by Nadia Ameli* and Daniel M. Kammen**

*Renewable and Appropriate Energy Laboratory UC Berkeley and Università Politecnica delle Marche,
**Class of 1935 Distinguished Professor of Energy, Founding Director, Renewable and Appropriate Energy Laboratory UC Berkeley

OVERWIEW AND OPPORTUNITY
FOR CLEAN ENERGY FINANCING
An economic transition is needed to a low-carbon, sustainable, and job producing model. Improving commercial and residential building energy efficiency is vital given than structures are the site of more than 70 percent of the electricity use representing $ 264 billion and almost 40 percent of greenhouse gas emission in the United States (Tables 1 - 2).
To trigger this change, more stringent laws are needed that reduce energy use in buildings, improve energy efficiency and encourage use of renewable energy such as solar photovoltaic and solar thermal. Regulatory approaches have proven effective, like in United States and Europe.


MECHANISM OF PACE PLAN
Many barriers exist to the reduction energy consumption: high cost of investment needed for this happen, lack of information, uncertainly of savings and long payback time.
Our research group from the University of California, Berkeley, are evolved in the development of tools that can used to overcome the financing barriers.

The Energy Financing Districts were first proposed by the City of Berkeley, California in 2007 and they have received an increasing attention as a mechanism for financing residential or commercial clean energy projects. The Energy Financing District enables the local governments to raise money through the issuance of bonds to fund these clean energy projects. The financing is repaid over a set number of years through a special tax or assessment on the property tax bill of property owners, who choose to participate in the program.

The financing is secured with a lien on the property, and then if the property is sold before the end of the repayment period, the new owner inherits both the repayment obligation and financed improvements. This mechanism is better known as PACE (Property Assessed Clean Energy) referred to mechanism of land-secured financing. PACE programs are simply additions to existing state laws that already authorize the creation of land secured financing districts to pay for improvements in the public interest.

Critical aspects distinguish PACE plan: the first is the voluntary nature of program; if the property owner opt in, they pay an additional property tax for the value of project. The second is repayment is secured by lien on the property, thus the property tax obligations transfers with property if it is sold, rather than being due on sale. The third is longer repayment period offered, the long term enables and lower payments the property owner to make affordable energy improvements compared to the standard five or seven years of conventional loans.

To establish these programs it is important to evaluate the cost of energy project and resulting energy savings. The net present value of energy saving has to increase the cost of property tax payment. The annual special tax amount is calculated on the cost of the energy project installed, the interest rate paid on special bonds and annual administrative charge levied by the city and financing partner. In the analysis we consider the following parameters and program design options:

► SIR - Saving to Investment Ratio should be greater than one, thus for each extra dollar spent the amount saved it will be greater;
► Financing should be for high-value investment that have well-documented efficiency gains;
► The term of the assessment should not exceed the useful life of the improvements, to avoid creating an imbalance between the value of the asset and the amount of the liability;
► The assessment should be appropriate size, generally not exceed 10% of property’s estimated value;
► Assessment reserve fund should be created to protected investors from late payment or non-payment of PACE assessment;
► Non-acceleration upon property owner default, in case of foreclosure the next owner is responsible for the future assessment payment, the liability for the assessment is limited to the amount in arrears at the time;
► Quality assurance concerning licensed contractor, attestation of property, estimate of house’s appraised value.

Well structured PACE programs minimize risks for homeowner, lenders and local government:
► Increase in property value, house or building with high energy performance belong upper rating;
► Upfront property valuation, the application approval process involves a careful examination of the property to ensure that property is not currently under stress;
► Energy cost savings improves homeowner cash position, especially during inflation time, PACE assessment remains fixed against the increase energy cost.

CASE STUDY
PACE’s spread since the Berkeley pilot started, has been notable: it was applied in several areas City of Berkeley, CA; Palm Desert, CA; Boulder County, CO; and Babylon, NY; Sonoma launched his program in March 2010. To date 21 states have authorized PACE legislation: 20 states have passed legislation and one states permit it based on existing law.
The program has taken a different approach according to the design in each case for each area. Local government that chooses to offer a PACE financing program must determine the eligible energy efficiency or renewable energy technologies, identify a funding source, develop the terms of the loan and program specifics.

