PACE: Property Assessed Clean Energy
The Property Assessed Clean Energy (PACE) concept has been widely piloted in the US. Under this scheme, local governments issue bonds for renovation projects. The building owner repays the loan through an additional special “assessment” payment on its property tax bill for a specified term (Assessments are comparable to loans as the property owner pays off its debt in installments over a period of various years. But legally, PACE assessments are not considered to be loans). When the property changes ownership, the remaining debt is transferred with the property to the new owner. In other words, PACE financing is a mechanism set up by a municipal government by which property owners finance energy efficiency and renewable energy measures via an additional tax on their property. The property owners repay the “assessment” over a period of 15 to 20 years through an increase in their property tax bills (in the US, property tax payments are made annually or in arrears. Payment modalities may be different in other countries). When the property changes ownership, the remaining debt is transferred with the property to the new owner.
This Business Model is now being adapted to Europe: EuroPACE adopts best practices from the US PACE market and intends to further enhance its reach, scope, and overall impact well beyond the American experience. This Horizon2020 EU funded project started in March 2018 and will develop, pilot and standardise the PACE financing scheme for residential energy efficiency retrofits in European cities.
"What” (value proposition)
- 100% up-front financing
- Long-term financing, up to 20 years
- Can be combined with utility, local, regional, and state incentive programs
- Financing is attached to the property – can be transferred to a new owner upon sale
- Financing is repaid with regular property taxes
- Simple and clear value proposition that speaks directly to people’s needs
- Local energy services contractors function as sales force
- Digital platform allows for quick and easy approvals
- Technical and customer assistance is provided throughout the process
- Comprehensive consumer protection policies
"Who” (target customer)
The PACE business model can in principle be applied to all buildings for which the owner is eligible for property taxes, with a particular focus on small and residential and commercial buildings since these business models make a life cycle approach possible where building owners can spread the investment costs across the project life time. The model is relatively new, and current programmes in the U.S. apply to owners of existing free-standing residential houses and commercial buildings.
"How” (value chain, activities, resources)
Payments Are Collected Using Existing Tax Mechanisms
On-tax financing is a type of financing mechanism used to collect the repayment for money that was lent for investments in building improvements that meet a ‘valid public purpose’, e.g. save or produce energy. Typically, investors lend money for deep retrofits up-front and then get repaid regularly through an additional charge on a tax bill. EuroPACE is a form of on-tax financing and it builds upon an existing relationship municipalities have with their citizens – the property tax system.
The local tax agency acts as the collecting agent for the repayment. For a US$ 20,000 tax assessment at an interest rate of 6% over 15 years, the annual re-payment would for example amount to US$ 2,060. Generally, PACE financing instruments aim at structuring RET and EE measures in a way that the additional property tax payment is lower than the cost savings achieved, thus aiming at annual net cost savings for the building owner.
Assessing which measures are cost-effective requires at a minimum a rough energy audit of the property. Such services may be facilitated within the frame of the PACE financing programme, e.g. the administrative body can recommend service providers or may even offer energy audits themselves. These may be crucial for the programme to succeed, as building owners need to know in advance if the investment is cost-effective. The ownership of the RET system or EE technologies financed through a PACE financing programme lies with the property owner. Thus, the property owner could legally be eligible for additional subsidies or incentives, e.g. a feed-in remuneration or tax benefits.
Whilst municipal bonds are the most typical way of financing a PACE programme, other options are possible, such as bank loans, general local government funds or existing revolving funds (see NREL, 2010 and RAEL, 2009). Depending on the type of financing used by local governments, interest rates for home owners may differ substantially.
"Why” (revenue model and cost structure)
Cost structure for the owner:
Up-front long term financing: 100% funding covers 100% of a projects hard and soft costs and frees up disposable income for families and capital for businesses, low interest rates for terms up to 20 years, while standard bank loan rarely exceeds 5-7 years.
Revenue streams for the owner:
20 years repayment – positive cash flow. Annual energy savings > annual PACE payment