Community Research and Development Information Service - CORDIS

Final Report Summary - PACE (Property Assessed Clean Energy)

The aim of the PACE project is to contribute to sustainable development, by proposing a candidate policy for promoting renewable and energy efficiency deployment mainly in households. The PACE policy allows residential property owners to cover upfront energy investment costs and then recoup payments through increased property taxes over a 20-year period.

The project is built around 3 main building blocks, where we explore:
1. the main factors behind consumer choices regarding investments in energy efficiency and renewable energy technologies;
2. the effectiveness of the PACE policy in promoting solar investments;
3. how the PACE model could fit the European context.

In the first part of the project we focus on the main hypotheses explaining underinvestment in energy efficiency and renewables. By using the OECD Survey on Household Environmental Behaviour and Attitudes, this study provides empirical evidence of the determinants of such investments. Empirical results suggest that households’ propensity to invest in clean energy technologies depends mainly on home ownership, income, social context and household energy conservation practices. Indeed, home owners and high-income households are more likely to invest than renters and low-income households. In addition, environmental attitudes and beliefs, as manifest in energy conservation practices or membership in an environmental non-governmental organisation, also play a relevant role in technology adoption.

Targeted policies are required to address specific barriers for different groups of consumers. For instance, credit constraints are more relevant for low-income households and lifting these constraints, through models like PACE, would likely promote investment for this group. Direct subsidies, tax credits or rebates can also be relevant policy instruments to lower the upfront cost of energy investments. While internalising external costs of emissions by increasing energy prices is thought to be a more efficient instrument in the absence of credit constraints, subsidies to adopt low-emission technologies may be a more effective and less costly policy instrument than higher energy taxation, when credit constraints are present. PACE and similar policy alternatives, such as the Green Deal, can address the credit constraint directly. Providing more reliable information can reduce uncertainty and asymmetric information addressing associated market failures and leading consumers to better decisions. This can include product standards or energy labels. Those instruments set a minimum level of energy performance or energy standards that the product must meet, helping consumers to better evaluate products’ energy efficiency characteristics. Innovative approaches, such as “nudging” might complement these information policies, by reducing biases in consumer’s decision process.

In the second part of the project, we perform the first rigorous evaluation study on PACE effectiveness by employing a regression discontinuity design. Under this design, a geographic or administrative boundary allows drawing units into treated and control areas to assess the casual effect of the variable of interest. In this analysis, the casual effect of PACE policy on solar installations is estimated exploiting the cities’ spatial proximity to county borders in California which determines the programme eligibility. Given that PACE was implemented only in Sonoma County in California, the county boundary determines whether households are eligible for the PACE financing programme, thus allowing us to draw arbitrarily the treated (cities eligible for the programme) and control groups (cities not eligible for the programme). Empirical results demonstrate that the PACE policy had a significant role in increasing solar PV installations in Sonoma. On average, the PACE policy more than doubled solar installations in Sonoma compared to its neighbouring countries.

We finally study different country-specific contexts for PACE policy implementation, emphasising the different challenges faced in Europe compared to US and analysing whether this model might provide a theoretically and financially sound alternative to subsidy-based incentives.
In the US, federal agencies with significant equities in financing and regulating the housing market, such as Government Sponsored Enterprises (GSEs) Fannie Mae & Freddie Mac and their conservator the Federal Housing Finance Administration (FHFA), took a drastically opposite policy position on allowing municipalities to underwrite PACE loans backed by the U.S. government. In particular, Fannie Mae and Freddie Mac have questioned the PACE’s senior lien status over an existing mortgage. Nowadays, 30 States have passed PACE-enabling legislation, but a widespread implementation of the programme is missing due to those issues linked to the mortgage market structure. Europe faces different challenges compared to US. In particular, the fragmentation of the building sector, that is differences in building types and construction periods, and the mortgage market along with high transaction costs may discourage lenders from offering loans for energy efficiency investments to individual households.

The other challenge is whether the PACE model might provide a theoretically and financially sound alternative to subsidy-based incentives. Most of the European countries have already experienced generous supporting schemes and a challenge is to promote energy investments without overly burdening tight public budgets. For instance, countries such as Germany and Italy have been reducing supporting schemes for solar panels. In this respect, the PACE loan program is a novel mechanism, likely to be less of a burden for public budgets and a viable solution for the long-term financial sustainable growth.

Related information

Reported by

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
France
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