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What has the Department of the Environment been doing to address the issue of commercial building efficiency?
The city has goals to reduce our community wide greenhouse gas emissions 25% below by 1990 by 2017, and 80% below 1990 by 2050. 53 percent of our emissions come from the building sector, and a great majority of that from existing buildings. So this is a very important sector for us. For the past eight years, we’ve been managing an energy efficiency incentive program called SF Energy Watch, which is a partnership with PG&E; it currently has a budget of about $7 million a year for rebates, technical assistance, and quality assurance and has given out over $18 million in incentives for about 5,600 projects to date. More recently, the department has been working on a couple of new major initiatives. First, we passed an ordinance that requires commercial buildings to benchmark their energy performance and report those results back to the city, and also mandates that these buildings complete an energy efficiency audit once every five years. The intent of this law is to raise awareness and generate useful, actionable information for building owners to make energy use more transparent in the marketplace.
Secondly, we realized there was a need to provide new sources of capital for energy retrofits, so in 2010 the city created a PACE financing district which allows qualified property owners to get 100 percent up-front capital to install energy efficiency, renewable energy or water improvements and pay it back through their property taxes for up to 20 years. It’s a really innovative mechanism that has many unique attributes, such as longer terms, transferability, and the ability to pass through costs and savings to tenants. Our 2012 Prologis transaction is good example of these. Because of these features, PACE is ideal for comprehensive, multi-measure projects that can achieve deeper energy savings, but which have been traditionally hard to finance.
How do you think the PACE program has changed the process of energy efficiency retrofitting?
Across the country PACE has done a substantial amount of financing. It’s currently available in nine states and Washington, D.C. through 26 different programs, with many more on the way. To date, about 200 projects have been financed to the tune of about $60 million. PACE is unique because it is secured by a property tax assessment levied by a sponsoring local government. And I think because of that, it has the ability to create a community conversation about energy efficiency in general. Another thing about PACE is that it changes the value proposition of undertaking an energy efficiency retrofit. Because you can get long term, low rate financing that stays with the property, it changes the conversation from simple payback to one about cash flow and property value.
What is the biggest challenge you’ve encountered with implementing PACE projects?
A couple of things come to mind. Energy efficiency projects are generally voluntary actions on the part of a busy property owner, who likely has a long list other priorities that compete with the time and effort it will take to identify the best opportunity to do a PACE project. The building owner’s core business is primarily investing in, selling, and leasing properties, so energy efficiency projects may not be a high priority. That’s where our ordinance helps. Contractors, ESCO’s, and equipment vendors are key to educate the market, and develop and originate projects. The second is lack of data and information: everything from how the building is performing, to what technologies are working, to how financing options like PACE can make great business sense. As you know there’s a lot going on in this space as well, with new smart building systems and controls and advanced data analytics platforms and app’s that can deliver real time building data so energy managers can quickly make changes and save energy.
There are a total of 31 states that have passed PACE legislation, yet only around 8 states have funded projects. What can we do to encourage more widespread adoption of PACE financing like we’ve seen in San Francisco?
Education. It’s important to think in the context of where we are with energy efficiency financing. For privately owned buildings, this is all still very nascent. Creating building owner awareness and demand is the biggest challenge. There is plenty of capital looking at investing in energy efficiency, and PACE is great because the mechanism is so secure. We need to work on standardizing the financing process and documentation, and ultimately rates and fixed costs will come down. We also need to come up some good standard templates for energy project development which will give owners and investors confidence that savings will be realized. The Investor Confidence Project is doing some great work on this.
What are some best practices you’ve learned from your work at the San Francisco Department of the Environment?
Again, we are fortunate in San Francisco to have the ordinance to broadly raise the issue of building energy performance; without it, we would be starting from a different and more challenging place. We are just now seeing that the mandatory energy audits are creating some good buzz and activity in the market. Another one is learning to be patient. Commercial retrofits take a long time to nurture, develop, and execute, and especially when you factor in a brand new financing mechanism like PACE. Bringing together the disparate interests of this sector to do this work requires persistence and tenacity, but it feels like we are turning a corner. I am optimistic this will be a breakout year for PACE.