Green Building Law Blog : Green Building Lawyer & Attorney : Shari Shapiro: Cozen O'Connor Law Firm : Environmental, LEED

Many people, including me, have noted that the National Defense Authorization Act (“NDAA”), signed into law by President Obama on December 31, 2011, prohibits the Department of Defense (“DoD”) from using any appropriated funds to achieve the two highest levels of green building certification offered by the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) Program – platinum and gold.  The NDAA, however, does provide that the Secretary of Defense can certify a building under LEED gold or platinum standards if certification imposes no additional cost to the DoD, or if the DoD conducts a cost-benefit analysis of the project and there is a demonstrated payback for implementing energy improvements or sustainable design features.

More interesting, upon further reflection, is that the bill requires that by June 30, 2012 the Defense Secretary must provide Congress with a report on the energy efficiency standards the DoD uses for military construction and repair.  The report must include:

1. A cost-benefit analysis as well an examination of the return on investment and long-term payback of LEED, ASHRAE 189.1 and ASHRAE 90.1-2010; and,
2.  A new DoD policy on energy efficient construction based on the cost-benefit and ROI analysis.

 The methodology for assessing the "cost-benefit" and return on investment of the standards is not specified.  Given that life-cycle costing makes the ROI of energy efficiency and other green features much more attractive, the standard that is used will be significant.   

The proposed DoD "policy" could also be used by Congress as a model to impose on the other Federal agencies, which mostly use LEED-Silver as their building standard.

Look out for a debate in the middle of the year over whether LEED and ASHRAE 90.1-2010 should be scrapped from DoD (and potentially other agency) requirements because they fail the "cost-benefit" analysis. 

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As the last days of the year wind down, Congress scurries around to finish its unfinished business, almost always with "surprises" for the regulated community. 

The House appropriations committee issued a final version of the 2012 Omnibus spending bill last night.  It has, of course, significant implications for energy and environment spending, particularly spending related to climate change.

The omnibus bill cuts spending on climate change programs, prohibits the appointment of a Federal "Climate Change Czar" and cuts spending on climate change research.

Most stunning, of course, are changes to EPA funding.  The summary of the omnibus bill issued by the House appropriations committee states that EPA funding has been reduced by almost 19% in 2011:

The conference agreement funds EPA at $8.4 billion, which is a $233 million reduction below the FY 2011 enacted level and $524 million below the President’s request. Overall, funding for EPA has been reduced by $1.8 billion (-18.4%) in calendar year 2011.

The conference agreement cuts $14 million (-6%) in clean air and climate research programs; $12 million (-9.5%) in EPA’s regulatory development office; and $14 million (-5%) to air regulatory programs. In addition, the bill includes:

• A 33% reduction to the EPA Administrator’s immediate office;
• A $101 million reduction for the Clean Water and Drinking Water State Revolving Funds, which received $6 billion in “stimulus” funding;
•  A $78 million reduction for EPA operations/administration, which includes $41 million
• (-5%) in cuts to EPA’s regulatory programs;
• A $14 million (-6.2%) reduction for uncoordinated climate and other air research; and
•  An elimination of $4 million in funding that EPA has used to delay the processing of Appalachian mining permits.

These are some other provisions in the omnibus bill that impact the green building community:

1. Funding for CBECS may be restored--Funding for the Commercial Building Energy which was defunded this year may be restored, paving the way for updating the baseline building energy data at the heart of Energy Star. Division B, Title III on page 44 provides $105,000,000 for the Energy Information Administration. 
2. New energy efficient lighting standards won't go into effect-- The omnibus bill includes a rider which would prevent the new energy efficient lighting standards from going into effect on January 1st, and actually rolls back standards in effect since 2008 for floodlights. 
3. Innovative Technology Loan Guarantee Program has $0.00 appropriated for 2012.  The loan guarantees are for eligible clean energy projects (i.e., agreeing to repay the borrower’s debt obligation in the event of a default), and by providing direct loans to eligible manufacturers of advanced technology vehicles and components. 
4. Appointment of Administration “Czars” for climate change and urban affairs prohibited.

A full version of the final bill is available here, a summary from the appropriations committee is here.

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Contrary to common belief that nothing is really happening in green building at the Congressional level these days, I provide the following two counterexamples. Of course, neither of these efforts are designed to promote energy efficiency or green building, but that doesn't mean that nothing is happening.

 An amendment to the Senate Appropriations Bill for Energy and Water introduced by Senators Wicker (R-MS), Boozman (R-AR), and Inhofe (R-OK) would essentially eliminate the use of LEED and Energy Star for DOE green building programs.  According to the NRDC:  

This rider would prevent the Department of Energy (DOE) from using strong green building energy rating standards. The amendment limits DOE to using only green building standards that are developed and approved in accordance with American National Standards Institute (ANSI) rules. Such a requirement would effectively limit DOE to using only the National Association of Home Builders (NAHB) and Green Globes building standards.The amendment would disallow the use of many other strong rating systems, including LEED, EPA Energy Star Portfolio Manager, and EPA Energy Star Homes, which have substantially increased the number of environmentally-friendly buildings in our country.
 

