PACE Program Scaling to Help Finance Energy Upgrades

Many consider you the godfather of PACE financing, which you first implemented in the City of Berkeley. How has the program grown, and what is its role in helping California meet its energy and climate goals?

Cisco DeVries: It’s been a long road for the development of PACE. I first cooked up the idea that became PACE in early 2007, and now, in 2016, it is truly going mainstream. A whole industry has grown around the concept. My team and I are seeing the fruits of many years of labor.

As an industry, we’re going to do over $1 billion worth of residential PACE projects in California. That means that tens of thousands of homes are going to see significant reductions in energy use, improvements in comfort, and reductions in energy bills.

That is a remarkable scale. Other programs, like the state’s rebate program, don’t achieve anywhere near that breadth and reach.

The state has set very aggressive targets around deployment of renewable energy resources and energy efficiency. Over the last several decades, the state has been remarkably successful at improving energy efficiency in new buildings through new building codes and appliance standards. But, it’s been a struggle to improve the energy performance of existing homes and businesses. We have not had much success in holistic home energy retrofits or larger energy improvements across existing building stock.

Quite simply, there is not enough money in state government to fund the kinds of rebates and programs necessary to achieve deep energy savings in existing homes. In large part, PACE solves that problem. It enables deep energy efficiency and renewable energy projects at scale, at very limited-to-no cost to the state. That ability has not existed before.

At a recent legislative hearing, a member of the California Energy Commission said that PACE is California’s single most effective tool for energy-efficiency and renewable-energy projects. For me, there’s no higher praise than to have one of the people charged with developing and implementing energy efficiency for the state to say something like that—and I think it may well be true.

 Give our readers a sense of how PACE financing functions.

PACE enables people to do energy projects they wouldn’t have otherwise been able to do.

For the most part, people don’t decide to do an energy program because of PACE, but PACE helps them do a better or bigger project that generates more renewable energy, takes advantage of more energy efficiency opportunities, or reduces the overall energy and water footprint of the building.

Usually, it begins with a homeowner who has a problem they need to solve—maybe their air conditioner broke, or maybe their energy bills are too high. Their contractor will propose an energy improvement they can make, and offer PACE financing as a way to pay for it. That takes the homeowner from struggling to come up with the bare minimum of money needed to do the simplest fix possible, to being able to afford—and being financially rewarded for undertaking—a bigger, even more energy-efficient project.

It’s a great model for the industry to build on. We’re not trying to generate demand out of thin air. We’re helping to solve problems for homeowners by enabling them do better projects and save even more money. 

What is the role of counties, cities, and local jurisdictions in PACE?

PACE is a local government program. It was created by local government, and is available only where it is approved by local government.

A local government provides permission for homeowners to finance an energy-efficiency, renewable-energy, or water-efficiency project on their homes, and repay it as a line item on their property tax bill.

That permission can be granted only by a local government, and the taxes can be collected only by a county government. The program as a whole operates only because state law was amended to allow it. This is truly a public-private partnership at every level.

Companies like Renew Financial fit in as providers of a service to those governments. We make it possible for homeowners and contractors to make easy use of this product, to get good projects, to be confident that the projects are done right, and to ensure that there’s sufficient large-scale, low-cost capital to cover the demand.

The California state Legislature is currently considering AB 2693, which addresses consumer disclosure regarding PACE programs. The bill would require that prior to entering into a PACE loan, a homeowner must be provided a financing estimate and disclosure document. How has Renew Financial contributed to this discussion?

Let me start by saying that it is absolutely necessary and appropriate for California to create strong consumer protections and rules around PACE financing, to ensure that it’s used for the purposes that it was designed for and that homeowners understand the choices they’re making. I view this legislation as a potentially important step forward, as PACE becomes a more mainstream financing option.

AB 2693 has given us an opportunity to educate and engage with local government, state agencies, and the private sector. I do think that when it was first introduced, it included some misunderstandings about the nature of the program and the protections that industry leaders have already put in place.

Over the last few months, my team has testified before the state Legislature numerous times and worked closely with the Governor’s office, the State Treasurer’s office, state legislators including Assemblymember Dababneh, and state agencies on how to support PACE and maintain a set of clear rules as it grows. That work will be beneficial to the industry, and it’s something I’m proud of.

Renew Financial and other major players have embraced the goal of setting high standards for the industry, but that is not true of everyone. How does the industry discipline itself? 

With any new consumer finance or finance product, there is a need to put in place strong industry standards, and PACE is no different.

We collaboratively created and work very hard to follow a strong set of rules, as well as to help organize the industry around a common set of rules—and I think it’s working.

