Kristina Klimovich of PACENow talks to Bert Hunter, the Connecticut Green Bank’s Executive Vice President and Chief Investment Officer and Ben Healey, the Connecticut Green Bank’s Assistant Director, Clean Energy Finance.
Kristina Klimovich: Bert and Ben, thank you for joining me today to talk about the PACE PPA product developed by the Connecticut Green Bank. Let’s start with a brief introduction and a general overview of the C-PACE program.
Ben Healey: Thanks, Kristina. Bert is our Chief Investment Officer, leading the finance function for the Green Bank, and I am an Assistant Director on our Clean Energy Finance team. We both joined the organization as the C-PACE program, under Jessica Bailey’s leadership, was getting off the ground in 2012. The program has been very successful, and since its launch over $70 million worth of energy efficiency and renewable energy (EE/RE) projects have been approved. The majority of these projects have already been closed and are either complete or in construction now. On the financing side, the Green Bank provided the initial warehouse capital for the program, and then accessed the private capital markets for the first time last year, via a $30 million securitization that closed in May 2014. CT’s C-PACE program continues to be driven by private capital and will use other private capital sources to continue originating deals.
Kristina Klimovich: Ben, how does the PPA structure fit within the C-PACE program?
Ben Healey: Under Bert’s leadership, the Green Bank team put together a solar tax equity fund –CT Solar Lease 2, which is a follow-on program to the original CT Solar LeaseTM, a residential tax equity fund that our predecessor organization, the Connecticut Clean Energy Fund, ran from 2008 through 2011. For CT Solar Lease 2, we worked with a leading national tax equity partner and brought in a cohort of regional banks, led by First Niagara Financial Group, to provide debt to the facility. Today, CT Solar Lease 2 is open to commercial, municipal and non-profit clients for small to medium (< 1 MW) solar projects. What is special about this fund is that the Green Bank received approval to finance otherwise non-creditworthy projects by making use of a C-PACE benefit assessment lien as a credit enhancing, thus providing investors with the security they need. Now we can serve the mid–tier commercial and non-profit market in Connecticut and offer lease and PPA products to properties that couldn’t access this type of financing before. We have seen a lot of initial uptake.
Kristina Klimovich: Thanks, Ben. Sounds like Connecticut is leading the way on the PACE PPA front.
Bert Hunter: We consider this development nothing short of a game changer. The commercial solar PV sector is a challenging space. Now with a PACE PPA option on the table, we have really opened up a totally new market segment. It is important that the tax equity provider and the lending banks understood the concept and followed the Green Bank’s leadership. Our purpose is to innovate and to continue demonstrating what can be done to take advantage of this market.
KK: I like the concept of opening up a new market. Is there an asset class that is a natural fit for PACE PPAs?
Ben Healey: My guess would have been that a PACE PPA would have been a natural fit for non-profit entities, and it is, but I’m surprised and pleased to see a number of commercial and industrial clients using the structure as well. On the non-profit side, we have some great examples, such as the JCC of Greater New Haven, which is doing 750 KW carport project in their parking lot. This is a community institution that existed for decades and has already done some EE work on its building and was looking for ways to finance a solar project. Annual PACE PPA payments will be below what the JCC is paying for utility costs. The same is true about the Waterbury Boys and Girls project – their electric bill savings should reach nearly 60% as a result of the PACE PPA rate and the state’s ZREC program (a Renewable Energy Certificate purchase program from the local utility company). The Boys and Girls Club is undertaking a 111 KW project that will produce 130,000 KWh a year. Waterbury CT is a distressed community and the Club is serving low and moderate income population. So, it is both an economic story and a community story around going green. These projects show that entities that otherwise would not be able to pay for solar PV, now have access to a well-understood tool – the solar PPA.
