Tax Programs to Finance Clean Energy Catch On

Over the years, as Rick Murphy helped expand his family's auto business in Edina, Minn., outside Minneapolis, he wanted to install solar panels to cut the electricity bills, but the upfront cost was too high.

Then a developer, Blue Horizon Energy, made a proposal: Grandview Tire and Auto, using a new loan program, could borrow the $34,000 to install the system and pay it back over 10 years, but instead of making traditional loan payments, they would be made through his property taxes.

Now, with 117 panels on one of his five stores, he is saving $3,600 a year and bringing in new customers attracted to the company's green image.

The program, he said, "made the concept of adding solar to our business reality."

After years of fits, starts and unanticipated pitfalls, the long-term loan program -- championed by the White House but stymied by federal housing officials -- is gaining traction across the country, especially among businesses like Grandview. Known as Property Assessed Clean Energy financing, the approach allows owners to borrow the money for conservation or clean energy upgrades and pay it back over the long haul, often 20 years, through a property tax surcharge.

Since June 2011, the number of projects completed with the financing has more than doubled, to at least 168 worth $33 million, from 75 worth $10 million, according to PACENow, a nonprofit advocacy group that tracks the programs. The group says that 30 states and the District of Columbia have passed laws allowing the program, and estimates that the number of projects could easily double by the end of next year.

And the approach is on the verge of becoming more widespread. A week ago, Gov. Rick Perry of Texas signed legislation that would allow more commercial and industrial projects to go forward. Texas joins seven other states that are amending their laws this year to allow the financing, while several local and state governments, including Connecticut, Sacramento, Miami and Atlanta, either have new districts with loan programs or soon will.

"It's an idea that resonates and is catching on," said David Gabrielson, the PACENow executive director. "I see encouraging signs in the build-out of a whole new approach to funding energy efficiency."

Despite the program's growth among businesses, the group it was originally intended for -- homeowners -- is still largely left out. The Federal Housing Finance Agency, which oversees financing for two-thirds of new residential mortgages through Fannie Mae and Freddie Mac, does not allow those agencies to buy mortgages for properties with liens that have a higher priority for payback, as PACE loans often do.

Local governments have long used special taxing districts to finance improvements to private property that benefit the public. The idea behind PACE was to turn that idea toward upgrades like new windows and insulation or solar arrays that often cost more than property owners could pay upfront but less than they would save on electricity bills over time. Berkeley, Calif., pioneered the concept in 2008, and it quickly expanded, sometimes with the help of grants from the Department of Energy to pilot projects in several towns and states across the country.

But the program hit a snag in 2010 when the F.H.F.A., under pressure to improve its balance sheet during the housing crisis, derailed the program largely because in most cases the PACE loans would have to be repaid before the mortgages during a foreclosure.

Congressional and legal challenges to the agency's rulings have failed to overturn them, but advocates remain hopeful that a federal policy change could open up the loans to more homeowners.

"What's frustrating is when there's something which is an obvious win -- it's not even contentious -- and it doesn't go forward," said Dan Kammen, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, who helped design and study early PACE programs.

F.H.F.A. officials have maintained that their legal obligation is to manage the risk of loss that Fannie and Freddie take on in guaranteeing mortgages, which also backs an enormous securities market. Some of the early programs approved by state lawmakers, for instance, allowed homeowners to borrow as much as 40 percent of their home values, raising concerns that, as in the subprime loan crisis, borrowers would push past their ability to repay.

"We're not averse to energy retrofitting," Alfred M. Pollard, the F.H.F.A. general counsel, said in an interview, adding that the agency remained concerned with how the loans would be repaid.

In any case, the market may have found other ways for homeowners to finance solar power systems, including traditional leasing and bank loans for purchase and installation.

"A few years ago, there weren't banks doing that kind of thing," said Toni Bouchard, vice president of SmartPower, a nonprofit clean energy marketing consultant. "Now there are."

For the moment, the momentum is on the commercial side. In Texas, for instance, the new law will allow special districts for commercial and industrial property owners, a large segment of the energy users in the state.

"What worked in progressive areas like Berkeley and Sonoma, what they were able to put up there, we couldn't just lift that and put it in a place like Texas," said Kate Zerrenner, climate and energy project manager of the Texas regional office of the Environmental Defense Fund.

So they worked closely with national lenders, she said, to create an approach allowing for flexible public-private partnerships and including water conservation projects and the industrial sector, a huge part of the state economy, to build support.

"Environment doesn't really sell here," she said. "Climate change doesn't really sell here. But what does sell is anything that's good for business and job creation."

In Connecticut, the PACE program is nonresidential as well, administered through the state's green bank, the Clean Energy Finance and Investment Authority, which originates the loans but then sells them individually or in bundles to investors.

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