Green Blog: For Sacramento, Energy Upgrades With No Upfront Costs

Sacramento has announced a new program to help finance energy-saving upgrades for buildings like adding insulation, replacing old windows, installing high-efficiency heating and cooling systems or adding rooftop solar panels.

Owners of homes or commercial buildings will incur no upfront costs for taking part in the program, Clean Energy Sacramento, but will gradually pay back the financing in installments on their property tax bills. The city?s program will be one of the largest in the country based on this approach, known as Property Assessed Clean Energy, or PACE, financing, said Stacey Lawson, the chief executive of the company that will manage the program for the city, Ygrene.

Sacramento has set a goal to reduce its energy use by 15 percent by 2020. The program will open with $22 million already committed to upgrades, Ms. Lawson said in a telephone interview.

It will also be the first program to operate under a state legislative measure that expanded the guidelines for regulating PACE programs and should help resolve some of the snags that have troubled other such efforts, she said.

In 2008, when cities in California began piloting PACE financing, it seemed like the ideal solution for cutting the huge amount of energy used by homes and commercial buildings, estimated at 40 percent of all energy consumed in the United States each year.

For property owners, PACE offers low-cost financing and long payback terms while improving their properties. Typically, the savings on energy bills pay for the additional tax assessment. Cities see this as a way to meet their climate and energy policy goals without digging into their own pockets.

Since 2008, 27 states and the District of Columbia have adopted legislation enabling local governments to offer PACE programs to building owners. But many mortgage lenders balked. In most states, the PACE tax assessment is considered a senior lien on the property. This means that in a foreclosure, the lien gets paid ahead of the mortgage balance.

In July 2010, the Federal Housing Finance Agency, which owns or guarantees about half the home mortgages in the country through the Fannie Mae and Freddie Mac programs, issued a ruling expressing its concerns about the ?safety and soundness? of PACE programs. The agency followed up in 2011 with an order that explicitly directed Fannie Mae and Freddie Mac ?not to purchase mortgages affected by first-lien PACE obligations.?

?The F.H.F.A. rulings essentially spooked all the municipalities,? said Eric Bloom, an analyst with Pike Research. A few programs have moved forward, notably in Sonoma County in California and in Babylon, Long Island, he said, but the F.H.F.A. ruling effectively shut down most others. Some programs that focus only on commercial buildings have continued, however, as these properties don?t rely on government-backed mortgages.

California and other states challenged the F.H.F.A. rulings. Last August, a federal district court ruled that the F.H.F.A. edict had violated federal law because it offered no public notice. The district court instructed the agency to offer a public comment period. That ended in September, and a final rule could come from the F.H.F.A. by May of this year, estimated David Gabrielson, executive director of PACENow, an advocacy group.

In the meantime, Sacramento is moving forward with its own program based on passage of Senate Bill 555, which expanded the state?s definition of public-benefit projects that are eligible for repayment through property taxes to include renewable energy, energy efficiency and water conservation improvements on private property.

At the same time, the program will carefully weigh each project to protect the mortgage holders, Ms. Lawson said. For example, the property owner must hold at least 15 percent equity in the property, and the cost of the project cannot exceed 10 percent of the property value. For commercial projects, the project must pay for itself through the savings on energy costs.

For industry watchers like Mr. Bloom of Pike Research, PACE?s potential is vast, but most communities interested in this approach will remain on the sidelines for now, he suggested. ?They are waiting to see what happens with the F.H.F.A. final rules, and watching to see if programs like the one in Sacramento can crack the code,? he said.

Source: http://green.blogs.nytimes.com/2013/01/31/for-sacramento-energy-upgrades-with-no-upfront-costs/?partner=rss&emc=rss