ENERGY FINANCE: White House Announcement Clears Up PACE; Tax Extenders Pass Senate Finance

Posted by Dan Scripps on Sep 1, 2015 11:43:54 AM


The White House announcement last week, on the day of President Obama’s clean energy speech in Las Vegas, resolved two issues that have been dogging the Property Assessed Clean Energy (PACE) market over the past several years. Namely, it clarified how PACE loans could be paired with federally guaranteed mortgages, as well as how those loans could be transferred to new owners, rather than paid off, at the time of the property’s sale.

Representing a compromise of sorts, the announcement included a statement from the head of the Federal Housing Administration stating that FHA was developing guidance that would allow borrowers to use Single Family FHA financing for properties with existing PACE loans provided that, among other conditions, the PACE loans are subordinated to the original mortgage. This was a victory for the mortgage lending industry, which opposed giving PACE loans a priority lien position over the mortgage, which would mean the PACE loan would be repaid ahead of the mortgage in the event of default (though there’s been no evidence that PACE loans lead to higher default rates, and there have even been studies showing that energy efficient homes are 32% less likely to default than traditional homes). But it also provided needed clarity for the residential PACE market, in particular.  

FHA’s statement is consistent with guidance from the Federal Housing Finance Agency prohibiting Fannie Mae and Freddie Mac from purchasing mortgages that have given priority lien position to PACE loans. This has forced mortgage holders to pay off PACE liens at the time of selling their homes, slowing down and complicating the process of transferring properties. FHA addresses this issue by stating that, for PACE loans that preserve priority loan position for the original mortgage and meet other conditions, “[w]hen the property is sold, the PACE loan may transfer to the next owner who is responsible for repaying the loan. The ability to transfer the loan to the new owner allows for both the payment and the value of the retrofit to be transferred from one owner to the next.”

These changes provide some much needed certainty to the growing PACE market, and resolve some ambiguities that have frustrated lenders and investors. Taken as a whole, the announcement should help fuel additional growth in a PACE market that has grown from $60 million in projects in 2013 to more than $600 million today – a 10x expansion in just two years – and particularly help with the residential PACE market, which is five times the size of commercial PACE.

Federal Energy Tax Credit Extension Passes Key Hurdle

In wrapping up its business before breaking for the summer recess, the Senate Finance Committee approved a package of “tax extenders” with broad, bipartisan support, including extension of a number of key energy tax provisions, including electricity production credits, for wind and hydroelectric generation, as well as tax breaks for a variety of energy efficiency services. The tax breaks would apply retroactively to December 31, 2014, and extend through the end of 2016. The legislation is now awaiting action by the full Senate.

Energy Finance News in Brief

  • SunEdison is buying Vivint Solar, the second-largest residential PV installer in the country, for $2.2 billion in cash, stock, and convertible notes. As part of the deal, SunEdison would acquire a 523 MW portfolio of residential solar projects, which it plans to drop into its TerraForm Power yieldco, making TerraForm the largest yieldco owner of residential solar projects.

  • A report from Bloomberg New Energy Finance shows that advancedenergy investment was flat globally for the second quarter (down 0.2%) in comparison the investment numbers from a year ago, while investment in the U.S. advanced energy sector was up 3% over Q2 2014.

  • The initial public offering for 8point3 Partners raised $420 million by selling 20 million shares at $21 per share. 8point3 Partners, the renewable energy yieldco formed by First Solar and SunPower, trades on the Nasdaq under symbol CAFD.

  • The U.S. Department of Agriculture recently announced $63 million in loans and grants for renewable energy and energy efficiency projects through USDA’s Rural Energy for America Program. Eligible agricultural producers and rural small businesses may use REAP funds to make energy efficiency improvements or install renewable energy systems, including solar, wind, renewable biomass (including anaerobic digesters), small hydroelectric, ocean energy, hydrogen, and geothermal. The next application deadline for REAP grants is November 2, 2015.

  • The New York Public Service Commission in July approved $150 million in funding for the New York Green Bank, bringing the total funds available to lend to more than $350 million. The New York Green Bank ultimately aims to get to $1 billion in capital, and has focused on a series of “first of its kind” projects, which it announced in October 2014.

  • The 2014 Wind Technologies Market Report, released by the U.S. Department of Energy and the National Renewable Energy Laboratory, finds that investment in the U.S. wind industry in 2014 topped $8.3 billion, including $5.8 billion in tax equity – the largest year on record. The Report also noted that “tax equity yields held steady at around 8% (in unlevered, after-tax terms), while the cost of term debt fell by roughly 100 basis points (i.e., an absolute decrease of 1%).”

  • Clean Power Finance and Kilowatt Financial are merging, with Clean Power Finance CEO Nat Kreamer to serve as CEO of the new company, to be called Elevate Power. Terms of the merger between the two solar financing startups were not released. As a result of the merger, which is expected to close in the third quarter, Elevate Power will have $1.6 billion in project and loan financing under management. Both Clean Power Finance and Kilowatt Financial are backed by Kleiner Perkins Caufield & Byers.

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