Cisco DeVries compares his envisioning of PACE financing in 2008 to the excitement of the first peanut butter sandwich: the ingredients were all there, and he had a Eureka! moment. Easier said than done! To take this sweet allegory to its finality, let’s say that the sandwich was one thing but in the end it was about the milk. PACE ran almost immediately into federal regulatory adversity which took a couple of years to work out, and more years to compel local governments to feel comfortable with that work out. Finally the way was cleared. Cisco’s PB&J financial instrument is taking off, with programs opening up all over the country. Colorado has just approved its state-wide program and California is catching on fire. For updates on programs, see pacenow.org.
Most contractors in the California solar and efficiency industry have now heard the word PACE at least once. An increasing number of them are using it with increasing frequency. Some of them are now staking their future on it. “As California goes, so goes the country,” and PACE will most likely make this adage true.
What is it? Property Assessed Clean Energy (PACE) lending is the mechanism by which a property owner obtains a loan specifically for the purpose of renewable energy, efficiency upgrades, water management or seismic retrofit (new in CA); the loan is provided by a private entity but is secured by bonds, and its reimbursement is billed through the annual property tax bill. So the loan has the same seniority as the government’s property taxes. This low-risk lending structure has opened up a sizable pool of third party capital providers including my own company, CleanFinancing.com, which is structuring a program to support PACE. The great competitive proposition of PACE is that the loan is not tied to the property owner, but to the property. So credit score issues and property transfer issues are almost eradicated.
How it works. Typically, the process involves the establishment of a state, county or city PACE administrator(s), which the local government can choose to be a single agency or a competitive market, and which oversees the operation of the program: the approval of projects, the distribution of money, the interaction with the state, etc. Then there are lenders who provide the capital against the projects and with which the bonds are purchased. Finally there are the originators, or market makers, that are the contractors who bring the signed project contracts into the administrator for the review of an application and the eventual issuance of a loan.
I caught up with Cisco via Skype. A few weeks ago his 7-year old company was renamed Renew Financial, of which he is CEO, to encompass the wider range of projects for which it now provides PACE financing. The company has significantly expanded its operations this year.
Question: Cisco, why do you think the market needs PACE, and to what extent will its roll-out impact the rate of infrastructure growth throughout the United States?
Cisco: PACE is a tool. People finance, not because it’s fun but because they need something. We are in the midst of enormous change in how this country uses energy, and this is a key tool to transforming our energy in a way that is much more distributed. PACE is fundamental to the democratization of distributed energy. We want to make certain that everybody participates. PACE can be instrumental in making sure that this happens quickly and fairly across society.
Q: What do you anticipate to be the value of the renewables/efficiency market in the next 5 to 10 years, and how much of that market do you see PACE capturing?
Cisco: We are talking about a transformation that will require billions if not trillions of dollars over the coming years. It’s not going to happen “on the cheap.” In the US, owners of homes are already spending about $80 billion a year in energy related improvements, on HVAC’s and roofs and things that have huge energy impact. So they’re already making those decisions, but they’re not making very good ones from an efficiency perspective, not big enough, deep enough, thoughtful enough. So if we only take this market, even if the transformation I’m talking about never happens, we are helping make this enormous market of homeowners make more efficient decisions through PACE.
Q: As such, who will be the greatest beneficiaries of PACE?
Cisco: Property owners. We’ve been talking about energy companies, solar companies , that they’re going to make a lot of money. If the homeowners and business owners are not the greatest beneficiaries, then something has gone terribly wrong, and we’ve created something that doesn’t have anywhere near the impact that we need. In the end, we need to be helping people.
Q: Could you explain how PACE is set-up in CA, and the different roles which must be filled in each county and town that opts into PACE in order to have a successful program?
Cisco: The reality of how each of the individual pieces of how PACE gets deployed in an individual city can get pretty complicated and there’s a lot of minutia. You’ve got to have a willing city, pass resolutions and create districts, you’ve got to go court and validate those districts…every level of government from the state to the city are all participating and all have key roles. But in the end, it’s about how we are enabling home owners and contractors. The rest of it, like state reserves etc., doesn’t matter unless we’ve got happy contractors and homeowners. So PACE is set-up today in a way that makes it very easy for cities and counties to participate, because companies like mine and a couple of others have spent a huge amount of time and energy and money helping to figure out how to make that easy.
Q: In CT and now CO, programs feature a single statewide administrator. Do you see that as a simpler model that could gain traction as additional states adopt the program? What are its disadvantages?
Cisco: The reality is that both approaches can work. I started out years ago looking at this and saying “First of all, you’ve got to have scale.” I set-up the first program in Berkeley, CA. It’s a great town and they did a great job. Then there was Palm Desert, CA, and Boulder County, CO. Those are all incredibly important learning experiences. But those were individual [communities] doing an individual program. But you simply cannot get the machinery and the marketing and the system to work at that scale on any cost effective basis. So all of the programs in CO, CT, or here in CA, all of them are predicated on the fact that you must have scale. It’s got to be simplified, it’s got to work, there’s got to be plenty of capital at low cost. So whether you do that via a central state program or whether you’ve got a more competitive dynamic like we have here — I tend to prefer the more competitive dynamic — you need to have something that works with the market, is receptive to changes and has scale. I will say that in a competitive environment, it allows for other folks to spend that money and for new ideas to come into the market more quickly. Over time, I think it will move in that direction and you see that with Sonoma County, CA. They have one of the most successful PACE programs in the country. They’ve been a great leader with their own program. They proved and it worked and can scale, and now they’ve invited other companies like us and others to finance projects in their jurisdiction alongside them because they recognize the importance of having competition and bringing in scale.
