Municipalities across Canada are wondering how to honor their climate emergency declarations and net zero commitments. To reach net zero by 2050, municipalities would need to deliver in-depth energy efficiency and / or renewable energy renovations to around 3% of existing buildings on average each year, from now on. PACE (Property Rated Clean Energy) programs could help tackle this huge task, but only if they grow at unprecedented speed to unprecedented size. Is it possible ?
Building emissions are increasing
For most municipalities, the heating and cooling of buildings is a major source of climate pollution (namely, greenhouse gases, refrigerants and soot), although only 12% of the total in Canada. As new and existing buildings have become more efficient over the past decades, these gains have been more than offset by increasing population and customer demand for more space. This helps to explain why emissions from buildings have increased 9.5% since 1990. It is also one of the reasons why Canada’s emissions increased again in 2019, which is directly contrary to our international commitments in under the Paris Agreement.
Yet on the difficult road to net zero, eliminating emissions from heating and cooling buildings is one of the easiest tasks. Older buildings, in particular, waste large amounts of fossil fuels, largely because so much air and energy escape through their walls, roofs, floors, doors and windows. We already have the technology to solve this problem and would reap many benefits from it.
Most people would prefer to live and work in buildings that are draft free, warm in winter and cool in summer, inexpensive to maintain and non-polluting. A renewable energy source, such as solar panels or geothermal heating and cooling, can increase self-sufficiency and resilience. During the Texas power outages of 2021, owners of efficient homes with their own solar energy avoided the misery and broken pipes that plagued so many of their neighbors.
So why do existing buildings so rarely receive significant energy upgrades, even when they are renovated? My last report as Environmental Commissioner of Ontario, A Healthy, Happy and Prosperous Ontario: Why we need more energy savings, have shown that the challenges of financing the initial cost are one of the main obstacles.
Why PACE funding works
Municipalities can play a key role in providing access to attractive financing for the incremental costs of energy retrofits, due to their ability to unlock PACE funding programs. PACE programs lend money to willing homeowners for renovations through low-interest, long-term, fixed-rate loans secured by a property tax mechanism. The owner’s utility savings help pay off the loan, which can stay with the property or be paid off on the sale. (This is important because the average homeowner moves out every few years, while major renovations can take a decade or more to pay off. The buyer automatically takes over the loan obligation.) In some cases, the savings done on utilities make renovations neutral for the owner. The owner also benefits from improved comfort, higher resale value and lower equipment costs, and knows he is doing something to solve our biggest crisis.
PACE programs remove several important barriers: Homeowners don’t have to invest money up front, their credit rating may not matter, interest rates stay low, and they don’t have to. repay the loan if they move. This is important since the average homeowner moves out every few years, while major renovations can take a decade or more to pay off. The buyer automatically takes over the loan obligation. For lenders, the loans are low risk because they are secured by the property tax, which has few defaults, high priority and adequate security.
Well-designed PACE programs make good financial and environmental sense, even if they require patience. For example, Halifax Solar City’s photovoltaic systems cost an average of $ 20,000, with savings estimated at $ 57,000 over 25 years. A study for Our Energy Guelph calculated that a $ 3.2 billion investment in community energy – two-thirds of which was in renovations to CAPC-funded buildings – would yield $ 4.9 billion over 30 years, thanks to the energy savings, carbon price savings and electricity sales. In addition, the renovations would reduce carbon emissions and make homes more comfortable.
There are at least 34 clean energy financing programs in Canada. Halifax Solar City was the first, launched in 2013. It has financed most of the solar water heaters and photovoltaic systems in its city. Yet, despite numerous pilot projects and an alphabet soup of programs,[iii] Canadian PACE programs have not reached speed or scale. Instead, they run into some hurdles that should be easy to resolve. For example, half of all applicants for Toronto’s Home Energy Loan Program (HELP) were unable to renovate because their mortgagee did not agree to it. The US PACE programs have left us in the dust, despite the environmentally unfriendly leadership of the Trump years.
Given the need for urgent and transformative change, what could help Canadian PACE programs take off?
1. Ensure that mortgagees cannot block PACE loans for energy improvements.
There is no legitimate reason to allow mortgagees to freeze PACE loans for energy improvements. Default property tax rates are low and properties that have undergone PACE upgrades have a lower than average default rate. Equally important, according to a study in the Structured Finance Journal: Energy upgrades are the only renovations that generate a greater increase in property value than they cost. This obstacle could easily be removed by legislation or by provincial governments establishing a loan loss reserve to protect mortgage creditors. In the meantime, city councils can ask local banks and credit unions for formal commitments to automatically agree to PACE upgrades.
2. Encourage private sector financing of PACE loans.
Few municipalities have the capital available to fund PACE on their own. Some compete for federal government funds through the Federation of Canadian Municipalities (FCM), plus local government dollars and perhaps a little private capital. (Ottawa, for example, has a pilot project combining funding from FCM with a loan from the Vancity Community Investment Bank.) This approach may not provide enough money to scale up. It’s great that the federal government has increased FCM’s Green Municipal Fund to about $ 1 billion, including a $ 300 million Community Effectiveness Funding Plan. But it could take over $ 800 billion to renovate all existing buildings in Canada.
The private sector can provide money on this scale, and is indeed eager to do so, but struggles to find appropriate programs to fund without excessive risk or administrative costs. PACE programs might be suitable. They can qualify for municipal green bonds, which are finding a strong market appetite at better than usual rates. A cheap government loan loss reserve would make these programs particularly attractive and minimize interest rates for homeowners.
In addition, private sector funding is less likely to be disrupted by elections. Reducing political risk could improve the capacity of subcontractors, the capacity of suppliers, awareness and confidence of customers.
3. A multi-municipal entity with economies of scale.
One of the factors that has fueled PACE’s growth in the US to over US $ 8 billion is an independent third-party administrator who serves many municipalities. This makes it easier for municipalities who want a PACE program but lack administrative capacity, technical expertise, know-how and capital, or who simply want to reserve their borrowing power for other things.
Buying, marketing, administering, and borrowing are all cheaper on a large scale. A mission-oriented administrator can ensure that these programs are geared towards the public good and not predatory lending. A common entity may tap into private sources of funds, such as pension plans, which prefer to lend far too large amounts ($ 50 million to $ 100 million) for most municipalities.
Our energy Guelph hopes to fulfill this role in Canada. If they or a similar organization are successful, Canadian municipalities may be able to expand their PACE programs at unprecedented speed to unprecedented size and initiate building renovations across the country. After all, on the road to net-zero, financing building renovations is one of the easiest problems.
Dianne Saxe is one of Canada’s most respected environmental lawyers, with a Clean50 award, a doctorate. in law and a medal from the Bar. She was a People’s Environmental Commissioner of Ontario, reporting to the Environment, Energy and Climate Legislature. She now runs SaxeFacts, hosts the Green Economy Heroes podcast and is Deputy Leader of the Green Party of Ontario.