In other news, Rep. Charles J. Fleischmann [R-TN-3] introduced a bill yesterday in the House H.R.3441 to repeal the Department of Energy's home weatherization assistance program.  The DOE weatherization assistance program provides funding to states to weatherize the homes of low income households to make them more energy efficient.  According to the WAP website:

During the past 33 years, WAP has provided weatherization services to more than 6.4 million low-income households. Families receiving weatherization services see their annual energy bills reduced by an average of about $437, depending on fuel prices.  

According to a recent release from the National Association for State Community Services Programs, the WAP received $5b in funding from ARRA, which weatherized 534,208 low-income houses through August 2011. This made the WAP seventh out of approximately 200 federal programs funded by American Recovery and Reinvestment Act (Recovery Act) in jobs created or retained, with 14,090 jobs  for the third quarter beginning July 1 and ending September 30, 2011.

The bill is not yet available from the GPO, but it can be followed on Thomas through this link. 

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As I mentioned in a previous post, I led a study this summer analyzing the legal policy and process factors impacting commercial building energy efficiency in Pennsylvania and New Jersey.  The study was commissioned by the Department of Energy-led Greater Philadelphia Innovation Cluster for Energy Efficient Buildings (GPIC). The results of the study and a presentation I gave on the findings are now available through the GPIC site. 

The purpose of the study was to identify the most significant policy and legal-related process factors effecting energy efficiency (“EE”) in commercial buildings in the Greater Philadelphia area. The research focused on policy areas such as the structure of government, specific laws and regulations, government funded or mandated incentives and other financing mechanisms. Processes included legal-related factors impacting EE transactions, such as contracts, leases, public bidding requirements, and accounting standards.

The study revealed that between Pennsylvania and New Jersey, the state and local governments have implemented almost all of the policy levers that advocates have called for to increase EE. For example, both Pennsylvania and New Jersey have up-to-date building and energy codes. The states have invested hundreds of millions of dollars collected from utility ratepayers in EE incentive programs. New Jersey has experimented with alternative rate structures for utilities. Therefore, the primary recommendation of this study is to conduct further legal and market research to compare the effectiveness of the New Jersey and Pennsylvania regulatory initiatives designed to address the efficiency gap, including the incentive and ratemaking efforts.

Although many policies are in place to promote EE, direct and indirect barriers still exist. For example, until August 2011, New Jersey did not allow sub-metering of multi-family residential buildings, creating a direct barrier to energy management. The indirect barriers are numerous, and include even the structure of government itself. For example, the multitude of governing bodies and the often inconsistent policy goals of each result in a fragmented and sometimes contradictory set of policies regarding EE.

Finally, the study found that market processes necessary for smooth transactions and full valuation of EE construction are immature, increasing transaction costs and making EE investments less valuable. For example, appraisers of EE buildings frequently ignore or undervalue EE upgrades. As a result, owners may not recoup their investment at the sale of the property, or their cost to borrow against their assets may be compromised.
 

 I welcome feedback from the GBLB community on the findings. 

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As we all learned in kindergarten, every snowflake is unique.  Now, studies have shown that is not entirely true (see here if you are marginally interested in the science of snowflakes), but close enough. 

Uniqueness may be good for snowflakes, but lousy for financial transactions. At least part of the problem in harnessing private capital to fund energy efficiency projects is the lack of standardization across projects.   Major financial institutions need big pipelines of medium- to large- deals to make the sector worthwhile.  If each transaction is significantly different, it means that underwriting standards, loan documents, due diligence and so forth have to be created from scratch for each transaction.

The solution to the snowflake problem is to standardize the transactions.  It is very tricky with energy efficiency, because each building has different features--age, system types, use, occupants, etc.  Therefore, the technology needed to create the efficiencies also differ. 

To break through the logjam, someone needs to develop one or more reliable algorithms that can be used to evaluate projects quickly, while still respecting the unique features of different projects.  Transactions could be structured around the standardized model, and then tweaked for the particulars of the transaction.  Without a reliable and replicable structure for financing energy efficiency deals, financing will always be limited and expensive.   

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On September 29, 2011, the Appraisal Institute issued a Green/Energy Efficiency Addendum to its standard Fannie Mae Form 1004.  The form has sections for including energy efficient appliances, water savings, energy audit results, energy bills and more.  It can be downloaded here. 

According to the release by the Appraisal Institute, Form 1004 is "the appraisal industry’s most widely used form for mortgage lending purposes. Used by Fannie Mae, Freddie Mac and the Federal Housing Administration, Form 1004 is completed by appraisers to uphold safe and sound lending. Currently, the contributory value of a home’s green features is rarely part of the equation.