Q: Do you see PACE as providing financing help for the all the efficiency components of new construction as well as retrofits?
Cisco: In concept yes if you use the same basic approach. You don’t want to increase the upfront cost of a home in order for people to get the benefit of clean energy, so if they’re going to be just as good or better off on a monthly basis buying a home with efficiency and solar built right in, and PACE is a tool, then great. Clearly it becomes complicated to determine what is a PACE improvement and what wasn’t, and you want to be careful that builders are not tacking on costs that aren’t part of the home itself and don’t belong in PACE. So I’m sympathetic to the challenge. But I would argue that we need to find a good way to do it, and I hope we will.
Q: Some market observers are concerned that the currently broadening access to PACE financing could put property owners in trouble as they develop excessively large debt servicing obligations through their tax bills, leading them to a default. What is the industry doing to protect itself from any such eventual negative publicity?
Cisco: We are lucky in that the folks in this market including my company have been pretty pro-active in trying to figure this out ahead of time. This is a long game. The industry has been lucky to have some leadership that’s had that focus. The key piece here is the appropriate tension between providing homeowners and contractors the tools they need to do a project that fits them right there, and the tension to make sure that they are getting a cost effective, appropriate project. Let’ me give you a couple of examples of how we’ve done a good job of growing the PACE financing opportunity without …creating a situation where they are more likely to default. Most people in CA don’t get a permit for replacing their HVAC; they use the cheapest guy who shows up in some truck, so they get the worse product, the worse service, it’s not installed properly and most importantly there has not been the king of rubric around it that makes sure there is duct testing and air testing and that all the systems worked. With PACE, just to start off with, we require the permit. So you’re going to get an efficient HVAC improvement. We’re eliminating the folks who operate without permits. So by supporting the regulatory framework, we’ve improved the outcome tremendously. So people are happier because [their investments pay-off] and cities have people that follow the law. There’s no law that requires us to demand a permit, but we’ve set that in place and already cities and counties are getting better outcome. And the proof is in the pudding: the data shows that people with PACE on their homes are less likely to default on their mortgage than people who didn’t. Lots of data still to come.
Q: As the acknowledged enabler of the PACE mechanism, you have chosen via Renew Financial to compete in the marketplace your helped create, in CA both as an originator and an administrator. Given your broad perspective, how are you positioning the company and what sort of competitive advantage would you cite for Renew Finance?
Cisco: Well, I’m certainly not going to wander down my business plan too far; but there’s a lot of pieces here. I’m certainly proud of the role that I and my company played in helping give birth to the PACE idea and to creating a market-based approach to making this a reality. But that and $2.50 gets you a cup of coffee at Starbucks. The success of Renew Financial is because we offer great service to cities, to contractors and to homeowners, and we’re doing so not just with PACE but with other financing tools as well. We just completed the first securitization in history, unsecured energy efficiency improvement loans, got an A rating from Fitch just last month, working with Citigroup on the issuance, so we’re involved in a number of financing tools. What we’ve figured out here is that it’s not just about PACE. Obviously, for PACE we want to make it simple, easy, make sure the money is there on a large scale at low cost, and we’re operating today in over 70 percent of the state of CA, our growth from last month to this month was over 50 percent in our residential PACE business, and we’re way away of our projections in our commercial PACE business. But it’s not about PACE, it’s about helping contractors do more and better work on efficiency and solar. So we’re taking that all across the country, and there will be a lot of other people doing this. It’s a huge market. If we’re good at what we do there will be plenty of business for us and I’m not so worried about what other folks do. Most of what I spend my time with is how I make homeowners and contractors happier, and how our systems make this faster and easier.
Q: Most people in CA have never heard of PACE, but all know the word “mortgage.” What will be the channel that will educate property owners?
Cisco: It’s all contractors. Look, 2 to 3 out every 100 homeowners will get an HVAC each year, less than one out of every 100 will get solar. But a contractor doing solar/HVAC will be talking to 3 to 5 people every day. So this works because contractors understand that PACE fundamentally changes the game; it allows people to do bigger better projects, and homeowners to have more successful projects, save them more money. That’s it. So whether they know the word PACE, or California First or Renew Financial, I don’t really care. The point is contractors are out there saying this works, here is a thing you can do. Mortgage has a hundred year head start on us — let’s see how we do in a hundred years [laugh]. In the meantime, I don’t care what word they use. The key issue is are we helping them, and are they using it, and so far the answer is yes.
Q: Let’s play a little word association game. I give you a word and you say the first thing that comes out of your mind:
Cisco: [laughs] that’s a good one…alright I’ve got to speed up here: Government… uh…risk averse!
That was the right answer! Thank you Cisco.
Cisco: Thanks for the discussion, Philippe, it’s an important one.