Cash Incentives for Renewables Cost Half as Much as Tax Credits

Date: 30 Mar 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Using the tax code to support wind and solar power significantly increases their cost.  I wrote about this problem last year because project developers were selling their federal tax credits to third parties at 50 to 70 cents on the dollar.

Along these lines, the Bipartisan Policy Center released a study [last week] showing that simply handing cash to clean energy developers is twice — yes, twice — as effective as supporting them through tax credits. [emphasis added]

The problem is that all but the largest renewable energy developers or buyers can’t capture the full value of the federal tax credits.  So, prior to the economic collapse, a number of enterprising investment banks (and others) started buying up tax credits to reduce their tax bills. 

This was great for big banks, but lousy for taxpayers and electric ratepayers.  In fact, using tax credits instead of cash grants for wind and solar projects increased the cost per kilowatt-hour produced by 18 and 27 percent, respectively.  (Wait, why not 50 percent?  Because even though the tax credit is only half as good as cash, the cash payment only covers up to 30 percent of a wind or solar project’s costs.  So cash in lieu of tax credits can only improve that portion of a project’s finances.)

Seen another way, if the $4 billion spent on renewable tax incentives in 2007 had been given as cash instead, it could have leveraged 3,400 MW of additional wind power and 52 MW of additional solar power.  This would have increased incremental installed wind capacity in 2007 by 64%, and installed solar capacity by 25%. 

The increased costs come from higher prices that utilities pay for wind and solar power (and pass on to consumers) as well as the the cost to taxpayers of passing half of the tax credit value to investment bank shareholders instead of wind and solar projects.

The problem isn’t solved, but has simply been postponed.

When the economy tanked, so did profits (and tax liability) for big banks.  Wind and solar producers had no one to buy their tax credits and the entire industry was in danger of collapsing.  The adjacent chart illustrates the idiocy of relying on the tax code for energy policy.

Congress stepped in with a temporary fix, allowing project developers to receive a cash grant in lieu of the tax credit.  The temporary cash grant (currently extended through 2011) kept the wind and solar industry running during the recession and has saved taxpayers and ratepayers billions of dollars. 

It’s also helped level the playing field, allowing for local ownership of wind and solar projects, rather than requiring complex tax equity partnerships.  It’s meant more revenue from wind and solar staying in the local community.  And this means a larger, stronger constituency for renewable energy.

The cash grant option will expire at the end of 2011, but hopefully the climate hawks and fiscal hawks in Congress will take note: we can support wind and solar at half the price with smarter policy.

Hat tip to David Roberts at Grist for the study link.

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National Association of Counties and League of Cities Ask Congress to Support PACE

Date: 15 Feb 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

February 9, 2011

Dear Members of Congress:

On behalf of the nation’s counties, cities and towns, we urge Congress to support legislation that clearly affirms the right of state and local governments to exercise liens or assess special taxes or other property obligations to protect and improve housing stock for the public good, including the installation of renewable energy and energy efficiency improvements, by directing federal regulators to enforce underwriting standards that are consistent with guidelines issued by the U.S. Department of Energy for Property Assessed Clean Energy (PACE).

As you know, the health and vitality of local economies are essential for reversing the national economic downturn. Despite sizable budget shortfalls, state and local governments, in partnership with the federal government, are working to maintain and improve efficiencies in federal programs that support the services that citizens expect governments to deliver. A further challenge, however, is that traditional mechanisms for local finance and revenue, such as sales and property taxes and bond financing, remain difficult to access. As a result, local governments are developing innovative financing programs, such as PACE, that will help neighborhoods realize community and economic development goals even in challenging fiscal periods.

PACE financing programs help property owners finance renewable energy and energy efficiency improvements – such as energy efficient boilers, upgraded insulation, new windows, and solar installations – to their homes and businesses. The PACE program removes many of the barriers of renewable energy and energy efficiency retrofits that otherwise exist for residential homeowners and businesses, particularly the high upfront cost of making such an investment and the long-term ability to reap the benefits of cost savings. Twenty four states plus the District of Columbia have already passed legislation enabling cities and counties to pursue PACE programs.

