The U.S. Department of Energy has updated its guidelines for property-assessed clean energy financing for homes, as residential property-assessed clean energy programs begin to blossom beyond California.
In a few short years, the residential PACE market has grown from nearly nothing to more than $2 billion. Most of the projects are in California, but there are also expanding markets in Florida and Missouri.
PACE programs allow investments in water- and energy-efficiency retrofits and distributed renewable generation to be paid back through property taxes, which lowers the risk for both lenders and property owners.
PACE financing can potentially open up a far larger swath of the energy-efficiency market than traditional programs have been able to. For example, in a few short years, PACE has become one of the largest loan programs by volume, according to Lawrence Berkeley Lab, with the Mass Save HEAT Loan program being the other leader.
The DOE guidelines are not binding, and are therefore limited -- since they are essentially voluntary. Even if they were binding, they do not go far enough to protect consumers, some consumer groups argue.
“At a minimum, PACE loans should have at least as strong of protections as conventional mortgages. States also need to adopt enforceable rules to protect homeowners from abusive sales practices,” Brian Simmonds Marshall, policy counsel at Americans for Financial Reform, said in a statement.
No one argues that the most recent guidelines are not an improvement, however. The guidelines suggest there should be an eligible products list and that the term of the assessment of the PACE loan should not exceed the useful life of what’s being installed. The DOE also calls for PACE contractors to recommend basic weatherization as part of their package, which can boost energy savings.
“People don’t often set out to do energy efficiency,” said Ellen Qualls, VP of communications at Renovate America, the largest residential PACE administrator by far with its HERO program. “They set out to do solar or another project, then they’ll get energy efficiency.”
The question is, what is the cheapest and most readily available form of financing when people set out to do those projects? Renovate America argues it opens up a market that other financing mechanisms, from utility programs to home equity loans, have been unable to tap in the decades they’ve been in existence.
But some consumer protection groups argue that there can be lower-cost options. Interest rates for residential PACE are often around 7 percent, while a home equity line of credit could be half of that and the Mass Save HEAT program has 0 percent financing for low-income residents. But few, if any, contractors offer comparison shopping for all of the financing options and rebates available to people in one easy format.
At the very least, the DOE’s latest guidelines say that PACE cannot be represented as a no-cost or government program. The DOE has also recommended that an energy audit should be required. But while the DOE says that it should be done only by a qualified energy assessor, the largest PACE program administrator in the country argues that technology can also do the job, and at a lower cost.
“We encourage home energy audits, but to require them...would be an impediment to energy-efficiency projects moving forward,” said Qualls. As the HERO program integrates a software energy audit technology it bought last year from CakeSystems, it could become the default baseline for auditing for most customers. However, stakeholders have all acknowledged that an audit may not be best in the case where it is an emergency replacement, such as for a furnace.
Beyond the audit issue, it is the terms of the loan and potentially predatory sales tactics that have consumer groups most concerned. National Consumer Law Center attorneys said that nearly every legal aid they’ve spoken to in California have heard from poor or elderly customers about aggressive sales tactics or financial burdens they didn’t anticipate from PACE programs.
Renovate America said it is trying to increase disclosure, and it now offers a ‘know before you owe’ disclosure form, similar to disclosures for home mortgages. “We want to make sure as we expand access to more kinds of homeowners we do it in a way that isn’t a bad idea for them financially,” said Qualls.
For now, these guidelines will ideally impact how states beyond California lay out their rules for residential PACE. Renovate America has said it will adopt what the DOE has outlined. California, as a first mover, has also strengthened its consumer protection rules for PACE earlier this year. “We pledge to make these best practices the operating manual for our program going forward,” J.P. McNeill, founder and CEO of Renovate America, said in a statement about the new DOE guidelines.
For leading residential PACE providers, such as Renovate America and Ygrene, they have a vested interest in comprehensive regulation where there is a level playing field that keeps out bad actors. As for federal oversight, “we would welcome that,” said Qualls. “We want to make sure everyone is playing by the same rules.”