Assembly Bill 811 is the environmental law that authorizes all cities and county in California to designed area within property owner could establish contractual assessment to finance energy efficiency improvements and renewable energy generation. Governor Arnold Schwarzenegger signed law on July 20, 2008. Table 3 shows states authorized PACE: 21 States authorized PACE and Washington DC (20 states have passed legislation and Hawaii permitted it based on existing law).


BERKELEY FIRST, Berkeley - California
The Berkeley City Council approved the formation of special tax district based on Mello Roos Community Facilities District Act of 1982. The Act allows county, city, special district establish a Community Facilities District for the purpose of financing public facilities and services. Berkeley FIRST - Financing Initiative for Renewable and Solar Technology, has been launched in November 2008 included 38 residential projects with an average project value of $ 28,000.
One million dollar has been committed through micro bonds which support each solar photovoltaic project. Interest rate applied is a comparison between interest rate equal to 3.25% above the 10-year U.S. Treasury Note or 6.75% whichever is greater, in addition about 1% for administrative fee. Financing come from by Renewable Funding LLC which buys, aggregates and resells the micro bonds on the market, it is under contract with the City of Berkeley as third party. Renewable Funding oversees also the application process.


ENERGY INDIPENDENCE PROGRAM, Palm Desert - California
The Energy Independence Program (EIP) provides for the City of Palm Desert to make loans to property owners to finance the installation of distributed generation renewable energy sources or energy efficiency improvements. The City Council adopted Resolution No.08-75 declaring its intent to establish the EIP pursuant to AB 811.
The Office of Energy Management (OEM) administer the program: $ 7.5 million have been committed in the first two phases for 206 projects in energy efficiency such as air conditioning, pool pumps, roof insulation, windows and solar, with an average project value of $ 36,000. The interest rate applied has been 7% for up to 20 years.
Funding come from city’s general fund for the first phase and from city’s Redevelopment Agency for the second phase. On February 2010 City of Palm desert has announced $ 6 million in new funding: half will be dedicated to loans for energy efficiency improvements with the other half reserved for loans for solar projects.


CLIMATESMART LOAN PROGRAM, Boulder County - Colorado
In 2008, Boulder County staff worked with Representative Alice Madden, the Governor’s Energy Office, Environment Colorado, and others to ensure the passage of HB 08-1350, which created the necessary state-level authority to run a local financing program for supporting energy efficiency and renewable energy measures. In November of 2008 Boulder County approved Ballot Measure 1A, which permits the county to sell up to $ 40 million in bonds to fund the ClimateSmart Loan Program.
After the first phase $ 7.5 million have been committed for 393 projects with an average project value $ 19,000. Two type of bond have been issued: tax-exempt bonds for homeowners qualify as for income qualified fund fixed limit up to 115% of area median income and taxable bonds which have not income restriction. The Board of Commissioners set not-to-exceed interest rates of 6.75% for income-qualified loans and 8.75% for open loans, the real interest rates applied were 5.2% for income-qualified loans and 6.68% for open loans.


LONG ISLAND GREEN HOMES PROGRAMS, Babylon - New York
In 2006 Babylon adopted green building code requiring that all new construction meet ENERGY STAR standards and LEED standards for commercial and industrial buildings over 4,000 square foot. The State established to maintain a reserve fund for waste facility, for implementing PACE programs the Town expanded the definition of solid waste to include energy waste in the form of CO2.
Two million dollars from the solid waste reserve fund was allocated to be used as a revolving fund to finance the Long Island Green Homes program. In Babylon’s case $ 1.2 million have been committed for 169 projects in energy efficiency and solar with an average project value of $ 7,100. The interest rate is only 3% for administrative cost, assessment tax already exists for solid waste which added energy assessment. The below table (Table 4) shows the case studies comparison.

