Property Assessed Clean Energy (PACE) legislation, enacted in 27 states and the District of Columbia, offers significant opportunities for traditional energy service companies (known as ESCOs) and other licensed contractors to provide qualified energy retrofits. A PACE program allows a business to pay for energy retrofit equipment and components through its property tax bill.
PACE programs connect building owners, ESCOs, and lenders and bondholders, as well as provide alternatives to the two most prevalent problems with energy performance retrofits: the availability of capital and the recovery of investment before the asset is sold.
Three PACE Models
The structure of PACE programs is separated into three models, all of which already have been enacted by cities and counties in California, Colorado, Florida and New York. Each model has different ESCO qualifications and energy performance contracting terms and conditions.
Under the warehouse model, an investor makes a line of credit available to cities and counties to use in funding the PACE program, with the intention of reaching a critical mass of funding that results in bonds or other securities issued to replenish the line of credit. It provides immediate funding at a scale that could allow multiple retrofit projects at one time.
Following are items of importance to ESCOs.
- Owners can only use qualified PACE ESCOs.
- Investment-grade energy audits will be required at a certain energy performance contract dollar amount.
- PACE ESCOs will have to guarantee the energy savings, but these dollar thresholds have not been set yet.
- Each PACE ESCO will have to pay the third-party administrator a certain percentage of the energy performance contract costs for program expenses.
- Energy savings insurance might be a substitute if the PACE ESCO does not have a balance sheet to justify an unsecured guarantee of the energy savings. Expect additional costs of 4 percent to 6 percent of the energy performance contract amount.
- Some providers of energy savings insurance may require a payment and performance bond, which might range between 1 percent and 2 percent of the energy performance contract amount.
- Intermediate draws directly to the PACE ESCO on the energy performance contract are anticipated.
- The form of the energy performance contract and energy savings guaranty are not anticipated to be dictated by the PACE program, but the energy savings insurance carrier may dictate the form of energy performance contract.
The second model involves the issuance of bonds to create a fund the local government makes available to the PACE program. The Florida PACE Funding Agency, organized by Flagler County and the City of Kissimmee, validated the issuance of $2 billion of bonds. Although the warehouse and bond models are set up so other towns and cities can join these programs and local governments will not be held responsible for any costs or liability, the agency program claims to have one set of rules, procedures and guidelines for the entire state. Once the bonds are sold and this PACE program is funded, the bond model should be similar to the warehouse model. The program requirements are still under review, as are terms and conditions affecting PACE ESCOs.
The third model is known as owner-arranged financing, or the open market model, in which the owner negotiates the rates and reserve requirements for the PACE funding needed with a private institution or bondholder. Renewable Funding LLC and Eco City Partners are promoting this model in San Francisco and Lantana, Fla. The owner-arranged model has all the benefits of traditional PACE financing (e.g., the funding is repaid with special assessments that have priority over the existing mortgage).
Additionally, this model may favor larger retrofits because the financing terms and draw schedule, schedule of performance, measurement and verification, and ESCO guarantee could be subject to modification and customization for a particular property. Additionally, the retrofit might not have to wait for bond terms to be agreed upon if the bond model was adopted, but not yet funded. However, most owner-arranged models require the existing mortgage holder’s consent, whereas the other models require only that notice of any proposed PACE financing be given to existing mortgage holders. Plus, the consent will take extra time to negotiate and obtain. The City of Lantana program is still being formulated, but it looks like the San Francisco program energy auditors and ESCOs will be required to meet certain qualifications.
Each model is designed to allow a third-party administrator to run the program, thereby reducing the amount of city or county employees allocated to the PACE program. The fee paid to a third party to administer the program usually is passed on to the owner.
What Contractors Should Do
Given the fact that program facilitators and potential third-party administrators are pitching PACE models to communities across the country, ESCOs should consider taking the following actions.
- Establish relationships with PACE facilitators and third-party administrators to discuss ESCO certification criteria, audit requirements for each PACE program, and energy performance contracts that include a form with an energy-saving guarantee, measurement and verification protocols, and maintenance obligations.
- Weigh in during the political process for establishing a particular model adopted by the city or county.
- Meet with selected PACE program lenders, such as Bank of America, Wells Fargo and PNC.
- Prepare marketing materials that demonstrate the ESCO is ready for and supports the development of PACE programs.