The following guest post is by Eric Jamison, a law student at Wayne State University Law School who is working with the Great Lakes Environmental Law Center to assist local and state government leaders in developing a Property Assessed Clean Energy (PACE) Program for Michigan. Eric is an “environmental capitalist” preparing to spend his career finding business solutions that are environmentally sustainable and economically viable for clients. Eric’s legal work is focused on state and local energy policy and the effects of climate change on business. He has a background in business management and obtained his BS in General Management from Oakland University.
While Michigan is struggling economically and lagging behind some other states in making the transition to a clean energy economy, Jeff Irwin, a Washtenaw County Commissioner, is taking a proactive approach to finding solutions to the state’s economic and environmental challenges. Commissioner Irwin approached the Great Lakes Environmental Law Center to research and develop enabling legislation for a Property Assessed Clean Energy (PACE) program for Michigan. The Great Lakes Environmental Law Center, in conjunction with a work team from the City of Ann Arbor, local and national environmental attorneys, and public interest groups, has drafted proposed enabling legislation that will authorize PACE programs. The proposed legislation is modeled after similar program in other states, though additional input from stakeholders familiar with local government bonding in Michigan would be useful as the legislation moves forward. The legislation is being prepared to be presented to the Michigan House of Representatives and Senate for consideration this fall.
In a matter of just over a year, Property Assessed Clean Energy programs and their progeny have spread across the United States with 15 states passing enabling legislation and many others debating similar bills. California and Colorado started the trend in 2008 with AB 811 and HB 1350, respectively. (For more information about PACE programs nationally, see the PACE Now website.)
The enabling legislation expands traditional uses of land secured financing by authorizing local governments to sell revenue bonds to raise capital; the capital is loaned to consenting homeowners within the local government’s jurisdiction to purchase renewable energy systems or to make energy efficiency upgrades to their home or business. Through a special assessment attached to the property, the amount voluntarily borrowed is repaid over a period of years on the property tax bill and transfers with the property in the event of a sale.
PACE programs facilitate adoption of renewable energy technology and energy efficiency improvements by overcoming two significant barriers to entry: (1) the up-front capital; and (2) the payback period. Upfront capital costs have always served as a barrier to entry. With the tight credit market, property owners often cannot get the loans to pay the relatively high costs of a renewable energy system or energy efficiency upgrades. PACE programs allow property owners to voluntarily borrow money from local governments to pay for such upgrades without negatively impacting their credit. The payback period needed to make renewable energy and energy efficiency upgrades economically attractive has often been outside the reach of traditional loan programs. Traditional home equity loans are limited to five to ten years, which don’t allow the increased payment to be offset by the energy savings. Depending on the size of the loan, the PACE payments can be made for a period up to twenty years which allows the annual energy savings to exceed the cost.
In addition, many people are hesitant to make significant renewable energy and energy efficiency investments in their property because of the likelihood of selling the property before the cost savings are realized. PACE programs operate like traditional land secured financing which allows the special assessment to remain with the property in the event of a sale. With the expansion of land secured financing to include PACE programs, two significant barriers to wide spread market adoption have been removed.
States have used land secured financing for over a hundred years to fund improvement projects such as sidewalks, water works, and parks that benefit the public. With the awareness of the damage that greenhouse gases cause to humans and the environment, the definition of what constitutes a public benefit naturally expands to include projects that reduce greenhouse gas emissions. Most states that have passed PACE legislation have included specific statutory language to expand the definition of public benefit to include the adoption of renewable energy and energy efficiency improvements.
As the state and country transition to a low carbon economy, PACE programs are an important step in the right direction. Buildings account for almost 40 percent of greenhouse gas emissions in the United States. PACE programs encourage existing building owners to invest in improvements that will reduce the buildings energy consumption. In addition, most states (including Michigan) now have Renewable Portfolio Standards requiring the production of certain percentages of energy from renewable sources by certain target dates. PACE programs may provide a potential aggregation point for states with these policies.
In uncertain economic times PACE programs offer a low risk, win-win economic development tool. Property owners are justifiable hesitant to invest in their properties; PACE programs mitigate much of the risk through annual energy savings and because the investment is attached to the property and not the property owner. If the PACE legislation is passed in Michigan it will drive economic development. Manufacturers will need to produce the supplies; local contractors will be hired to do installations. In 2007, $24 billion left the state of Michigan to pay for energy resources – coal, oil, natural gas, and uranium – that cannot be produced locally. Even a modest one percent increase in energy efficiency would keep $240 million in the Michigan economy annually, create thousands of jobs for Michigan workers and help our residents and businesses save money on energy.