PACE AND U.S. IMPLEMENTATION
federal Government and Department of Energy are allocating funds for supporting these programs: a considerable fraction of American Recovery and Reinvestment Act funds and Energy Efficiency and Block Grant funding have been committed for PACE programs; also the White House’s Recovery Through Retrofit encouraged DOE to support pilot programs. Under the State Energy Program, DOE has received approximately $80 million of applications for PACE-type programs to provide upfront capital, out of nearly $ 3.1 billion in total funding available.
Implementing these programs enable several benefits in terms of emissions reductions, job creation, improved energy performance, as well as better local economics. The important challenges for the future will be design new best practices and guidelines for standardizing steps and mechanism.

Several protests there were been in US concerning the constitutionality of PACE programs and the special assessment as first lien mortgage. In June of 2009, the Federal Housing Finance Agency (FHFA) - the federal government agency that regulates Fannie Mae, Freddie Mac and the Federal Home Loan Banks - wrote a letter expressing concern that PACE programs could put owners and lenders at risk of fraud, property loss and also they offered resistance toward the possibility to deliver energy-related senior lien mortgage because represent a key alteration of traditional mortgage lending practice.
The debate has created confusion for grantees and stakeholders. Local agencies and government as Governor Arnold Schwarzenegger, Attorney General Edmund G. Brown Jr. Department of justice California, Governor Bill Richard State of New Mexico, Governor Bill Ritter Jr. State of Colorado, Mayor city of New York Michael R. Bloomberg, United States Senate Washington DC, Member of Congress of United States are urging to clarify FHFA position especially that PACE programs adhering to federal PACE guidelines will not subject to adverse action. DOE and White House are working for reporting data collection evaluate the efficacy of these programs.


INTERNATIONAL SPREAD: ITALY
Achieving these goals is also a priority for Italy, where the responsibility of energy consumption is for 18 percent by industrial sector, 33 percent energy sector and thermoelectric, 27 percent transportation, 20 percent residential sector and 2 percent primary sector. Italy situation in comparison Kyoto target: initial trend is 516,9 Mt CO2 in 1990, became 550,4 Mt CO2 in 2000, all-time high in 2005 with 573,6 Mt CO2 at the end 544 Mt CO2 in 2008. Kyoto target establish average value about 483,3 Mt CO2 in a commitment period 2008-2012. Italy is accumulating an average debt of 1.5 million euro per day for overshooting the CO2 target under Kyoto Protocol. Based on preliminary estimate of GHG emissions in the first two years, it has accumulated a debt about 1.1 billion euro. In the period 2008-2012, the amount of emission assigned to Italy amount to 483 Mt CO2 (-6,5% compared to 1990), it must cover a gap almost 60 Mt CO2.

Next years will be critical in compliance with Kyoto goals issued, any further delay will lead to rising costs, Italy will have to move energy consumption trajectory and innovation will be required in all sectors. Italy is composed in 20 regions: regulatory powers are more general and include executive and judicial powers as well as legislative power, each region has the possibility to establish and authorize a particular tax assessment in their jurisdiction area. Regional governments should encourage this innovative financial model which eliminate upfront cost of energy improvements and property owner to do their part to reduce greenhouse emissions.


CONCLUSION
PACE is an innovative and financial model for overcoming upfront cost in energy retrofits on residential, commercial and industrial buildings. Different benefits can be allowed:
► Promoting energy efficiency, energy consumption reduction and bill saving
► Reduction in greenhouse emissions in regard climate change
► Achieving national energy policy goals towards energy independence
► Green job creation, as well as local economies growth.

Energy Financing District programs can given cities and states the tools to lead the charge for improving energy efficiency and usage of renewable energy. Programs like the City of Berkeley, “Berkeley FIRST” (Financing Initiative for Renewable and Solar Technology), have the potential to increase the accessibility and affordability of energy saving measures. The purpose of PACE must be to create the conditions for a low-carbon, sustainable, and job producing model. Education and information are called to play a key role in value creation: understanding the benefits of clean energy improvements and how to get the work done, is the way to gather these needs and transform them in national objectives.