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Tag:

Property Assessed Clean Energy

What’s Unique about the Texas PACE-in-a-Box Toolkit

What’s Unique about the Texas PACE-in-a-Box Toolkit

written by Kat Friedrich

Texas faces an unusual scenario when it seeks to advance property-assessed clean energy (PACE). The state has a tradition of seeking private-sector solutions and streamlining government activities. This means PACE methods adopted in other states – such as Connecticut – would not work in Texas.

Also, Texas’s private sector is massive. The state’s businesses – and their environmental footprint – are growing rapidly. In a Nov. 18 webinar called “PACE in Texas 101,” Charlene Heydinger, executive director of Keeping PACE in Texas, said Texas uses 19 percent of the industrial energy consumed in the United States.

“Texas leads the nation in energy consumption, accounting for 12 percent of the nation’s energy use,” Heydinger said. “Water is even more of a challenge.”

“All of this is being exacerbated by tremendous growth in Texas,” Heydinger said. “More than 1,000 people move to Texas every day.”

“PACE can help,” Heydinger said.

PACE, as Texas defines it, includes loans for energy efficiency, renewable energy, distributed generation, and water conservation. It covers commercial, industrial and multifamily properties.

Loans for all of these projects are created via voluntary county or municipal property assessments. These loans are considered high-priority compared to other debts, are passed on to new property owners, and survive defaults and foreclosures.

These terms are very favorable for lenders, since they make repayment quite reliable.

As Texas faces water shortages and grid reliability issues, its need for both clean energy and water efficiency are growing rapidly. Heydinger presented a graph showing the large scope of the current drought. This drought impacts industrial enterprises and other businesses and affects many communities.

Expanding PACE

The convergence of all of these factors has created momentum in Texas’s private sector and government to develop PACE programs that cover both water and energy. More than 100 stakeholders have built a toolkit in a unique response to this challenge. It is aptly titled “PACE-in-a-Box.”

“What is really wonderful about PACE-in-a-Box is that it’s the first program in the United States that has been designed by the stakeholders who are going to use it,” Heydinger said. “We were highly motivated with several goals that reflect the Texas economy and Texas mindset.”

Many potential PACE projects have already been proposed in Austin, Amarillo, and other cities – even though the programs do not exist yet.

When Gov. Rick Perry signed PACE legislation in 2013, the proposal was relatively flexible. It left a great deal of room for local municipalities and counties to interpret how to implement PACE.

But stakeholders recognized that such a high degree of flexibility would doom PACE to failure in smaller and more rural communities. While larger cities such as Austin and Houston might have the resources to customize PACE, smaller communities do not.

The toolkit specifies that small communities can partner with one another regionally to work together to implement PACE. This may result in clusters of communities creating PACE programs collaboratively.

Building a Standardized Solution

Keeping PACE in Texas partnered with a large network of groups to develop a simplified, standardized solution that communities and regions throughout the state can use.

PACE-in-a-Box contains standard documents for all of the major transactions involved in local PACE programs – from public hearings to lender negotiations.

According to Rachel Stone, Policy Coordinator at South-central Partnership for Energy Efficiency as a Resource (SPEER), PACE-in-a-Box provides many resources for program developers. These include model contracts for providers and lenders, open market financing instructions, a model lender notice, a technical manual for ensuring the viability of energy improvements, a model application, and a series of tests of financial ability.

“We’ve tried to do as much as we can to make this easy for local governments to use,” Heydinger said.

PACE-in-a-Box encourages property owners to select their own contractors, lenders, and equipment manufacturers.

Stone said she believes this market demand will stimulate economic growth. “PACE helps in places where the economy has been depressed and people want to make capital improvements.”

The toolkit encourages third-party financing of loans, but municipal bond financing is also an option.

Loans may be serviced by the local PACE program itself, via a county tax assessor or collector, by the lenders, or by third-party servicers.

Stone said PACE-in-a-Box recommends a savings-to-investment ratio of greater than one for each project. It also recommends total investment of less than 20 percent of each property’s assessed value.

“We are only doing deals that make sense in the business community,” Heydinger said.

This article was originally published by Clean Energy Finance Forum, a news website sponsored by Yale University. To subscribe to our newsletter, please visit our website.



January 6, 2015 0 comment
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Alternative Market Solutions Could Ignite Renewable Energy Finance

Alternative Market Solutions Could Ignite Renewable Energy Finance

written by Kat Friedrich

How can alternative financing solutions help expand clean energy through capital markets? Industry experts convened at this year’s Asset-Backed Securities (ABS) East conference in Miami on Sept. 20-23 to discuss these possibilities. Yieldcos, crowdfunding or peer-to-peer (p2p) markets, and property-assessed clean energy (PACE) financing could supplement the role of securitization and may deliver the capital the renewable energy industry demands.

