Texas Picks Up The Clean Energy PACE

Chairman John Carona’s Property Assessed Clean Energy (PACE) bill, Senate Bill 385 (SB 385), which was sponsored by Chairman Jim Keffer in the House, is headed to the Texas Governor’s desk!  Building upon successful legislation passed in 2009 to authorize “PACE districts” in Texas, SB 385 clears some of the hurdles that prevent commercial and industrial properties from taking advantage of new financing for water and energy conservation efforts.

PACE is an innovative, market-based approach that helps alleviate the steep, upfront costs property that owners generally incur for water and energy improvements by using loans that are seamlessly repaid through an additional charge on their property tax bills.  The loan is then attached to the property, rather than the owner, and can be transferred if the property is sold.  PACE loans can be issued by city or county financing districts or financial institutions, such as banks.  Property owners who participate will start saving money on their utility bills each month as a result of water conservation, energy efficiency and/or renewable energy improvements, while repaying the loan annually when they file their taxes.  In other words, they will see net gains despite increased property taxes.  The program is entirely voluntary.

In 2009, Governor Perry signed House Bill 1937 (HB 1937) by Mike Villarreal, which established PACE districts in Texas for the first time.  Although cities and counties across the state began the process of setting up PACE districts, the entire process was derailed when the Federal Housing Finance Agency (FHFA) created an obstacle for residential PACE programs.  FHFA expressed concerns about the senior lien—that is, if a homeowner with a PACE loan defaults, the repayment of the PACE obligation would take priority over settling the mortgage.  There were also some structural concerns which would have “required the Texas legislature to amend or replace the existing statute.”  This new bill, SB 385, addresses the structural problems and applies to commercial and industrial (rather than residential) property owners, thus removing the senior lien concern from the equation.

More than half of the states across the U.S. have some sort of PACE legislation on the books.  Many states have come up with solutions to work around the objections of FHFA, such as making the additional PACE-related charge secondary  to the mortgage or granting senior lien status on a case-by-case basis.  Additionally, many states, like Texas, are pursuing only commercial and industrial programs until FHFA’s concerns can be addressed across the board.

Similar to on-bill repayment (OBR) programs, PACE is an important tool in the clean energy financing toolbox.  It addresses one of the main barriers to the adoption of more clean energy: high upfront costs.  By helping to overcome that barrier through easier access to water and energy improvements to commercial and industrial properties, Texas is reducing constraint on an already stressed electric grid, creating jobs that cannot be outsourced, reducing harmful pollution from buildings and, of particular importance to Texas and other Western states, reducing the amount of water needed for electricity generation.

Once the Governor signs SB 385, as we hope he will, the real work of implementation begins.  Cities and counties will kick off the process to establish PACE districts and, then, begin financing clean energy projects across Texas.  This will enable Texas to pick up the clean energy PACE, act as a model for other states and hasten the transition to a clean, low-carbon energy economy.  If everything is bigger in Texas, then so should be our clean energy leadership!

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