment obligation and improvements to stay with the building even under a change of ownership
• the application process is often easier and more streamlined
• energy savings typically exceed the cost of the loan

PACE legislation also offers advantages to lenders:

• property taxes have very high payback rates, mitigating default risk
• property tax assessments are "senior" to other types of debt, meaning they must be paid off first, even before mortgage debt

PACE districts are not, however, a silver bullet for realizing energy efficiency savings in a community's total building stock.  One obvious drawback affects most such programs: PACE districts are designed for property owners, not renters, so the incentive to invest in energy efficiency is split between the owner, who must make the investment, and the renter, who reaps the benefit from lower utility bills.  However, a similar financial instrument called on-bill financing attempts to mitigate this split incentive by including the cost of any improvements to a rental property on the tenant's monthly utility bill; this type of financing is also transferrable to subsequent occupants. ACEEE will be developing a more in-depth resource for on-bill financing in the near future.

Best Practices

In order to put PACE projects in place, states will likely need to amend or create enabling legislation, and local communities will need to grant approval for proposed districts within their jurisdictions.  The US Department of Energy has recently published guidelines for pilot PACE programs, and Vote Solar has compiled a list of 10 key components of PACE legal authority. Specific issues to address in legislation include:

• establishing the source of authority for the assessment district through the amendment of existing, or the creation of new, legislation
• ensuring that assessments are secured by transferrable liens on the property
• clarifying that assessments serve a public purpose, such as air quality improvements or greenhouse gas reductions
• enumerating the energy efficiency measures that qualify for financing both broadly and flexibly, so as to accomodate technological change
• providing an opt-in mechanism for annexation of a specific property into the assessment district
• authorizing local governments to issue and sell bonds

Model Language

• California Streets and Highways Code § 5898.10 et. seq.: amends state authority to create special tax assessment districts and to fund them with public monies
• Colorado HB 08-1350, Session Law 299: amends county and city authority to create improvement districts specifically for clean energy improvements
• Texas HB 1937: amends existing local government code, giving municipalities the authority to establish loans for energy efficiency and renewable energy improvements to property