The False Promise and Premise of PACE

It is widely recognized that financing the purchase of a residential photovoltaic system is a major barrier for consumers who want to go solar.  One attempted solution has been the Property Assessed Clean Energy (PACE) program, under which states authorize municipalities to issue bonds and use the proceeds from their sale to make long-term loans to homeowners for expenditures on energy-efficiency improvements and solar.  These loans take the form of liens on the property, which are repaid by the borrowers through their property tax bills.  The Obama Administration has also made $150 million in stimulus funds available for PACE loans.  To date a few thousand PV systems have been installed with PACE financing.   

Now a major glitch in the program has surfaced.  The New York Times reported on June 30 that mortgage giants Fannie Mae and Freddie Mac might not accept loans on properties with PACE liens.  The problem is that such a lien, like all liens, is superior to other obligations on a property, like a first mortgage.  Fannie and Freddie are not allowed to issue mortgages that are subordinate to other obligations.  As a result, the PACE program is in turmoil, and the promise of PACE is in doubt.

But that promise, using municipalities and their bond and taxing authority to promote the widespread adoption of PV, was a false one from the start.  Like Fannie and Freddie, most first-mortage issuers would decline to have a loan subordinate to a lien on a  property, especially one which could run into the tens of thousands of dollars for a PV system.  This could prevent a homebuyer from getting a mortage on a PACE property, or an existing homeowner from refinancing a first mortgage.  It would also prevent a homeowner with a PACE lien from getting a home equity line or second mortage, since that issuer would surely decline to be third in line.  So much for using your home equity, to the extent that you have any in this depressed housing market, to pay for a child’s college education or make needed home improvements.

Were all these drawbacks disclosed to homeowners applying for a PACE loan?  I don’t know, but they certainly should have been.  And as people become aware of them, and so too the state and local officials who must authorize and create PACE programs, the growth in their availability and the demand for them is likely to slow and even decline.  The chances of Congress passing legislation to amend Fannie’s and Freddie’s charters and allow their first mortages to be subordinated to a PACE lien is slim.  These two organizations are already viewed with hostility by many on Capitol Hill as having exacerbated, if not caused, the real estate crisis by pushing mortgages to people with too little regard for whether they could repay them.  To those Congressmen, many of whom are not big boosters of renewables, allowing Fannie and Freddie loans to be  subordinated to PACE liens for solar equipment would only make matters worse.  So the promise of PACE as the solution to PV financings on a mass scale is proving false.     

In the case of using PACE loans to improve home energy efficiency, the Fannie/Freddie glitch in the program is particularly unfortunate.  The first dollar a homeowner spends on energy improvements to his house should be on efficiency, and even for an extensive retrofit, the cost is much less than a PV system.  The benefits of conservation under PACE are available to all homeowners in a locality, unlike solar, which requires an unshaded south-facing roof and is still viewed by many consumers as not ready for prime time.  One way for Fannie, Freddie and other mortgagers to accept PACE liens might be if they were limited, say, to $10,000 for efficiency improvements only.  That would enable the available pool of funds to help more homeowners, whose energy savings would, of course, make them better able to meet their mortgage payments.

As for solar, it is not only the promise of PACE which is false, but the premise on which it is based, namely, that homeowners should pay to build renewable energy generating facilities on their roofs, and that government and government alone should finance them.  State and local governments are facing a growing financial crisis requiring them to lay off workers and curtail or shut down programs once thought to be essential and untouchable.  This comes on top of the severe problem of decaying infrastructure which has been ignored for years.  As needed road, bridge and school maintenance and improvements are further delayed for lack of funding, the problem is compounded. 

State and local governments, in declining fiscal health, can only go to the bond well so often.  Should solar be given precedence over infrastructure when it comes to drinking from that well?  Any thoughtful solar advocate, who is concerned not just with energy but with the overall well-being of his community, would have to say no.  Especially because there’s a much better and proven way to deploy PV on homes.

The premise of PACE, and indeed much of the residential PV industry, is that we should put the burden on homeowners to increase the generation of renewables-based electricity in the U.S. by buying mini solar power plants for their homes.  If that is the premise on which we’re trying to reduce our use of fossil fuels, and expecting  government alone to finance it, then we’re doomed to fail, at least insofar as solar  generation at the residential level is concerned.

The only way to achieve mass deployment of PV on their rooftops is to sell homeowners solar power, not solar equipment.  Third-party service providers will own, install and maintain those PV systems, and bill homeowners for the renewable energy they deliver under power purchase agreements.  Service providers will finance those systems with equity and debt from the private sector.  We know that this works, because companies like SunRun are already doing it.  In fact, this one company alone has now raised almost $300 million from the private sector, nearly double the amount of those stimulus funds the Obama Administration made available for PACE. 

Yes, of course government has a role in fostering the adoption of PV, using classic tools like investment tax credits and new techniques like Renewable Energy Credits to leverage private sector money.  The stimulus funds should be redirected as loan guarantees to local banks to encourage them to provide PV system financing to service providers in their communities. With such a public-private sector partnership to deliver solar as a service, and not asking homeowners to go into debt to go solar, we can far outpace PACE in deploying PV and displacing fossil fuels.