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Municipalities across Canada are grappling with how to honour their climate emergency declarations and net-zero commitments. To reach net-zero by 2050, municipalities would have to ensure deep energy efficiency and/or renewable energy renovations in an average of ~3% of existing buildings every year, starting now. PACE (property-assessed clean energy) programs could help tackle this huge task, but only if they grow at unprecedented speed to unprecedented size. Can it be done?

Building emissions are rising

For most municipalities, heating and cooling buildings is a major source of climate pollution (namely, greenhouse gases, refrigerants and soot), though only 12% of Canada’s total. While both new and existing buildings have become more efficient in recent decades, these gains have been more than offset by increases in population and customer demand for more space. That helps explain why emissions from buildings have increased 9.5% since 1990. It’s also one of the reasons that Canada’s emissions increased again in 2019, directly contrary to our international commitments under the Paris Agreement.

Yet in the challenging journey to net-zero, eliminating emissions from heating and cooling buildings is one of the easier tasks. Older buildings, in particular, waste large amounts of fossil fuels, largely because so much air and energy leak through their walls, roofs, floors, doors and windows. We already have the technology to fix this and would reap many benefits from doing so.

Most people would prefer to live and work in buildings that are draft-free, warm in the winter and cool in the summer, that are inexpensive to keep that way and non-polluting. A source of renewable energy, such as solar panels or geothermal heating and cooling, can add self-sufficiency and resilience. In the 2021 Texas blackouts, owners of efficient homes with their own solar power avoided the misery and broken pipes that plagued so many of their neighbours.

Then why do existing buildings so rarely receive meaningful energy upgrades, even when they are renovated? My last report as Ontario’s Environment Commissioner, A Healthy, Happy, Prosperous Ontario: Why We Need More Energy Conservation, showed that challenges with financing the upfront cost are one of the main obstacles.

Why PACE financing works

Municipalities can play a key role in providing access to attractive financing for the incremental costs of energy retrofits, because of their ability to unlock PACE financing programs. PACE programs lend willing property owners the funds needed for upgrades through low-interest, long-term, fixed-rate loans secured through a property tax mechanism. The owner’s utility savings help pay back the loan, which can stay with the property or be paid out when it is sold. (This is important since the average homeowner moves every few years, while deep retrofits can take a decade or more to pay back. The purchaser automatically takes over the loan obligation.) In some cases, utility savings make retrofits cost neutral to the homeowner. The owner also receives improved comfort, higher resale value, and reduced capital equipment costs, and knows they are doing something about our greatest crisis.

PACE programs remove several significant barriers: property owners don’t have to put money up front, their credit rating may not matter, interest rates remain low, and they don’t have to keep paying back the loan if they move. For lenders, the loans are low risk because they’re secured through property tax, which has low defaults, high priority and adequate security.

Well-designed PACE programs make good financial and environmental sense, although they require patience. For example, Halifax Solar City photovoltaic systems cost an average of $20,000, for estimated savings of $57,000 over 25 years. A study for Our Energy Guelph calculated that a $3.2 billion investment in community energy – two-thirds of it in building retrofits funded through PACE – would yield $4.9 billion over 30 years, through energy savings, carbon price savings and electricity sales. Plus, the retrofits would slash carbon emissions and make homes more comfortable.

There are at least 34 clean-energy financing programs available across Canada. Halifax Solar City was the first, launching in 2013. It has financed most of the solar water heaters and PV systems in its city. Yet, despite many pilot projects and an alphabet soup of programs,[iii] Canadian PACE programs have not achieved either speed or scale. Instead, they run into obstacles that should be easy to fix. For example, half of all applicants to Toronto’s Home Energy Loan Program (HELP) were unable to proceed with their retrofit because their mortgagee didn’t consent. U.S. PACE programs have been leaving us in the dust, despite the environmentally hostile leadership of the Trump years.

Given the need for urgent, transformative change, what could  help Canadian PACE programs takeoff?

1. Ensuring that mortgagees cannot block PACE loans for energy upgrades.

There is no legitimate reason to allow mortgagees to block PACE loans for energy upgrades. Property tax default 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 Journal of Structured Finance: energy upgrades are the only renovation that yield a larger increase in property value than they cost. This obstacle could easily be resolved by legislation or by provincial governments setting up a loan-loss reserve to protect mortgagees. In the meantime, municipal councils can ask local banks and credit unions for formal commitments to automatically consent to PACE upgrades.

2. Encouraging private sector funding of PACE loans.

Few municipalities have the spare capital to fund PACE themselves. Some compete for federal government funds via the Federation of Canadian Municipalities (FCM), plus local government dollars and perhaps a little private capital. (Ottawa, for example, has a pilot project combining FCM funding with a loan from the Vancity Community Investment Bank.) This approach cannot provide enough money to scale. It’s great that the federal government has increased the FCM Green Municipal Fund to approximately $1 billion, including a $300-million Community Efficiency Financing Plan. But it could take more than $800 billion to retrofit all existing buildings across Canada.

The private sector can provide money at this scale, and is indeed eager to do so, but is having trouble finding appropriate programs to fund without excessive risk or administrative costs. PACE programs could be a good fit. They can qualify for municipal green bonds, which are finding strong market appetite at better-than-usual rates. An inexpensive government loan-loss reserve would make these programs especially appealing and would minimize interest rates to homeowners.

In addition, private sector funding is less at risk of disruption by elections. Reducing political risk could improve contractor capacity, supplier capacity, customer awareness and customer confidence.

3. A multi-municipal entity with economies of scale.

One of the factors that has fuelled U.S. PACE growth to over US$8 billion is an independent third-party administrator that serves many municipalities. This makes it easier for municipalities that  want a PACE program but lack administrative capacity, technical expertise, know-how and capital, or simply want to reserve their borrowing power for other things.

Purchasing, marketing, administration and borrowing are all cheaper at scale. A mission-driven administrator can ensure that these programs are focused on the public good and not on predatory loans. A common entity can tap sources of private funds, such as pension plans, that prefer to lend amounts far too large ($50–100 million) for most individual municipalities.

Our Energy Guelph hopes to fill this role in Canada. If they, or a similar organization, succeed, Canadian municipalities may be able to grow their PACE programs at unprecedented speed to unprecedented size, and kick-start building retrofits across the country. After all, on the road to net-zero, funding building retrofits is one of the easier problems.

Dianne Saxe is one of Canada’s most respected environmental lawyers, with a Clean50 award, a Ph.D. in Law, and a Law Society Medal. She was a popular Environmental Commissioner of Ontario, reporting to the Legislature on environment, energy and climate. She now heads SaxeFacts, hosts the Green Economy Heroes podcast, is Deputy Leader of the Ontario Green Party

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