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PACE Solar Financing Shows Signs of Life

Chip Gaul's picture
Residential Solar 101

Chip Gaul is a researcher and blogger on Residential Solar 101. He focuses primarily on solar PV markets, trends, prices, and additional incentives. He graduated with honors from the University...

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  • Feb 1, 2012

 Communities and homeowners have more reason to be optimistic about solar financing. In the summer of 2010, the Federal Housing Financial Authority (FHFA), which is the regulatory arm of mortgage giants Fannie Mae and Freddie Mac, unilaterally wiped out PACE financing programs that were just gaining fruition in communities (sometimes state-wide) across the country. With the recent boom in solar leasing, the not-so-distant demise of property-assessed-clean-energy financing (PACE) programs has faded quietly. But it looks as though PACE might not be completely phased out just yet…

To back up a bit, since we haven’t posted (or had reason to post) about PACE financing in a while, a brief review. PACE financing is a program similar to solar leasing in a number of ways.

Before leases became a viable option, homeowners could pay no money upfront in areas where PACE financing was available. Like leases, PACE relies on electricity savings as the key ingredient to the scheme, but also leverages government funding as part of the equation. But while solar leases leverage private equity investments with the support of a generous 30% federal tax credit, PACE programs operate in a more concentrated locus to finance the systems.

Under PACE, residential PV systems are usually financed through a revolving loan or bond-issuance program. Once a PV system is installed, the homeowner pays back the loan that financed the system through a supplemental charge on their property taxes. The payments are usually spread out over at least 10 years, and adjust based on anticipated electricity savings so the increase in taxes never outpaces the savings captured by the homeowner (sound familiar?)

Much to the chagrin of solar advocates, PACE programs were halted almost overnight when FHFA ordered Fannie and Freddie not to underwrite mortgages for homes that had opted into the innovative program. The reasoning, however, short-sighted, was that in the event of a foreclosure, the property tax assessment owed to the PACE program could have senior lien over the mortgage. Though this logic is flawed because the value of homes would only increase with the addition of a PV system, Fannie and Freddie followed suit and effectively ended PACE programs.

Or so we thought.

A court order from a California federal district judge last August ruled that FHFA must conduct a public notice and comment period for 60 days (until March 26th) to weigh in on PACE programs. We’ll definitely keep our eyes on this, though the National Resources Defense Council – a leading advocate for this financing tool – has been keeping a beat on the day-to-day developments. What I’m interested to see is how, if PACE can make a real comeback, these programs will size up to solar leasing. Though the process is a little less direct in terms of government subsidies, solar leases are just as dependent on government financing as PACE programs are, just at different levels that produce different tools. They both leverage electricity savings as a means to make the tool viable. But solar leasing has an advantage in scalability, because it in fact requires large investors that can pour millions upon millions of dollars to take advantage of the large tax credit in the first place, and because, obviously, this funding is not limited to a geographic area (unless you wanted to define the United States as a geographic limitation). 

Yet don’t count out PACE programs as being inferior or unscalable. Several states had PACE programs in the works or already coming to fruition when FHFA stomped on them. PACE also has two advantages over other more directly government-funded renewable energy programs that are particularly useful given the current climate over solar energy. First, these programs are designed to have a direct payback that is easily measurable over time. While rebates and other subsidies drive demand and generate electricity savings (not to mention saved environmental and social costs), those benefits are hard to capture, and more importantly, to quantify over a set period of time. PACE programs have a predictable, measurable payback for the public’s investment. Second, PACE programs are less likely to become muddled in disputes over “choosing winners and losers”, as we’ve grown accustomed to after Solyndra and Evergreen Solar. Most states in which PACE financing would even be possible already have a list of qualified installers for other incentive programs, and because the incentive goes straight to the homeowner (not a solar company), the community that seeds the funding has greater security in their collective investment.

Posted by Stuart Ivy

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