The Connecticut legislation incorporates financing changes to the original U.S. Department of Energy plan that are likely to be adopted by many other states—which, to date, have stopped just short of PACE implementation.
PACE was created by the DOE in 2009. It was envisioned as a mechanism that would raise capital for energy efficiency and renewable energy projects—much in the same way that municipalities would issue bonds to fund projects with a public purpose, such as streetlights, sewer systems, or underground utility lines.
However, there was a problem with the consumer version of the PACE program. Under that model, property owners could install improvements without a large up-front cash payment—and the financing could be repaid over a set number of years (typically, 15 to 20) through a "special tax" or "assessment" only on those property owners who voluntarily choose to attach the cost of their energy improvements to their property tax bills.
Connecticut State Capitol
The stumbling block was that the liens from the consumer PACE program loans were designed to run with the property and have priority over mortgages, including preexisting first mortgages. In 2011, the Federal Housing Finance Agency (FHFA), which regulates Freddie Mac and Fannie Mae, warned that PACE programs presented significant safety and soundness concerns, and directed Freddie Mac and Fannie Mae not to purchase mortgage loans of properties with outstanding first-lien PACE obligations
Connecticut found a work-around for the problem by actively collaborating with bankers statewide. Now, under the innovative Connecticut (C-PACE) program, the state’s Clean Energy (News - Alert) Finance and Investment Authority (CEFIA) will aggregate transactions involving funding for renewable energy and energy efficiency, and work with financial institutions to invest in them—enabling commercial building owners to access capital at a lower interest rate than they can today.
The Connecticut model addresses the original issues that federal mortgage financing agencies had with the consumer version of PACE. When the idea of commercial aggregation was introduced, the Connecticut Bankers Association endorsed the legislation.
“There’s a degree of excitement out there with the bankers. It’s one of the newer products we’ve had in some time,” Tom Mongellow, vice president and treasurer of the Connecticut Bankers Association, said in an interview with Forbes magazine. “The banking industry, obviously, is very well aware of the increasing product demand for clean energy solutions, both on a commercial and a residential basis. This was a great way to get green lending out on the street.”
Mongellow believes Connecticut’s new C-PACE legislation is influencing other states. “One thing we were also excited about was that the Connecticut approach was being looked at as a model out there,” he said.
Over 28 states have passed commercial PACE legislation, but many of them have not followed through actively yet. Connecticut’s new strategy offers an alternate route toward funding commercial PACE programs.
“The big hurdle in expanding the implementation of energy efficiency has not been in the technology, but in the financing,” State Senator John Fonfara summed up for the Hartford Business Journal.
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Edited by Rich Steeves