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Ensuring PACE Delivers on Clean Energy

Residential Property Assessed Clean Energy (PACE) represents one of the most exciting demand drivers for both energy efficiency and solar energy as a means to achieve our clean grid and climate goals. Recognizing this promise, California recently enacted legislation SB-350 (de León, 2015) that includes a requirement to track normalized metered savings from PACE projects towards the governor’s goal of doubling efficiency, where these measurement techniques are feasible and cost effective. The good news is that normalized metered savings are both technically feasible and extremely cost-effective leveraging the State’s investment in smart meters and Green Button Connect, and the CEC funded open source OpenEEmeter platform.

PACE works by providing upfront capital to homeowners for efficiency or solar upgrades. This capital is serviced through an assessment on a home’s property tax bill, which ensures repayment even after a foreclosure. The core premise of this approach is that energy savings and renewables create positive cash flow for borrowers, and therefore decrease the risk of default.

California’s PACE legislations require that a PACE assessment must either save energy or water, or produce clean energy, but they do not specify how those goals are met or monitored over time. Because of the security afforded by being part of the property tax bill, PACE providers and financiers do not incur any performance risk around actual savings; the risk is borne entirely by the home or building owner. While PACE providers do have contingent liability associated with poor results, the fact is, they neither make nor lose money based on energy savings -- in essence, we have given them no business reason to care about results. This inevitably results in a race to the bottom in the market, where we already see some PACE providers dropping their standards to the minimum allowed by code.

DOE’s PACE Guidelines specify that PACE assessments should not exceed the useful life of installed measures, and that PACE programs should identify and prioritize measures that will be cost effective during that period (save more than they cost, excluding required health and safety measures). This makes sense for both homeowners who are taking on long-term debt, but also as a means to ensure that PACE assessments do not increase the risk to first mortgage holders.

So the question is, given the need for normalized metered savings to achieve California’s climate and energy goals, and the need to ensure that PACE assessments save homeowners money and do not increase the risk to first mortgage holders, how do we ensure energy efficiency outcomes without creating costly complexity that gets in the way of achieving scale?

One option is to treat PACE as an efficiency program and regulate eligible measures, contractor standards, installation standards, and quality assurance processes. This is the status-quo approach, carried out for most current efficiency programs, which are driven by a similar set of requirements as put forth in the DOE PACE Guidelines. As we know, however, regulatory approaches almost always result in massive new overhead costs (in CA we spend 50% of ratepayer portfolio expenditures on program administrator costs), constrain the development of new and innovative solutions, and even after these considerable costs often fail to generate positive energy outcomes.

A second and more market-based option that also aligns with other recently enacted California legislation AB-802 (Williams, 2015), and SB-350 requirements, is to require PACE providers to track and report normalized metered energy savings and encourage the establishment and participation in pay-for-performance programs.

Rather than prescriptively establishing standards through regulation and enforcement, this approach would instead track and pay PACE providers for the grid value of savings that accrue to the utility at a portfolio level. A pay-for-performance approach aligns the goals of PACE providers with the Golden State’s energy and climate policy by paying for realized outcomes over time, making those projects that deliver greater public benefit both more profitable for industry and a better deal for consumers.

A Market-Based Approach to Ensuring PACE Energy Outcomes

Instead of creating a new regulatory system, which is likely to create significant new overhead and substantially impede the needed growth of PACE, California should align PACE with current policy efforts by requiring providers to track normalized metered savings and enabling pay-for-performance programs which drive adoption of the most valuable outcomes.

This approach would make PACE providers compete to deliver real savings not just projects, and allows utilities to send a price signal that harnesses the power of PACE market demand to deliver projects that drive valuable benefits for the grid. This new cash flow to PACE providers will result in lower costs to home and building owners for projects that deliver better results.

Pay-for-performance will also require that all energy savings are tracked using the Normalized Metered Energy Savings approach required of PACE by SB-350 so that savings can be accounted for toward the State’s goals.

Given the need to ensure that PACE projects are cost effective to customers, and to avoid building new and expensive regulatory systems that would inhibit innovation, we should connect PACE with the statewide move towards pay-for-performance and normalized metered savings. By aligning consumer and utility interests with those of PACE providers, we can accelerate PACE deployment and demand while simultaneously delivering the grid and climate outcomes we need.