Financing of Renewables and Energy Efficiency
Missouri’s Clean Energy District was formed in January of 2011. The District operates as a political subdivision following the enactment of the Missouri PACE Act (HB 1692) during the 2010 legislative session.
Under the program, municipalities and counties may join the Special Tax District to help property owners finance energy retrofits by allowing an owner to place an additional tax assessment on his or her property.
Property owners who invest in energy efficiency (EE) measures and renewable energy (RE) systems repay these assessments over a period up to 20 years via additional annual payments on their property tax bills. Communities that provide access to PACE funding for their property owners can address two major roadblocks to clean energy growth:
- Lack of Capital: Property owners often balk at the up-front cost of EE/RE improvements. While some are willing to make the investment, most are cautious about any investment, especially in the current economic environment. To finance EE/RE improvements, property owners have had to self-finance (e.g., get equity loans) or rely on small-scale state or local government rebates and other financial incentives.
- Hesitancy to Make Long-Term EE/RE Term EE/RE Investments: Many owners move every 5 to 7 years so they may hesitate to make a long-term investment. Because PACE assessments are fixed and stay with the property, any remaining balance may be able to transfer to a new buyer when an owner sells the home.
PACE Basics
The pivotal innovation of PACE is the creation of EE/RE assessments that are tied directly to a property and repaid via the property tax bill. The voluntary assessment, which is secured by a senior lien on the property, does not require an up-front payment.
The lien provides strong debt collateral in the event a property owner defaults on the assessment. And, because the assessment and lien are tied directly to the property, they can be transferred upon sale.
Missouri Clean Energy Board
District Board members are elected by member municipalities annually.
To ensure local representation, each member municipality of the District designates an advisory council member and certifies in writing to the Secretary of the Board one Elector
to represent the member at annual meetings. The elector need not be the advisory council member. And neither Directors nor elected officials may serve as Electors or Board members.
The intent of this arrangement is to provide ample opportunity for the member community to have input while maintaining a reasonable number of board positions and a manageable working board.
This system of board operation is a way of acknowledging the importance of local input.
Funding
The District’s purpose is to provide sustainable capital for qualifying EE/RE projects in communities across the state. When municipalities join together they create a broad base of demand for capital and therefore an opportunity for scale —and ultimately to a reduced cost of borrowing for property owners. One of the most attractive aspects of the program to members is cooperation among communities which becomes a gateway to the lowest possible cost in terms of operational efficiency and ultimately the borrowing rate for property owners.
Program funding is provided through private investment sourced from the municipal bond market.
An interim warehouse facility has been arranged by the District to accommodate the funding of individual projects as required. Once sufficient projects have been funded, the District issues bonds in the market.
Jobs
PACE has the ability to stimulate local job creation through the installation of EE / RE improvements on private property – jobs that can’t be outsourced.
Recent case study research into the economic impact on jobs found that $4 million in total PACE spending across the study area generated $10 million in gross economic output, $1 million in combined federal, state, and local tax revenue, and 60 jobs.
It is estimated that for each one million dollars in project expenditures, between 13 to 15 jobs can be created.
Extrapolating from this study, if each municipality in Missouri produced just five applications annually for property improvement investments averaging $20,000, the economic impact would translate into $75 million in gross economic output —increased federal, state, and local tax revenue, — and over 1,000 jobs.
It Must Work for Everyone if it is to Work for Anyone
As a financing mechanism, PACE provides relatively small funding amounts to individual property owners —and then bundles multiple contracts together for the purpose
of accessing the municipal bond market. Certain efficiencies of scale are necessary to spread financing costs. It is for that reason that pooling of projects from multiple municipalities is required.
It is generally understood that no single municipality can establish a truly sustainable PACE program. Even the largest of Missouri Municipalities haven’t the capacity for such a program. Therefore the board has determined the best practice for implementation of the Missouri PACE Act is to provide access to capital through municipal membership to the District. Here is a case where the best of intentions and a willingness to invest in the community is not enough and intergovernmental participation makes the program work for everyone.
Action Steps for Membership
Counties, cities and incorporated towns and villages in Missouri have the exciting opportunity to join the District and provide the benefits of PACE to their communities!
Local governments are struggling to maintain programs and services in difficult times. The benefit of our PACE program is that it does not require additional work load, budget impact or liability for local governments. The Board provides the necessary administrative functions so that communities have access to funding while avoiding the burden of running another new program. The Board has engaged an administrator to run day to day operations of the program.
The Clean Energy District also has engaged municipal counsel to produce specimen ordinances for the use of cities, towns and counties in authorizing District membership.
The specimen ordinance is available at no cost to municipalities who wish to join as a member of the District.
Eligible Properties and Projects
The PACE program will accept applications for the following property types:
- Commercial
- Residential
- Industrial
- Agricultural
- Multi-family
- Not-for-profit
- Public facilities
The Board has established the Missouri HERO program in partnership with Renovate America as a part of its offering. In addition to commercial, this program brings residential property funding into the district’s program offering.
Applications for qualifying properties will be accepted for EE and RE projects proposing any acquisition, installation, or modification on public or private property designed to reduce the energy consumption of the property, including a wide variety of project types.
Nearly any project which can show an energy saving with a reasonable payback qualifies.
Federal, State and Local Support for PACE
The Recovery Through Retrofit Act of 2009 identified three major market barriers to the widespread deployment of EE/RE technologies, one of which is access to affordable financing.
The interagency working group responsible for the report recommended providing program guidance to local government financing programs to address the financing barrier. The U.S. Department of Energy has also supported PACE funding programs through technical assistance, webinars, and online resources for ARRA Act grantees that pursued long term financing mechanisms for energy retrofits.
The US Department of Energy provided $452 million in funds to communities that received the grants as part of the Energy Efficiency Block Grant Program. The funds were used to creating models to make savings accessible, for example by offering low cost loans that are repaid through property tax systems.
The design of the state-wide PACE Program in Missouri was initiated by the law enabling Missouri communities to establish a special assessment district that recognize EE and RE as a public “good.”
While each locality can pass ordinances creating assessment districts, it is most likely that the best practice for a sustainable widely available program, is for communities to join with the statewide district.
With proper mechanisms for community representation on the board (as discussed elsewhere within this publication) municipalities may provide a value proposition that can enhance community support tools. PACE is a unique source of community capital which can be highly valuable to development efforts.
As competition for the development dollar becomes stronger and stronger, having access to capital without extensive barriers to entry is a great benefit for Missouri municipalities.