Texas Legislature Passes Commercial And Industrial PACE Bill

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This post first appeared on Clean Energy Finance Center
by Kat Friedrich

The Texas House and Senate passed Senate Bill 385 this week. If Governor Rick Perry approves the bill, the state will break new ground by developing plans for commercial and industrial property assessed clean energy (PACE) programs. This bill will redesign Texas’s approach to PACE, focusing on the commercial and industrial sectors rather than on residential programs. The legislation covers both energy efficiency and water efficiency.

To facilitate local decision making, cities and local areas will partner with businesses and nonprofits to set up their own PACE programs. These programs will allow businesses to borrow money from private lenders and repay it yearly via an assessment on their property taxes.

The bill has a solid foundation of support from a wide range of stakeholders including industry leaders and senior legislators. Charlene Heydinger, executive director of the nonprofit Keeping PACE in Texas, has built an effective coalition which includes large businesses and banks.

“PACE is the only solution out there that is totally market-driven, totally voluntary and local, and there are no mandates,” Heydinger said. “Our business community loves PACE because it is a real option for a solution without the drawbacks that have given people pause.”

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Momentum of PACE Programs

PACE has been gaining traction nationwide since the first pilot PACE program in 2008, said David Gabrielson, executive director of PACENow. “It’s an idea that caught on very quickly and resonated all over the country.” However, some of the first generation of PACE bills were not designed for easy implementation. States are currently developing updated approaches to PACE.

In 2009, Texas passed a PACE bill which focused on residential energy-related programs. But because the bill was difficult to implement and the Federal Housing Finance Agency opposes residential PACE, PACE stalled in Texas. This year, Republican Senator John Carona introduced a new bill to improve Texas’s prospects for creating successful PACE programs. “I think Texas, in taking up this effort to get their legislation amended, is really on the cutting edge of states around the country,” Gabrielson said.

“We’ll put industrial PACE on the national map,” Heydinger said. Texas is a massive hub of industrial activity. Heydinger said Texas uses 19 percent of the energy used by industry in the United States. According to the United States Bureau of Economic Analysis, Texas was responsible for 8.73 percent of the national gross domestic product in 2011.

Collaboration with Banks

Heydinger collaborated with financial stakeholders to make sure banks’ concerns were addressed. Their collaboration led to a new version of the bill which focuses on commercial and industrial sectors rather than the residential sector.

“Two words, when spoken together, strike fear… and trepidation into the hearts of bankers, and that’s ‘priority lien,’” said Steve Scurlock, executive vice president of Independent Bankers Association of Texas (IBAT). “That is always a red flag. It was very important to us to make sure that the consent piece was very strong – that this would not happen without the consent and opportunity to do what the first lien holder would want to do.”

After the bill was revised, IBAT testified in favor of the House version of the bill. “We felt like it provided appropriate protections not just for our lenders, but for… consumers and building owners as well,” Scurlock said. “One of the things I like about the PACE bill this time is that there’s public/private cooperation. The primary funding for the projects is provided through the lending institutions and I think that’s a good thing.”

Control by Local Communities

“We have a very lean state government structure,” Heydinger said. Therefore, the legislation provides solutions which are inexpensive and simple for local and municipal governments to implement. The bill provides a flexible framework to allow local governments to partner with nonprofit organizations and businesses to set up PACE programs.

The bill does not specify extensive details as to how the individual programs will work, but it does outline guidelines for setting them up. The projects will be paid for through property assessments. They will be funded upfront by either governments or third parties. The financing may cover a variety of expenses including the cost of verifying savings. Project savings verification is required for every PACE activity in Texas.

Local governments will be able to designate regions for the purpose of creating PACE programs. Heydinger said that in agricultural areas, counties may combine their resources to create joint PACE programs.

There are powerful incentives for local districts and cities to set up PACE and water efficiency programs. In addition to being job creation engines, these programs can reduce water shortages and brownouts, both of which are of concern to industry. Texas is currently experiencing a multi-year drought. Brownouts can lead to increased costs for chemical production factories, Heydinger said.

Messaging for Business Leaders and Legislators

“I speak business when I talk about PACE,” Heydinger said. “Our effort now in the next month is about the jobs, the economic impact, the ability to upgrade our existing infrastructure. The benefits of our work that are environmental are wonderful, but they don’t get traction here. We have approached PACE as an economic development bill.”

Since the state legislature only meets for six months every other year, it was also crucial for Heydinger to use communication strategies that would appeal to legislators as persuasively as possible. When the Texas legislature puts a bill on the back burner, action can be postponed for years.

Heydinger said she has been impressed with the legislature’s commitment to addressing long-term infrastructure issues this year. “Good government invests in the future,” she said. This year, Texas’s legislature has focused on developing long-range plans for roads, construction, water conservation and energy efficiency. This bill is part of a larger emphasis on planning for Texas’s growth. Many people are moving to Texas from other states and nations.

“One of the things I… like about Texas is that they are very focused on results,” said Brad Copithorne, an energy and financial policy specialist at Environmental Defense Fund. “If something will create jobs and will stimulate the economy, that’s something they can agree on and make happen. We’re very pleased that this will lead to cleaner air and a healthier environment for everybody. If we can do this by allowing business to create jobs, that seems to me to be a win for everyone.”

To view the history of the bill, visit the Texas legislature’s website.

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