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Published on July 18th, 2014 | by Guest Contributor

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PACE Could Drive More Solar Adoption In Commercial Market

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July 18th, 2014 by  

By Jackie Pitera.

In the United States, access to third-party financing has been a main driver in bringing solar projects of all sizes across the finish line. While wide availability of third-party power purchase agreements (PPAs) and leases has enabled rapid solar adoption within the residential sector and with larger commercial solar projects, smaller commercial projects (i.e., under 1 megawatt) have had relatively limited or no access to capital due to higher transaction costs, lower returns and unrated or non-investment grade credit of some project owners.

Over the past couple of years, commercial Property Assessed Clean Energy (PACE) projects have been making strong headway in the United States, and this momentum is likely to grow in the coming years as more municipalities implement and adopt programs. Municipalities are adopting PACE programs to reach energy efficiency and renewable energy goals, as well as to bolster the local economy. For example, a study conducted in 2011 by the U.S. Department of Energy on the economic impacts of the Boulder County Climate Smart PACE Loan Program found that $9 million spent on energy efficiency and renewable energy projects on 598 homes contributed, statewide, to more than $7 million in personal income gains, just under $30 million of total economic activity, and the creation of roughly 125 short-term jobs.

PACE programs might just be the answer to how the less-than-1-megawatt solar commercial market can catch up in the solar race.

The History of PACE

PACE is a mechanism to finance energy efficiency and renewable energy upgrades to residential and commercial buildings, and was first introduced in pilot programs in 2008. Lawmakers in 31 states have now passed legislation enabling municipalities to offer PACE financing. With PACE, states and local governments can stimulate local economies while offering its residents and commercial building and property owners a way to save on energy costs in a way that mitigates financial risk: PACE loans aren’t typically granted if the resulting energy savings does not exceed the cost of the upgrade, making it a win-win for property owners.

Here’s how PACE works: a real estate owner, if eligible, can receive financing for 100 percent of his or her energy saving initiatives from a PACE administrator, to be repaid as a property tax assessment since the financing creates a lien on the property. The financing terms, typically a 20 year time frame, is structured like a loan with fixed payments and a competitive interest rate. If the property is ever sold, the upgrades go with it, along with any tax liability. Through PACE programs, property owners can add value to their properties with long-term capital, without upfront costs, and local economies are bolstered with new job creation.

The early days of PACE largely focused on energy improvements for the residential sector, but in 2010, PACE took a hit when the Federal Housing Finance Agency (FHFA) directed mortgage giants Fannie Mae and Freddie Mac to avoid purchasing mortgages with PACE assessments. Proceedings are currently underway to resolve these issues, which don’t apply to the commercial building sector.

Commercial PACE on the Rise

Unlike residential PACE programs, commercial PACE programs aren’t under scrutiny from mortgage lenders and regulators; the only consents needed for commercial PACE projects to move forward are the consent of an existing mortgage lender and PACE administrator (neither challenging to obtain as long as building or property owner is current in paying mortgage and property tax). 71 commercial PACE programs are currently available in nine states and counting, with California and Connecticut leading the charge in terms of program quantity and scope.

According to PACEnow.org:

States with PACE enabling legislation and active commercial PACE program(s): California, Connecticut, Florida, Michigan, Minnesota, New York, Ohio, Wisconsin and the District of Columbia.

States with PACE enabling legislation and commercial PACE program(s) in the works: Georgia, Hawaii, Illinois, Louisiana, Massachusetts, Missouri, New Jersey, New Mexico, Texas, Utah and Virginia.

Why Commercial PACE Matters for Solar

An attractive aspect of PACE is that one of the main criterion of eligibility is if a potential customer’s property value is high enough to cover the PACE financing amount; it is not dependent on the customer’s credit. This is important with smaller solar projects for commercial entities that may be unrated or have below investment grade credit. PACE opens the door for them to access long-term, third-party financing that they would not be eligible for through PPAs or leases. Those latter financial products typically require investment-grade credit.

In addition, even if a commercial entity were investment grade, but only had space or load for a small solar project, it would have a hard time obtaining third-party financing through PPAs or leases. Larger institutions finance PPAs and leases typically and would face higher transaction costs and lower returns with small solar projects. As a result these institutions only finance smaller projects if they look identical and can be combined in a fund so they are more attractive at scale. With PACE small solar project size is not an issue; PACE administrators finance energy efficiency improvements that are even more custom and cost less.

Solar Developers’ Role in PACE Financing

Commercial solar developers like Borrego Solar can help customers through the entire PACE financing process including: determining if they are eligible for PACE financing, helping them apply, and helping them close financing on top of solar feasibility and economics modeling in general. In California, even if PACE programs are not currently available in a customer’s city or county, solar developers—through relationships with PACE administrators—can help push the agenda. Just as with other third-party financing options, developers can show customers what their solar system economics would look like if financed through PACE.

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