PACE is not a loan, but instead is built on traditional tax assessments, which local governments have managed for over 100 years. PACE was not designed to increase the risk of homeowners, business owners, lenders, or the financial system, and operates under stringent rules to ensure a net positive benefit to all parties. When fully implemented, PACE programs can achieve significant energy savings and provide positive benefits to the environment.

Unfortunately, rather than incent original solutions such as PACE, the Federal Housing Finance Agency’s (FHFA) determination that PACE energy retrofit lending programs present “significant safety and soundness concerns” effectively shuts the door on an important avenue for financing improvements that would deliver financial and environmental benefits long into the future. This determination is out of step with our nation’s economic recovery agenda and disregards the traditional authority of local governments to utilize the tax code in the best interest of its citizens.

In response to FHFA’s specific concern about the hypothetical risk to the secondary mortgage market involved with PACE homes, as local leaders responsible for investing hundreds of billions in public funds annually, we know well that risk is an inherent part of any investment. However, local governments constantly seek to minimize that risk; in our case, to the taxpayer. We believe that the standards and best practices called for in the Administration’s “Recovery Through Retrofit” report are sufficient to minimize any potential risk posed by the PACE program to both the public and private investments in a PACE home.

The PACE program is an achievement of the intergovernmental partnership to realize national policy goals, namely, reducing energy consumption, that will positively impact the fiscal conditions of every level of government. For these reasons, we encourage you to support legislation that will allow existing PACE programs to continue and encourage additional programs throughout the country. We look forward to working with you to ensure that local governments maintain the traditional authority to utilize the tax code for public benefit.

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More Than a ‘Flip’ – Community Wind Projects Still Require Financing Acrobatics

Date: 26 Jan 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Community wind projects deliver larger economic returns and encounter less local resistance, but a new report released last week shows that developing community wind still requires a daunting effort. The report, by Lawrence Berkeley Labs wind guru Mark Bolinger, illustrates … Read More

FHA PowerSaver Loans – a PACE Replacement?

Date: 26 Jan 2011 | posted in: Energy, Energy Self Reliant States | 1 Facebooktwitterredditmail

Late last year, the Federal Housing Administration announced a new PowerSaver loan program to provide financing for home energy efficiency improvements.  The program comes on the heels of the downfall of residential Property Assessed Clean Energy (PACE) financing, which allowed homeowners to pay back energy efficiency improvements via long-term property tax payments, as well as to pass the payments on to the next homeowner.  Can PowerSaver adequately replace PACE?

Sadly, no.

First, a bit of background on PowerSaver.  The loan program is part of FHA’s Title I Property Improvement Program and the basic principle is that the FHA provides loan insurance for participating private lenders who loan to eligible homeowners.  Federal insurance provides 90% coverage for the loan, with the lender only accountable for the remaining 10%, with limits on the portion of a lender’s portfolio in the Title I program.  Participating homeowners pay a premium equal to 1% of the loan amount multiplied by the loan term.  For example, a $10,000 loan financed over 15 years would have an annual premium of $1,500.  

Loans are capped at $25,000 with 15 year terms for energy efficiency and 20 year terms for renewable energy investments.  A list of eligible improvements can be found here. Borrower’s can only be owners of single-family, detached homes with a 660 credit score and a maximum 45% debt-to-income ratio.  Loans under $7,500 can be unsecured, but larger loan amounts must be secured by the first mortgage.  

The following table illustrates the major differences between PACE and PowerSaver:

  PowerSaver PACE
Lien type Secondary Primary
Backstop Federal insurance Local government
Credit score > 660 n/a
Transferable No Yes

In most cases, the differences make the PowerSaver loan significantly less attractive than PACE financing.  A PACE lien came before the mortgage, potentially allowing PACE programs to sell their obligations on the market and allowing local governments to obtain low interest rates.  PACE liens did not require credit scores, allowing many Americans with damaged credit (but good property tax payment history) to make their home more energy efficiency and cost effective.  Finally, the lien could be transferred between property owners, removing the discontinuity between the lifespan of effective energy efficiency improvements (15 years) and the average stay in one home (5 years).  

