By Racquel Palmese
Founded to bring private capital to the service of Property Assessed Clean Energy (PACE) financing, the Ygrene Energy Fund is pioneering an innovative approach to the problem of climate change. In an interview with Green Technology magazine, Dan Schaefer, the fund’s president, discusses this new model, its potential for job creation and economic stimulus, and the prospect of virtually unlimited funds for energy efficiency projects in existing buildings.
Please explain what PACE financing is all about.
PACE is the acronym for Property Assessed Clean Energy, which effectively allows local governments to implement energy efficiency tax districts. With PACE financing, energy efficiency improvements are paid for through a source of funding arranged by the local governments, and costs are paid back on property tax bills for up to a 20-year term. It's an innovative way to finance energy efficiency programs through upfront funding with no out-of-pocket costs for property owners.
How is Ygrene Energy Fund involved in PACE financing?
What Ygrene does is offer a turnkey solution for local governments that don't have either the capital to implement the structure to manage a PACE district, or, more important, the capital to actually fund the projects. We have developed a completely private capital solution through a public-private partnership model in order to implement a PACE district at no risk or cost to local government.
Clean Energy Sacramento, a PACE program managed and funded by Ygrene, provides financing to commercial property owners for renewable energy and energy efficiency upgrades. What does this program look like, and what do you hope to achieve there?
We're in that just-launching phase in Sacramento, what we call the judicial validation stage. This is the last stage before we can operate there and actually fund a project. We do have a pretty substantial number of property owners who have contacted us, as well as contractors who are going to get trained in this program. Property owners are lining up their projects because the Clean Energy Sacramento program is now available.
One very interesting aspect of our program is that each city or county or group of cities that adopt the program gets a very localized web portal and marketing campaign, so they can leverage the momentum and opportunity to work together to make the program more successful.
Why did you choose Sacramento as your first PACE district in California?
Two cities in the country last year, the city of Miami in South Florida, and the city of Sacramento, were the only two cities in the country that put out the RFP to set up a PACE district, and we were fortunate to win both of them. Now we're leveraging a bit of that success in order to work with not only other cities and counties in California and Florida, but Atlanta, Baton Rouge, Chicago and Minneapolis,
There's a lot of momentum and a groundswell around the realization of how valuable this could be to local job creation in the construction industry. It’s quite exciting in terms of economic stimulus; every dollar that goes into a PACE project yields about $1.30 in economic stimulus.
Is Clean Start Sacramento only for commercial properties?
In Sacramento they are launching it in a commercial program but asking us to run a residential pilot also. In Florida, the laws are a little more explicit as relates to property owner rights and they are actually launching a commercial and residential program.
What does a city stand to gain from a partnership like this? What are the range of economic benefits?
ECONorthwest did a study on PACE programs about a year ago and determined that every $4 million that was invested in a PACE program would result in 60 jobs and about $10 million in economic stimulus. So it's really just leveraging that math. If you took the city of Sacramento, you're looking at $100 million worth of project investment, which will result in almost 1,500 jobs and about $250 million in economic stimulus. That stimulus is really about families, and that's what should be first and foremost on any city or county government's mind right now.
These are the kinds of dollars that are freed up to go to restaurants and movies and normal spending, and ironically they are paid for by energy savings. That same $100 million, due to the nature of the way we structure these programs, is free because the energy savings paid for it. It's the perfect picture. If there is one, this is it.
Are any other cities in California looking at your PACE program?
We've got tremendous momentum in the Sacramento area. The county of Sacramento is looking to adopt the program, as is Yolo County and Solano County, which are three bordering counties. The city and county of San Diego are in late discussions as to which way they want to go. We've got the city of Tampa, Orlando and Jacksonville, Florida, who are looking at getting something going in the next 6 to 12 months, as well as the city of Atlanta.
How important do you think California is to Ygrene’s ability to develop partnerships with cities in other states?
Interesting question. California’s a leadership state in many respects and we've actually found that as we move from state to state, there's quite a bit of local momentum. For example, in Florida, we partnered with a company called Eco2Asset Solutions, which is a wholly–owned subsidiary of Lykes Bros. Inc, one of the largest companies in the state.
We were able to bring our structure and program to a company that's very well established. We have a very similar activity in Atlanta. We're finding that there are groups that have really tried to make this happen. What I like to say is that we're like the last five feet of the grid to get across the gully. We bring them the last piece without which you can't make it – but with it, you can.
Why is PACE financing a good deal for Investors?
The nature of a tax assessment and its position in the capital structure on a property is typically the first 2 percent of equity in the property – when you combine that with the tax collection system, it's a very powerful asset.
The investors are getting back their money plus interest?
Yes, of course. There's the initial capital plus interest, but in this environment, it's the actual security behind the assets. The security behind the asset is what's very interesting because it represents the first 2 percent of the property's value. The property tax collection system is quite frankly among the best systems in the United States.
Is this a long-term program?
Nobody has a crystal ball, but I will tell you that we have done an analysis on each market we work on. If only 3 ½ percent of properties participate - for example, in Sacramento that's $100 million of retrofit projects - this program could live on for ten or 15 or 20 years.