John Joshi, head of capital markets at Plant and advisor to National Renewable Energy Laboratory, said, “We started doing these panels four years ago or more and were looked upon as the hippies. Now we have rock stars – Fortune 500 companies, Fortune 100 companies, and energy companies; it’s an amazing evolution.”

In reference to low-to-moderate-income consumers, Joshi said, “ABS has a chance to do tremendous good.”

Yieldcos

Currently, yieldcos may be a preferable financing alternative to securitization. Panelists noted that yieldcos could eliminate many of securitization’s challenges and attract lower costs of capital.

For example, SolarCity’s first and second securitizations saw yields of 4.8 and 4.6 percent, respectively, while yieldco investors can expect slightly lower dividend yields of 3-5 percent. According to Allan Riska, senior manager at SunEdison, investors find yieldcos appealing because this dividend is expected to grow.

A yieldco is a publicly traded company that is created for the purpose of owning assets that produce cash flow. Some yieldcos specifically focus on renewable energy assets. The income from these assets is generally distributed to the shareholders as dividends.

Yieldcos and securitization are fundamentally different. “Equity markets are more liquid than any fixed income market,” Sullivan said. “You will [have] different volatility, a different investor set, a different tax strategy and a different target market.” Sullivan said both options add value because they bring in capital that wouldn’t otherwise be tapped.

While yieldcos are structured as normal taxpaying corporations, yieldcos that own renewable resources can use the tax benefits associated with clean energy investment to avoid paying corporate-level taxes. These tax benefits, called net operating losses (NOLs), must be used and carried forward to deliver dividends.

Yieldcos do not eliminate all risks. Dividend growth is reliant upon a sufficient pipeline of assets and the associated NOLs. A yieldco partnered with a strong developer that can keep feeding the pipeline will mitigate that risk, said Dan Sullivan, principal at PriceWaterhouseCoopers.

“We have a lot of projects from the SunEdison pipeline that are going to go into the yieldco and grow that cash flow,” Riska said.

Interest rate risk is another major concern which is ultimately managed by investors. But these fears may be overstated. Andrew Giudici, senior director of the Structured Finance group at Kroll Bond Rating Agency (KBRA), said interest rates will rise over time but investor demand should keep rates relatively low compared to the broader market.

Riska said SunEdison is currently looking at how the equity from its yieldco, TerraForm Power, interacts with the cost of debt. This will allow SunEdison to optimize its cost of capital. Financing projects with debt at the leverage ratios they had before may not be optimal.

“We might be leaving money on the table. We might have securitization and yieldcos work in the same structure to optimize cost of capital for us,” Riska said. To do this, SunEdison would securitize at the project or fund level before the project goes into a yieldco.

Crowdfunding and P2P

Crowdfunding and p2p networks are also an emerging financing alternative. Clean Power Finance operates an online business-to-business platform that connects institutional investors and lenders with residential solar professionals who need solar finance products to grow their businesses.

Clean Power Finance is interested in any conduit that provides the cheapest cost of capital to pass through to homeowners and installers, said Kristain Hanelt, senior vice president of the company. He said that, for crowdfunding, even major platforms get most of their funding from banks and most are venture-backed. He said he has not seen costs of capital extremely dissimilar from those on Wall Street.

According to Dan McMahon, senior vice president of Hannon Armstrong, the problems with p2p are achieving scale and deploying small increments of capital efficiently. In some respects, he said, Hannon Armstrong and SunEdison are crowdfunding at around $14 to $20 a share because “the whole point of going public was to hit a broader investor base.”

“I just don’t know how you can service and manage such small investments from so many different people,” McMahon said.

PACE

In PACE financing, an assessment is placed on a property to install a clean energy project, which is paid for over a 15- to 20-year period.

Renovate America recently issued over $104 million in PACE-backed bonds, which were rated AA by KBRA. According to Giudici, the HERO transaction by Renovate America had an advance rate of 97 percent.

The advance rate is the maximum percentage of the value of a collateral that a lender is willing to extend for a loan.

KBRA’s credit analysis of the HERO transaction proved it was impossible to break the deal, Giudici said.

KBRA found that, under a default scenario based on historical trends, a default will result in a temporary disruption of cash flows while the property owner is in foreclosure, but ultimately those payments will be made.

Giudici said a tax assessment for $2,000 would not drive a property foreclosure. Even if foreclosures by Fannie Mae and Freddie Mac occurred, credit supports like excess spread would absorb those losses. Additionally, many municipal districts do not allow homeowners to make partial payments on their tax roll assessments.