Perhaps most powerfully, PACE allowed cities and counties to become a hub of energy planning for their communities, whereas PowerSaver simply backstops the private lending market.

FHA should be applauded for expanding the financing options available to homeowners for energy efficiency and renewable energy improvements, but their offering will not provide the same power as PACE. 

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An update on PACE financing

Date: 5 Jan 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

This update is from an email sent by Renewable Funding’s Cisco DeVries, outlining the hopes for PACE in 2011:

Litigation Moves Forward.  The first Court orders regarding elements of the PACE lawsuits were issued by Judge Claudia Wilken on December 20th.  The orders cover Sonoma County’s request for a preliminary injunction and the Court’s desire for the US Department of Justice to weigh in.  The court has not yet made any decisions on the motions. However, while the judge stated that she was not inclined to require FHFA to affirmatively support PACE at this early stage of the case, she indicated that she was considering whether to order Federal Housing Finance Agency (FHFA) to begin a formal rulemaking process regarding PACE. We will certainly pass along any more information as it develops so that the PACE community can be ready to provide detailed comments.  You can also check the www.PACENOW.org website for updates.

Legislation Moves Forward.  While Congress did not take action on the PACE legislation that was introduced in 2010, work is continuing to prepare for the next session.  There are plans for new, bi-partisan, PACE legislation to be introduced early in the year.  Will send another update when this moves forward.

Commercial PACE Moves Forward.  While residential PACE has mostly (but not entirely) been put on hold, a number of jurisdictions are moving forward with commercial programs.  For example, Boulder County recently issued its first bond for commercial PACE and will now be funding the first 29 projects. Sonoma County continues to fund commercial projects and Los Angeles and Washington, DC are just two of the communities planning commercial programs in the new year.  To assist with this effort, the US Department of Energy just released a section of their “Finance Guide” (see chapter 13, drafted by Renewable Funding) to assist communities with designing commercial PACE programs.  Lastly, a report from the Clinton Climate Initiative, Lawrence Berkeley National Laboratory and Renewable Funding on existing and planned programs will be out soon.

PACENOW Hires Executive Director. PACENOW hired David Gabrielson as its new Executive Director.  David has extensive experience in public finance at leading firms such as CS First Boston and JP Morgan and is also a town councilman in Bedford, NY, where he worked to establish an energy efficiency and renewable energy financing program using PACE.  He has given the PACENOW website a facelift – check it out.  You can reach him directly at david.pacenow@gmail.com. 

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Michigan the 24th State with a PACE Law, Will It Matter?

Date: 15 Dec 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Yesterday Michigan governor Jennifer Granholm signed the state’s Property Assessed Clean Energy (PACE) law, making Michigan the 24th state to enable cities and counties to provide financing for on-site renewable energy and energy efficiency improvements via the property tax system. … Read More

Distributed Solar Power, Analyzed

Date: 14 Dec 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Yesterday we discussed the spread of solar carports in California, highlighting the Milpitas School District’s 14 distributed solar PV arrays.  According to a news story, the district anticipates savings of $12 million over 25 years from the projects, which were … Read More

PACE Lawsuits Up for Decision on December 2nd

Date: 23 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

In mid-October, yet another municipality joined the growing list of lawsuits against the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac over the popular Property Assessed Clean Energy (PACE) program.  Arguments in the court case will be heard next week.

A federal judge will consider next week whether to dismiss lawsuits questioning the Federal Housing Finance Agency’s decision to effectively shut down a White House-supported home energy efficiency program.

In a closely watched case, U.S. District Judge Claudia Wilken of the Northern District of California will hear arguments Dec. 2 over whether to dismiss several lawsuits against the agency, including one filed by the state of California.

I’m hopeful that the plaintiffs can win – PACE could really open the door to major improvements in home energy efficiency and expansion of distributed renewable energy.

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