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Is PACE Dead, and with it the LACEP?

We have been writing about the financing method known as PACE— for Property-Assessed Clean Energy — for many months.  (You can find all of our posts about PACE financing here.) Made available statewide through AB 811, PACE financing allows for solar projects (and other energy efficiency measures) to be funded by an assessment on the homeowner's parcel that is paid as part of the property tax bill over twenty years.  The funding comes by way of the sale of municipal bonds and there is no burden on local government budgets to support the program. This allows homeowners to make their homes more efficient (thereby lowering their utility bills) with little or no up-front cash and at the same time helps to create good-paying jobs in the local community.  The County of Los Angeles approved its own PACE program (LACEP) in May and the first loans were set to be funded sometime this Fall. PACE financing was viewed as such a win-win it is no wonder that communities all across the country were scrambling to join in.

Not so fast. Mortgage companies, led by Fannie Mae and Freddie Mac, have cried foul. Since the programs operate as a property assessment, they have priority over the existing mortgage in the event of a default and subsequent foreclosure. Using such a program could put a homeowner at odds with the terms of their existing mortgage and might, all by itself, result in a technical breach of the mortgage contract. Faced with such resistance, PACE programs have come to a grinding halt. A story in the August 19, 2010 LA Times reflects the chorus of bad news that has been trickling out now for many weeks. Does this mean that PACE financing is dead?

Perhaps - but is the position of the mortgage industry reasonable? After all, the LA County program had some pretty stiff requirements for participation that were designed precisely to prevent foreclosures. In particular, the LACEP required that the debt to value ratio for the home could not exceed 80% and that the loan to value ratio could not exceed 10%. Assuming that those valuations were for recent market conditions, they are very conservative. In addition, the homeowner needed to be current on both the mortgage and prior property taxes. Since the LACEP would have allowed the homeowner to substantially reduce their energy bills with either zero or little up-front cost, it is hard to see how participating could have pushed the homeowner closer to default, but if default had occurred, the mortgage holder would have still been protected. Indeed, by putting more money into the homeowner's hands, it would seem that the risk of default would have been substantially lessened.

LA County's Response

On August 24 we spoke with Lauren Rank of the LA County office of Sustainability about the County's response to these developments. (Many thanks to Ms. Rank for taking the time to speak with us.) Ms. Rank reported that indeed the LACEP program is presently on hold. However, there is much activity underway in an attempt to both revitalize PACE and find alternative means of financing renewable energy and energy efficiency projects in LA County. At the direction of the Board of Supervisors, on July 22, 2010 the Chief Executive Officer issued a Report to the Board (attached) with initial recommendations on how to deal with the present situation.  Some highlights from that Report are the following:

• Legislative attempts to "fix" PACE  are underway in Washington, D.C. (more below).
• The National Association of Counties adopted a resolution urging Congress to fix PACE.
• The County is exploring Alternative Financing mechanisms including:
  • An FHA Title I loan program directed at renewable & energy efficiency projects. The loans could be either secured or unsecured with "some degree of federal subsidy."  The anticipated interest rate (based on the current market) is 6-7%. HUD indicates that loans could be available in 3-6 months. If that is true, for qualifying home owners, this might be an attractive option. However, as of now we know nothing about the qualifying criteria that will be required.
  • California Energy Commission Grant Reallocation - the CEC had previously allocated some $35 million in State Energy Program grants for various PACE programs (not including LA County) but those grants are now on hold. The CEC is considering reallocating those funds to PACE jurisdictions "where they may make the most impact." This reallocation might assist LACEP.
  • PACE with Subordinate Liens - since the sticking point is on the priority of PACE liens versus the existing mortgage, one possible solution is to issue PACE loans that are subordinate to the mortgage. That solves the Fannie/Freddie issue, but jeopardizes the ability to sell the municipal bonds needed to fund the program. The County Treasurer & Tax Collector's office is warning that this is not a viable option.
  • Statewide Whole House Retrofit Program - the State of California has set aside $140 million for the Investor Owned Utilities to implement more comprehensive, whole-house retrofits instead of simply providing rebates on individual appliances. Unfortunately, it does not appear that any of this money could be spent on financing solar installations.
  • PACE funding on non-FNMA/FMAC loans - some loans are not subject to restrictions from Fannie and Freddie and in theory these loans could move ahead with PACE funding. However, since some of those loans could subsequently be sold to Fannie or Freddie, this is not considered a particularly viable approach.

While there is clearly a great deal of effort being expended, for the near term the only option that appears to have potential to assist homeowners in adding solar is the FHA Title I loan program. As we learn more details about that program we will report on them here.

Legislative Response

The clearest path to a resolution is legislation from Congress. In the House, both Henry Waxman (D-CA) and Barney Frank (D-MA) have indicated their support for PACE protection and action by their committees is to be expected after the recess.

