In Europe, household spending on energy is at historical peak levels. To be clear, there is already an energy crisis. According to the Dutch TTF market, natural gas prices reached $3100 per 1000 cubic meters in the middle of August, a 610% rise over the same period the previous year ($280 per 1000 cubic meters). At this cost, many power plants cannot afford to stay in operation for very long. Because of the growing cost of input fuels, European benchmark electricity rates have increased by about 300% in 2022, setting new records. Energy costs are collectively eight times higher than the five-year norm. As many experts discuss energy options, it is important to consider PACE, or Property Assessed Clean Energy, a mechanism used in the United States. It is a mechanism to pay for a various long-term improvements to residential and commercial properties that reduce hazards and increase energy and water efficiency. In this article, we examine the condition of the PACE market and go over the benefits and drawbacks of the PACE model.
By presenting Assembly Bill No. 811, the PACE model was created in California, the US, in 2008. In accordance with the "public interest" of addressing "global climate change," the bill permitted property tax assessments to pay for energy-efficient upgrades to particular properties. PACE was later seen as a new approach to funding energy efficiency and renewable energy improvement on residential and commercial buildings. PACE is now widely utilized in the US. According to the most recent market statistics from PACENation, a group that supports PACE financing, over 7 722 million dollars have been spent on residential PACE projects over the previous ten years, and over 323 000 buildings have undergone renovations with a spike during the last four years.
According to the study by Adam Rose, in California, the energy/water efficiency and renewable energy PACE projects are estimated to lead to electricity consumption reductions of 3.63 million megawatt hours (MWh), natural gas consumption reductions of 2.86 billion cubic feet, and water savings of 2.36 billion gallons over the entire life of the improvements.
Although, the PACE model is not yet available in Europe. Complex legal processes and first-lien complications have slowed it down. Moreover, PACE is usually based on bonds issued by cities, which is not ordinary in EU cities, especially small ones. Nevertheless, the first pilot project, EuroPACE, started in the small Spanish city, Olot. The EuroPACE project adopted best practices from the US PACE market and intended to enhance its impact further. According to the European Commission, the main objective for EuroPACE was to develop a scalable energy efficiency home renovation program combining home-based financing and technical assistance, thus stimulating consumer demand and investor appetite. During the three years project, a roadmap for EuroPACE adoption was identified in four countries, namely Belgium, the Netherlands, Portugal, and Spain, where the implementation of EuroPACE was considered the most feasible.
PACE is a method of funding sustainable energy initiatives based on property taxes. It might be viewed as a form of finance paid back by a regular tax assessment on the property. The PACE assessment is a property debt, which means it is connected to the property rather than the owner(s). Suppose the buyer agrees to take on the PACE debt and the new first mortgage holder authorizes the PACE obligation to stay on the property. In that case, the repayment obligation may be transferred along with property ownership. Such kind of assessment can remove a major barrier to making investments in energy efficiency initiatives. Property owners may be reluctant to undertake property modifications when they may believe they won't be able to save enough money to cover the initial expenditures. PACE is divided into two programs that share a common basis:
- Commercial properties – commonly referred to as Commercial PACE or C-PACE. Like other project financings, C-PACE uses borrowed capital to pay for the upfront costs associated with energy efficiency or renewable energy improvements. In contrast to other project financing methods, the borrowed money is paid back gradually through a voluntary tax assessment. Longer-term financing and the opportunity to transmit the repayment responsibilities to the subsequent property owner are just two the attractive aspects produced by the security of the tax assessment, a well-established and well-understood method. As a result, C-PACE makes a more robust economic case for investments in building retrofits with more extended payback periods and depth than would otherwise be achievable with conventional financing. US states and local governments implement C-PACE to create employment, promote economic growth, and stop climate change. Local governments can participate in and support program achievements while advancing these public purpose objectives through C-PACE with little to no public funding investment.
- Residential properties – often known as Residential PACE or R-PACE. Similar to Commercial PACE, Residential Property Assessed Clean Energy (R-PACE) is a financing tool used by local governments to enable owners of residential properties to fund energy efficiency and renewable energy renovations. Just like other public infrastructure investments, qualified energy improvements are repaid through a voluntary property tax assessment collected by local governments. Municipal bonds or outside funding backed by property assessment payments may be used to finance PACE projects. Homeowners pay back the loans as a line item on their property tax statement, and if they sell their home, the succeeding owner takes up the repayment obligations.
As mentioned before, with the help of PACE financing, households may significantly reduce electricity and water consumption. However, environmental benefits are not the only ones here. As reported by PACENation, more than 100 000 jobs were created while running the R-PACE program in the US.
The ability to transfer the debt to the next owner is a key advantage of PACE financing. You are not required to repay the loan if you sell the property after renovations. The loan is secured by the asset so that the next owner may simply inherit it and repay it. However, it could be difficult to sell such a house.
Furthermore, if you choose PACE financing, you have a lot more time to undertake big, time-consuming changes. As a result, payments may be small. Of course, as with any loan, the longer you wait to pay it off, the more interest you'll accrue. Notably, the high-interest rate can be seen as a drawback of PACE.
Last but not least thing about PACE is legislative measures. According to the study by Deloitte, European legislation on building sector energy efficiency is already embedded in different Directives. Although only five EU countries are fully compliant with the requirements: the Czech Republic, Finland, Romania, Span, and the UK. In order to introduce a mechanism similar to the PACE method in the Czech Republic, further legislative amendments will be required.