There is little or no real innovation happening in existing buildings. The innovation is being developed for new buildings with new opportunities to make them more efficient. So, as capital enters the market there will be more innovation, more investment in technology, which will really propel this opportunity for America to conserve and help ease the demand for fossil fuels.
Is PACE primarily for energy efficiency retrofits, or would it include renewable energy, such as adding solar panels or a cool roof?
It depends on the state, but in California it's for energy efficiency, renewable energy or water conservation. In Florida, it's for energy efficiency, renewable energy and wind hardening, which is very important for hurricane protection. There are variances state by state. It's where the state really needs investment in existing infrastructure in order to make it better for the future. It's a fantastic investment model for renewable energy.
Please explain the process a community would follow to work with you to create a PACE district.
Effectively, there are 26 states plus the District of Columbia that have established PACE laws. We can't work in all the states because our underwriting standards are a limiting factor. We work to engage with the local community to adopt a resolution which would bring the state law down to the local level and implement what's called a Program Report. This describes how the program will function, which properties will be made available i.e. commercial, residential or both, and the contract that we will operate under.
The contract that we will establish carries no cost to the local government for implementing this program. The last step is what we call judicial validation, where we go through a process of establishing that the PACE district is constitutional under state law so we can utilize the resources that we can access through Barclay’s Capital in order to fund as many projects as qualify for the program. When that is complete, you have a clean energy tax district or a Ygrene assessment district.
Is this different from previous approaches to PACE financing?
We've been fortunate to have Rod Dole, who ran Sonoma County's program for a couple of years, join our company as co-chairman. What we've done is basically taken that model to the next level by utilizing software systems to create what we call a funded district. We are able to use third-party software assets, bring them together under our platform, and pre-approve everybody in the district.
The district is typically a map of the city or county, that allows us to know from day one every property and how much money is available to each of them to invest in upgrades. By doing that we think we are going to create an incredibly innovative and exciting market driver to really enable contractors to participate and have more success in implementing these types of projects. A funded district model means that virtually every property that qualifies under the program guidelines is pre-approved.
Ygrene is associated with the Carbon War Room, a non-profit started by Sir Richard Branson to spur innovation to combat climate change. What is your relationship?
That was quite a wonderful accomplishment in 2011. The Carbon War Room is seeking to find what would be the best solutions, the best opportunities in the U.S. to make a dent in the war on carbon. This really is a war, a global war. We met the regional director for the United States, Murat Armbruster, and he and I began talking, along with our chairman, Dennis Hunter, CEO, and we began to think about how it takes a town to raise a child, and how it takes a team to run a PACE district.
Fortunately, he had conversations in the last couple of years with Lockheed Martin and insurance companies Energi and HannoverRe who are all looking for that last five feet to get to the other side. With our relationship with Barclay's Capital and our infrastructure to administer PACE districts, we were able to join together to create the PACE Commercial Consortium, and I think really create a lot of buzz and excitement and rejuvenate what seemed to have been, due to some of the federal legislative issues, a dead issue.
Since then, other major ESCOS [energy service companies] have joined the consortium, as well as some other insurance companies, feeder suppliers and manufacturers. We’re getting together to encourage local governments to go forward with these initiatives. It's absolutely the best answer to create energy efficiency retrofits and renewable energy solutions on major commercial projects with the type of companies in tow that are actually capable of doing them and doing them well.
Ygrene committed $100 million to President Obama’s Better Buildings Challenge through Clean Energy Sacramento. Can you speak a little to that and why that's of benefit to your investors?
We are committed to this as a national issue because we've established ourselves as an important part of that solution. We respected the Department of Energy in all the effort they've put into establishing this as a priority and something that needs to happen. We sit on a couple of councils, and we understand the true desire of the DOE to find more innovation and methods that are going to work.
Our commitment was in alignment with Mayor Johnson's commitment in the city of Sacramento, and we thought that would be an interesting way to establish the Better Buildings Challenge and a financial solution that would actually work. Sacramento determined that the only way to achieve its goal of energy use reduction would be to have a successful commercial PACE district in place, particularly in the downtown metro area. We really respect the goals of the Better Building’s Challenge and are proud to be a participant.
It sounds like there's an endless supply of investment capital available for this type of endeavor. Do you see any limits?
I know it sounds almost cliché or corny, but the bottom line is that just a couple of years ago there was a trillion dollars a year being spent on commercial mortgage backed securities, and the products that those people were buying have all but dried up or, even worse, turned out to be disastrous. We're very confident that the product that we are going to bring to the market, because of it being based on the first two percent of property value and the ability to use the tax collection structure whereby you are assured a payment of interest and principal on your investment, is really sound.
The market is looking for great products, and at the end of the day, we think we'll bring them the greatest product they've ever seen. It's a virtually endless amount of capital as long as we're steadfast in ensuring that our product is a quality product. That's what is really the most exciting part about this, that we've got the position to create this incredibly powerful product asset and bring it to a market that has the cash to buy into it.