The best way to support PACE is to ensure that all of our government partners—the local governments that enable us to work, the governments that sponsor and issue the bonds, the State itself—codify these rules and ensure that everybody is following them. It’s important that industry players, local governments, and state government all understand and abide by the same set of rules, and that we’re checked.

We send inspectors out to a percentage of all the projects that are financed through our financing program. We are not required to do that by law or by any particular government entity. But we know that it’s important that we are watching, and that contractors and other participants in our program know that we’re watching—that we’re going to catch things if they’re done wrong.

That same standard needs to be applied to all PACE providers, and I’m pretty confident over the next few months that those standards will be applied to everybody. That’s how we ensure the continued success of PACE, and widespread compliance with a standard set of rules.

Let me turn back to state goals. Under SB 350, California must double the energy efficiency of its existing buildings by 2030. What role do you see PACE playing in getting to that goal? 

PACE is one of the most important financial tools we have available to achieve the goals set in SB 350, as well as in other worthwhile legislation, like AB 758.

Let’s say we wanted 50 percent of residential homes in California to undertake a significant energy improvement. We would need around $90 billion to achieve that level of penetration just in the single-family home market. There’s not enough state money available—even in a good year—to make that possible. We need the public sector and the private sector to partner in ways that allow for that level of capital to be put into the market, and PACE is uniquely situated to do that.

In addition to energy projects, you mentioned that PACE financing can also be used for water efficiency. Elaborate on that.

A couple years ago, PACE was very smartly amended to allow for water efficiency improvements, and we are seeing an increasing number of water improvements being made with PACE financing.

The world is waking up—and certainly California has already woken up—to the fact that water is likely the next big resource challenge we will face.  

The good news is that there’s a lot of low-hanging fruit in water efficiency for homes and in businesses. But it faces the same challenge that energy efficiency does: You need to spend money to save money. You need to spend money to make the water improvements necessary to save water over time.

The water conservation industry has emerged, contractors are readily available, and PACE financing is available. I’m excited to see how much we can do in terms of water savings going forward.

I’m also excited by the fact that saving water also saves energy.  A low flow shower head not only reduces water use, it reduces hot water use – and Californians typically use natural gas to heat our hot water.  In addition, some 20% of the electricity consumed in California is used to move and treat water.  Reducing water use at home reduces the amount of water that needs to be moved and treated, thus saving even more energy.

I’m personally headed in this direction as well. I’ve already done an energy retrofit; I have solar in my house; I drive an electric car. Now I’m going to take the next step and put a rainwater-capture system in my house for irrigation purposes as well as put new permeable surfaces in my back and front yard areas—to take care of our water needs while tapping municipal supplies as little as possible.

What is PACE’s role for commercial buildings in need of energy upgrades?

Commercial financing may be even more important than residential—but it is harder. It has been slower to take off, and the projects take longer to get done. It’s a more complicated ecosystem.

For most small or medium-sized commercial businesses, it’s very difficult to get financing for solar or energy efficiency. PACE for commercial, industrial, agricultural, and multi-family properties fills that void, but it is taking a while to get to the kind of scale we want to see.

We’re finally starting to see it. Over $100 million worth of PACE applications came in our doors in the first half of this year. Many of those are making their way through our program now. We’ll keep our fingers crossed and see how they progress.

As important as residential PACE financing is, we may look back five or 10 years from now and find that in fact, it was in the commercial market that PACE financing turned out to be most important—simply because there are so few alternative financing options out there. 

You participated in the early years of VerdeXchange, which treats California as a portal to the West and the whole of North America. Is there interest in PACE financing throughout North America or beyond California?

There’s now enormous interest in PACE financing, not only around the country, but also around the world.

I helped set up the very first PACE financing program in Melbourne, Australia. Their program is called the Energy Upgrade Agreement, and it uses the same basic concept. We’ve also seen interest as far afield as India.

Here in the United States, 32 states have passed some form of PACE legislation—from Vermont and New York to Texas and Oklahoma. We’re launching a residential PACE program in Florida in July.

PACE has achieved something that is unusual today: strong bi-partisan support. It’s been a great joy over the last nine or so years to watch the program be embraced around the country without any of the partisan rancor that normally accompanies clean energy and energy efficiency issues. I think people see it as just common sense: help people save energy and money. There’s nothing political about that.

In many states, it’s still early days of these programs. Not all of it works perfectly. They’re just getting started and figuring things out. That means we have work to do, and I’m excited to share the experience of California so that we can make the program as successful in other states as it has been here. California’s model is shining bright right now.