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PACE Financing Set to Expand Commercial Solar Market

In the United States, access to third-party financing has been a main driver in bringing solar projects of all sizes across the finish line. Availability of third-party power purchase agreements (PPAs) and leases has enabled rapid solar adoption within the residential sector and with larger commercial solar projects. However, smaller commercial projects, or those under  1 megawatt (MW), have had relatively limited or no access to capital due to higher transaction costs, lower returns, and unrated or non-investment grade credit of some project owners.

Commercial Property Assessed Clean Energy (PACE) financing could fill the gap for smaller commercial customers eager to cut energy costs.

How PACE works: a real estate owner, if eligible, can receive financing for 100 percent of his or her energy saving initiatives from a PACE administrator, to be repaid as a property tax assessment since the financing creates a lien on the property. The financing terms, typically a 20 year time frame, is structured like a loan with fixed payments and a competitive interest rate. If the property is ever sold, the upgrades go with it, along with any tax liability. Through PACE programs, property owners can add value to their properties with long-term capital and little to no upfront costs.

PACE has been making strong headway in the United States over the past few years with the expectation that not only will more and more municipalities implement programs but that more and more financiers will see the value as well and put money behind these programs. According to PACENow there have been 71 commercial PACE projects ranging from $9,000 to $7 million in value. Office, government, and retail properties account for the majority of these projects. 

Municipalities see multiple benefits, beyond just reaching energy efficiency and renewable energy goals, from implementing PACE programs, according to The Solar Foundation.

What are the Benefits?

  • Administrative Costs: Municipalities are able to support energy efficiency and renewable energy adoption at little cost
  • Financing Costs: PACE allows property owners to secure capital at a lower cost than in traditional capital markets
  • Enhanced Payback: Cheaper capital allows property owners to pursue projects with a range of payback periods
  • Energy Costs: PACE financed retrofits reduce operating costs for businesses, supporting local economic vitality
  • Property Value: Energy efficient properties increase the value of the local building stock

Why Commercial PACE Matters for Solar

An attractive aspect of PACE is that one of the main criterion of eligibility is if a potential customer’s property value is high enough to cover the PACE financing amount; it is not dependent on the customer’s credit. This is important with smaller solar projects for commercial entities that may be unrated or have below investment grade credit. PACE opens the door for them to access long-term, third-party financing that they would not be eligible for through PPAs or leases. Those latter financial products typically require investment-grade credit.

In addition, even if a commercial entity were investment grade, but only had space or load for a small solar project, it would have a hard time obtaining third-party financing through PPAs or leases. Larger institutions finance PPAs and leases typically and would face higher transaction costs and lower returns with small solar projects. As a result these institutions only finance smaller projects if they look identical and can be combined in a fund so they are more attractive at scale. With PACE small solar project size is not an issue; PACE administrators finance energy efficiency improvements that are even more custom and cost less.

Commercial PACE on the Rise

Unlike residential PACE programs, commercial PACE programs aren’t under scrutiny from mortgage lenders and regulators; the only consents needed for commercial PACE projects to move forward are the consent of an existing mortgage lender and PACE administrator (neither challenging to obtain as long as building or property owner is current in paying mortgage and property tax). Lawmakers in 31 states have now passed legislation enabling municipalities to offer programs in nine states and counting, with California and Connecticut leading the charge in terms of program quantity and scope.

States with PACE enabling legislation and active commercial PACE program(s): California, Connecticut, Florida, Michigan, Minnesota, New York, Ohio, Wisconsin and the District of Columbia.

States with PACE enabling legislation and commercial PACE program(s) in the works: Georgia, Hawaii, Illinois, Louisiana, Massachusetts, Missouri, New Jersey, New Mexico, Texas, Utah and Virginia.

Solar Developers’ Role in PACE Financing

Commercial solar developers can help customers through the entire PACE financing process including: determining if they are eligible for PACE financing, helping them apply, and helping them close financing on top of solar feasibility and economics modeling in general. In California, even if PACE programs are not currently available in a customer’s city or county, solar developers — through relationships with PACE administrators — can help push the agenda. Just as with other third-party financing options, developers can show customers what their solar system economics would look like if financed through PACE.