As for the business entities, in Bloomfield CT, a manufacturing facility is undertaking a 1 megawatt sized project, which is in the final stages of closing. It is an energy hungry consumer that doesn’t want to tie up its resources with owning the asset and doesn’t want to deal with the tax complications. This family-owned business found a PACE PPA option very attractive.
Kristina Klimovich: Is the PPA structure specifically enabled in the Connecticut PACE statute? If not, how did you go around it to set this program up and what would be your advice for those states that are now in the midst of a legislative effort?
Ben Healey: In Connecticut, our statute doesn’t directly address the PPA structure, but at the same time there is no preclusion. CT’s PACE statute states that eligible improvements must be permanently fixed to the property, so, in consultation with our legal team, we interpreted that legislation to come up with a programmatic solution, such that a contract of a certain minimum length (in our case, 15 years) with a buy-out provision, would fit the statutory intent. For states that are in the process of putting their PACE laws in place, it is important to make sure that the door is open for PPAs and there is no explicit preclusion.
Bert Hunter: In fact, it would be better to include PACE PPA language in the statute because that would allow for a more flexible lease term, as opposed to 15 years that was deemed appropriate by our legal department.
Kristina Klimovich: Ben and Bert, can you explain how PACE PPA is different from a typical PPA agreement? What are the advantages for the owners and investors?
Ben Healey: It isn’t that complicated –the agreement is a property level agreement like a traditional C-PACE structure, but instead of paying back your C-PACE debt financing, a building owner is simply making PPA payments through municipal property taxes. In other words, building owners are paying their energy costs directly to a municipality. From the perspective of the owner of the system, PACE PPA is very similar to PPAs offered by the national solar companies (e.g. Solar City, Sun Run, etc.). The difference is that PACE PPA has to have a term of at least 15 years and a buy-out provision (both of which are standard in the industry already), and the repayment has to be done through property taxes. From the investor point of view, PACE PPA payments are a senior benefit assessment lien on the property, and in the event of a default, the remedies are much stronger compared to a typical PPA. And, as you know, should ownership of the property change, the new owner inherits the solar PV benefits and the PPA payment obligation though our PACE program. Overall, linking PPA and PACE world together can revolutionize and open up a new segment of the market.
Burt Hunter: I echo that, we want to emphasize that C-PACE is a security and a collection mechanism. We are using the power of C-PACE to open up the capital markets.
Kristina Klimovich: Are PACE PPAs applicable to solar projects only?
Ben Healey: No, in fact, we see the possibilities outside of the solar context. PPAs could be applied to finance fuel cells, CHPs, and other non-solar improvements.
Kristina Klimovich: Who is marketing this program to building owners?
Ben Healey: We focus on our partnerships with local and regional installers to “sell” the mechanism to building owners. We found that 10 reliable installer partners are using PACE PPA as one of their primary selling tools. This mechanism helped them make sales that were practically impossible before. We stand behind the installers as a trusted state actor and assist with all the necessary documentation.
Kristina Klimovich: In other words, PACE helps solar installers to get more deals done?
Benn Healey: Absolutely. Outside of the PACE PPA structure these installers wouldn’t be selling to the customers who can’t pay for these deals out of pocket and for one reason or another either couldn’t or wouldn’t benefit most from owning these systems outright
Kristina Klimovich: Are there any specific training sessions?
Ben Healey: We did a special webinar when we launched the program, which we’re happy to share (along with all of our template documentation), and we now walk new contractor partners through on a one-on-one basis. It is a specialized training, and we don’t include it as part of the basic, more general C-PACE training we do.
Kristina Klimovich: I want to touch upon the applicability outside Connecticut.
Ben Healey: In CA and FL there seems to be a lot of opportunity. The recent addition to the CA statute (AB 1883) will allow PPAs to be implemented in the state. If you are already in the environment where third party ownership is allowed and you are thinking of enabling PACE financing, adding a PPA option is a low lift that can create a huge return.
KK: Thanks for taking the time to talk to me! I think the Connecticut story can be an inspiration for the rest of the country!