The bill in the House, HR 5766 by Rep. Michael Thompson (D-CA), has some 48 cosponsors (47 Democrats and 1 Republican) as of today, while the corresponding legislation in the Senate, S 3642 by Senator Barbara Boxer (D-CA) has five cosponsors (all Democrats). As there is nothing partisan about helping homeowners make their homes more energy efficient and/or installing renewable energy systems, those cosponsor numbers will surely increase once Congress returns from its Summer recess in mid-September. (Of course, it would not hurt for you to contact your members of Congress and urge them to support the legislation.)

Installer's Dilemma - Solar Power Systems as a Commodity or Hi-End Item?

A recent survey looked into the question of whether solar power systems are now being viewed as a commodity item: that is, pretty much one system/component/installer is as good as another so the only point of differentiation is cost, with the lowest cost being the winner. The evidence from the survey was pretty mixed with a slight leaning amongst all respondents toward solar being a commodity, while the installers who responded felt that there were other, more important points of distinction.  Of course, that might just mean that the installer community is fooling itself, that in the consumer's eyes solar really is a commodity and customers really do not care about anything other than price.

The Run on Sun philosophy is a bit more complicated and considerably less cynical.  We are committed to providing the best-performing solar power systems on the market.  That is reflected in our preference for Sanyo solar panels for residential systems and our adoption of Enphase microinverters to overcome shading issues.  We are also committed to having the most professional installers in the industry — and that is reflected by our pursuing and achieving NABCEP Certification for all three principals of the company.  Taken together, we are designing and installing systems that produce more energy than their rebated rating would predict.  We are proud of these systems and we are equally proud of the great comments we get from our customers.

And yet, it is hard to get past the notion that we might not be connecting with the broader customer base that wants to add solar, but is daunted by the price. To serve that customer group we need to provide a system design that maintains our exacting standards yet can be priced at a more attractive level. That is a real challenge, but we are now in a position to make such an offering using the new Conergy P-series solar panels. Conergy is the world's largest distributor of solar power products, and these new panels are built to Conergy's demanding specifications in China, providing substantially lower cost without sacrificing quality.

The addition of these panels to the Run on Sun line of products will allow us to offer lower-cost systems where space and shading constraints permit. Combined with our long-standing reliance on SMA inverters, these new panels will allow us to provide high quality but much lower priced systems that will help make solar more affordable than ever before.  For those settings where space or shading requires a more sophisticated approach, we will still be offering our top-of-the-line Sanyo/Enphase systems that allow homeowners to wring every Watt available from their location.

We are very excited about these new panels and we hope that they will help even more folks add solar so that they too can Run on Sun.

It's Official - Solar Power is Now More Cost-Effective than Nuclear

In the debate over what constitutes the most cost-effective energy source to replace fossil-fuel power plants, it has long been claimed that nuclear power is the cheapest alternative available.  But a new report indicates that such an assumption is flawed and that for the first time ever, the cost of solar power is now cheaper than the cost of nuclear.  According to the study- "Solar and Nuclear Costs - The Historic Crossover" - by Duke University Economics Professor, John O. Blackburn and graduate student Sam Cunningham, while the cost of installing solar has been steadily declining, the costs of nuclear power plants have been rising "inexorably" over the past eight years.  "Solar photovoltaics have joined the ranks of lower-cost alternatives to new nuclear power plants," said Prof. Blackburn.  In a "historic crossover" the costs of solar PV systems have declined to the point where they are lower than the rising projected costs of new nuclear power plants, the authors claimed.

The crossover point occurred at 16 cents per kilowatt hour.

A New York Times article discussing the study notes that estimates of construction costs have gone from roughly $3 billion per reactor in 2002 to an average now of roughly $10 billion.  But since no one has ever built and commissioned a nuclear power plant in the United States according to present standards, no one actually knows what the final cost of a new nuclear power plant would be.  Of the five proposed designs for new nuclear facilities being considered by U.S. utilities, only one has ever been built, according to the Nuclear Regulatory Commission.

Thus nuclear power presents an inverted learning curve - whereas most technologies, such as solar, get cheaper over time as developers learn how to produce more and better products with fewer raw materials and less labor, it would appear that the more we learn about nuclear power, the more expensive it becomes.

This is certainly not for a lack of nuclear subsidies from the government. According to a 2000 report by Marshall Goldberg of the Renewable Energy Policy Project, from 1943 to 1999 the U.S. Government paid nearly $151 billion (in 1999 dollars) in subsidies to the wind, solar and nuclear power industries.  Of that, 96.3% went to support nuclear power.

In the quest to deliver cheap and clean power to supply future needs, it is clear that solar has taken the lead - a lead it is not likely to surrender anytime soon.