What is a pace? The length of a stride? The speed of activity? The pace that is attracting the most attention in the US in 2010 is Property-Assessed Clean Energy. Like many US trends and fads, it is worth understanding for its possible influence outside beyond North America.
This PACE is a mechanism for financing energy investments by property owners that was ‘discovered’ by a single city – local authority, if you will – and has since swept across many states and localities, even attracting national attention. Like many innovations, good and bad, it originated in California. Perhaps less characteristically for an apparently successful innovation, it failed to succeed in its initial implementation – and, especially unusually for the US, it originated in a city seen as exceptionally ‘radical’ and a state deemed too anomalous to warrant considering as an exemplar.
Berkeley, California, is a ‘home rule city’ with the power to raise its own capital through the issuance of bonds at its discretion. Consistent with its progressive ideology, the local council decided it would be a good idea to promote rooftop photovoltaic generation of electric power by its homeowners. To stimulate investment that would have a growing return over time but might not pay off quickly, the city wanted to facilitate access to low cost, patient capital. It had a number of advantages in setting itself up as a source of capital for its homeowners:
- Under US law, the interest earned for lending to municipalities borrowing on the bond markets is not subject to income tax, so the interest that has to be paid is lower than that which a private borrower would have to pay.
- Aggregating the borrowing of many different homeowners would permit the city to float a bond that would be a more cost-effective borrowing tool than a series of individual small loans and would therefore also pay a lower interest rate, regardless of tax treatment.
- Given that the city was already administering a tax on real estate property value, the debt service obligations of the households borrowing the funds for the solar installations could be collected by a simple voluntary supplement added to the tax bill accepted under contract by the property owners and would not require any additional fee collection process or bureaucracy.
The concept was simple on the surface – provide long-term loans for long-term investments at interest rates lower than individual households could get on their own to facilitate and stimulate distributed energy generation by people already committed to reducing fossil fuel emissions and fighting further climate change.
However, the loans were really a very sophisticated tool – they were Property-Assessed, so the debt service obligation ran with the property, not the owner. This feature has two very important effects:
- The current property owner could borrow the capital and make the investment with no risk of reducing the net proceeds from the sale of the property, since the loan, unlike a mortgage instrument, would not be due upon sale. This feature freed the investment decision from the constraint of the implications of property turnover, a real benefit in the then rapidly moving US real estate market.
- The subsequent property owner(s) would, for the life of the loan, be required to continue to pay the assessment for the improvement, but it would not be included in their mortgage calculations or raise the down payment needed for their property purchase. This feature maintained the property marketability on price grounds but also provided all new owners with the economic incentive to maintain and continue to operate the distributed generation system whether or not they cared about CO2 emissions, since they would be paying for it in their special property assessment.
The approach was so simple and appealing that other cities in California that did not have the same powers to act that Berkeley had under its home rule charter petitioned the state legislature for the needed legal authority, which they received. The state of Colorado soon followed suit, as have a total of some 20 states by mid-2010.
PACE thus started marching apace across the nation … But it has served a different purpose from that envisioned by its Berkeley promoters. The ‘clean energy’ part of its name has not been realised, since the finance scheme has been used more for retrofitting buildings to improve their energy efficiency than for installing distributed energy systems.
Arguably, the energy retrofits are easier to implement for property owners – capital costs are lower, planning permissions not needed or more likely to be awarded (even for listed buildings), and the cost savings are realised without any need to involve power companies and assure that surplus power generated on site would be purchased. Moreover, energy efficiency by non-residential property owners could also be supported through the same scheme. Some states have even stimulated energy efficiency investments on rental properties while maintaining housing affordability by providing capital to landlords for the improvements subject to some constraints on their raising rents to capture the cost savings for themselves.
But the Berkeley program failed! So why is it being replicated?
At its core, the failure in Berkeley came from the fact that so few homeowners signed up to install photovoltaic systems on their roofs. The program did not provide the option of using the financing for energy efficiency retrofits and there were not enough homeowners interested in installing solar on their rooftops. As a result, the city could not float a bond to finance them because the total amount to be borrowed was below the minimum threshold for bond issuance.
More fundamentally, energy efficiency has a broader economic and political appeal. The potential for savings on power bills and less drafty homes is more easily understood than the electricity generating possibility of a solar array. The immediate cost savings of retrofits make sense even to those who completely deny any human role in contributing to climate change.
Apparently, initiatives that provide for Property Assessed loans are more popular and likely to be promoted more broadly than those that require a prior commitment to Clean Energy.
The states that have adopted the PACE and made it possible for their localities to develop such programs have focused on the immediate cost savings, the advantages of longer payback periods, especially in a period of historically low interest rates and, perhaps most importantly, the job generation potentials of energy retrofits. In a period of high unemployment and severe decline in the rate of new construction, energy efficiency can be promoted as a job creation program. Retrofits, moreover, will employ more routine construction labour for a project of any given cost than would rooftop solar installations that require expensive materials and special labour skills.
As nef’s report, A Green New Deal, notes, British Local Authorities already have the power to float loans on their own. PACE, then, could stride across the Atlantic, albeit perhaps changing its acronym to a more inclusive title – Property-Assessed Conservation of Energy.
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Peter Meyer is President and Chief Economist, EPSG , Professor Emeritus of Urban Policy and Economics and Director Emeritus, Center for Environmental Policy and Management, University of Louisville. He is involved in a website on the economics of climate change (see Climate Change Economics).