Excess spread is the difference between the interest rate received on the underlying collateral and the coupon rate paid to investors. The excess spread is usually deposited into a reserve account and serves as the first line of protection against losses for security holders.

According to Giudici, PACE is an attractive security structure conducive to ABS.

PACE steps away from many issues that solar securitization currently faces – including operational costs, tax equity, and credit enhancements – and is one of a multitude of options that will be around for a while, Sullivan said.

This article was originally published by Clean Energy Finance Forum, a news website sponsored by Yale University. To subscribe to our newsletter, please visit our website.

The author, Marley Urdanick, is a student in the Master of Environmental Management program at the Yale School of Forestry and Environmental Studies. She writes regularly for the Clean Energy Finance Forum, a news website which is sponsored by the Yale Center for Business and the Environment.



November 10, 2014 0 comment
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Ygrene Energy Fund and EcoAsset Energy Solutions Enter Joint Venture

written by Walter Wang

Ygrene Energy Fund Florida, a leading provider of commercial and residential property upgrade programs for Floridian governments, announced that it has formed a strategic joint venture with EcoAsset Energy Solutions, a subsidiary of Lykes Bros. Inc., a 100-year old local, family-owned company and the largest private landowner in Florida.

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May 31, 2013 0 comment
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Texas Legislature Passes Commercial and Industrial PACE Bill

written by Walter Wang

The Texas House and Senate passed Senate Bill 385 in May. If Governor Rick Perry approves the bill, the state will break new ground by developing plans for commercial and industrial property assessed clean energy (PACE) programs. This bill will redesign Texas’s approach to PACE, focusing on the commercial and industrial sectors rather than on

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May 21, 2013 0 comment
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The PACE Soap Opera Continues

written by Walter Wang

It seems that soap operas did not, in fact, go away after the 80s. Because the ongoing saga of efforts to establish Property Assessed Clean Energy (PACE) financing programs play like an energy wonk’s version of ‘As the World Turns’.

We’re writing with an update, and a request to take

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May 7, 2013 1 comment
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Bad News For PACE

written by Walter Wang

Some bad news for PACE financing. As you may remember, after FHFA took action to stop residential PACE programs, a number of entities sued FHFA, claiming their action was not lawfully done. In a previous decision, the District Court for the Northern District of California forced FHFA to go through a rulemaking process on its PACE actions, and over

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March 20, 2013 0 comment
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Energy Efficiency and the Solyndra Effect

written by Walter Wang

Not so long ago the green energy movement celebrated because President Obama used words like ‘renewable energy’ and ‘climate change’ in his inaugural speech. It was a first for a US president.

Now comes the downside of being a political darling.

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September 22, 2011 0 comment
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Making Sense of the PACE Debate

written by The Vote Solar Initiative

In the case of the federal government overreach on property assessed clean energy (PACE) financing — this overreach — Fannie, Freddie, and the FHFA (Federal Housing Finance Agency) took issue with the fact that the PACE lien on the property is senior to the mortgage. To recap, a senior lien is the thing that really gives PACE its value and is well explained here.

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December 3, 2010 0 comment
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Fannie Mae and Freddie Mac Digging in on PACE

written by Walter Wang

Fannie Mae and Freddie Mac have already put a halt to many state clean energy and energy retrofit programs affectionately known as Property Assessed Clean Energy (PACE) or PACE like obligations. In July, California Attorney General and candidate for Governor, Jerry Brown, filed a lawsuit against Fannie Mae and Freddie Mac alleging that Fannie Mae and Freddie Mac

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September 1, 2010 2 comments
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The PACE Counter-Attack

written by The Vote Solar Initiative

By now, you’ve seen us talk plenty about PACE, the popular finance model that helps property owners overcome the upfront costs of green retrofits and boosts local job growth in the process. (In case you have missed it, welcome back, and check our PACE resource page for more info). You’ve probably also heard that Fannie Mae and Freddie Mac issued letters suggesting that property owners they lend to may be prohibited from participating in PACE programs (not insignificant considering that together these two organizations back around half of U.S. home mortgages). Then just last week, the lenders’ regulators at the Federal Housing Finance Authority (FHFA) issued a statement

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July 16, 2010 0 comment
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Stepping Up The Pressure On PACE

written by The Vote Solar Initiative

PACE financing is one of those issues that has sweeping implications for clean energy adoption, but can be just so darn difficult to understand (see: net metering). If you can you believe it, the current acronym (PACE stands for Property Assessed Clean Energy) is a major step toward intelligibility from what we were first calling it (Municipal Property Tax Financing . . . or MPTF?). Acronym alphabet soup aside, it’s a topic that mixes the intricacies of tax law and bond finance with mortgages and clean energy. Like we said, not easy.

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June 23, 2010 0 comment
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