Property Assessed Clean Energy (PACE) programs, viewed as one of the best alternatives for making green energy more affordable, will continue to expand despite a regulatory threat, according to participants at the ABS East Conference.
PACE allows property owners to finance energy efficiency and water conservation projects through property tax assessments. There are currently 31 US states that have legislation in place for either residential or commercial programs, or both. The liens have served as collateral in at least two securitizations.
“PACE is growing quickly across a lot of different states,” said Andrew Giudici, senior director at Kroll Bond Rating Agency. “PACE will grow tremendously because a lot of people want it.”
The threat comes from the Federal Housing Finance Agency, which issued a notice of proposed rulemaking in 2012 that would prevent Fannie Mae and Freddie Mac from purchasing loans that are subject to PACE liens. The regulator objects to the fact that PACE liens are senior to those of Fannie and Freddie.
“The directive is still out there, still in Limbo,” said Patrick Dolan, a partner at Dechert. He noted that the regulator received over 33,000 comments on the proposed rule.
California has established a $10 million reserve fund to repay mortgages guaranteed by Fannie and Freddie in the event of a PACE loan default. This enabled the Western Riverside Council of Governments to complete the first securitization of residential PACE bonds in March. The $104 million deal is secured by 5,898 assessments on 5,890 residential properties.
However there is concern that if PACE lending takes off it could possibly outpace the size of the reserve fund. To date the only other securitization was a $30 million deal backed by commercial PACE financing; it was executed in May by the Clean Energy Finance and Investment Authority, Connecticut’s green bank. However, Los Angeles County is taking steps to re-start its residential PACE program by early 2015.
Cisco DeVries, chief executive officer of Renewable Funding, doesn’t think there's any risk of burning through the reserve fund since the asset class is virtually risk proof. “California didn’t put more money into the fund because they couldn’t show losses that justified the increase,” said DeVries.
Renewable Funding specializes in design, administration, technology, and financing solutions for clean energy upgrade programs. It has committed a large amount of capital to finance PACE loans and is currently launching the nation’s largest PACE funding program covering over half the state of California.
Outside of PACE, there are other areas that where securitization can add value to costs of financing for green energy provider. John Joshi, director at Capital Fusion Partners and an advisor at the National Renewable Energy Laboratory, said that the market continues to consider the viability of peer-to-peer solar lenders. He and other panelists agreed that these lenders currently lack scale, however.
One solar panel financing company that may achieve sufficient scale for securitization is Mosaic, which teamed up with Enphase Energy in May to offer a package of loans and system maintenance. The lender expects to fulfill at least $100 million in loan volume with this new market initiative over the next 18 months.
Enphase provides microinverters, which convert the output from a single solar panel into electricity when sunlight hits a solar panel and it guarantees, through its remote diagnosis capabilities and proactive maintenance, that a properly installed system will be up and functioning 95% of the time or they reimburse the customer for the difference.