One notable omission is a specific reference to LEED certification.  It includes Energy Star, but not LEED, although there is space for listing "other"  certification. 

This kind of standard form for valuing green features gives specific guidance for appraisers on what to look for and include in the audit.  How the information translates into valuation remains to be seen, but it is an excellent step in the right direction.

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My loyal readers may have been surprised (or relieved) by my hiatus from publishing.  I was not idle, however.  I led a study on Energy Efficiency Policy in New Jersey and Pennsylvania on behalf of the Department of Energy-funded Greater Philadelphia Innovation Cluster for Energy Efficient Buildings.  I completed the work last week, and it will be released soon. 

I have also been advising New Jersey Governor Chris Christie on developing the 2011 Energy Master Plan for New Jersey.  The draft plan is available here.  The findings of the eight-person work group on clean energy will be made public shortly, and public hearing is being held on October 21 from 9:30-12:30 at the Rutgers Eco-Complex.  Details are available here. 

My public sector work has given me some new insights into green building and energy efficiency policy, which will be developed in further posts over the next few months. 

Among the most interesting findings is the difficulty in crafting public policy initiatives to break through the “efficiency gap”—the gap between a customer’s actual investments in energy efficiency and those that appear to be in the consumer’s best interest.

Most policy efforts are aimed at eliminating the "first cost" barrier to energy efficiency.  In other words, providing grants or loans to minimize the upfront investment required for energy efficient systems.  

Making these programs work to achieve scale and realize significant energy savings has proven devilishly difficult.    With the influx of ARRA funds, state and local jurisdictions have invested $650 million in loan programs for energy efficiency projects, with loans generally provided to customers at low- or zero- interest rates. 

The author of a May 2010 nationwide study of state, utility and municipal loan programs by the National Renewable Energy Laboratory concluded:

Despite the advantages of state, utility and municipal loan programs, participation to date has been modest, and they appear to be incapable of driving a large scale transition to a clean energy future by themselves.

A study just released in September, 2011 by the ACEEE which reviewed 24 financing programs nationwide concluded that participation rates were generally low across programs, and do not generally track energy savings.  The report concluded:

While several programs have many years of experience and have issued thousands of loans, this market has yet to come to scale. 

So, it is clear that transforming the energy efficiency environment will require more than providing low cost capital from government sources for at least two reasons.  First, because government capital and capital deployment mechanisms are not robust enough to create scale, and second, because the barriers to energy efficiency are not merely financial.  Psychological barriers, cultural barriers, resource barriers and technical barriers also play important roles.  [This report nicely summarizes the various barriers to energy efficiency investment by sector.]

From my research, policymakers must focus on better stimulating private capital deployment and integrating financing with tools to address other barriers to energy efficiency. Understanding consumer motivation, providing resources to address the less concrete barriers to energy efficiency, and partnering with private capital sources to bring financing to scale  should be the goals of energy efficiency policies going forward.

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For several years, property owners have become increasingly aware of the potential for energy efficient buildings to decrease operating costs, improve occupancy, and demand higher rental prices.

Theoretically, all of the benefits of energy efficient buildings should yield a higher property values for green buildings and lower values for non-energy efficient buildings.  However, real estate appraisers often fail to properly value the energy efficiency features, meaning that the building will be appraised for the same value as another building without the investment in energy efficient systems, features, etc.   

 If energy efficient properties are appraised below their actual value, it can lead to a reduced resale value, lower rents, and poorer financing options than the owner would realize if the appraisal took into account the value of the property’s green attributes.

On August 8, 2011, the Department of Energy issued a "Request for Information" seeking input from stakeholders on a "Commercial Building Asset Rating Program"--let's call it "Highrise Star."  The goal of Highrise Star is to create an Energy Star-like system for commercial buildings.  The program would establish common inputs for calculating energy efficiency, select a modeling tool to evaluate the inputs for individual buildings and output a rating with which to compare the energy efficiency of different buildings.

The goal of the new program is primarily to address the issue of valuing energy efficiency (it does not address other green features like water usage, etc.) discussed above by providing a common metric for comparing the energy efficiency of commercial properties, and providing a reliable and common system for evaluating commercial building energy efficiency. 

The devil is in the details, of course.  The RFI proposes several different models for valuing energy, evaluating energy efficiency, and conveying the information.  If the DOE program is created, the commerical real estate community could soon be using a 100 point scale, like LEED, or a star system like the Energy Guide labels on appliances.  The robustness of the inputs and the energy model is critical to accurately evaluating building energy use, the simplicity of the input system will determine whether commercial building owners will use it to rate their facilities, and the representation of the "score" will determine whether users will actually understand and act on the information.

Many will ask "Where does this leave LEED?"  The proposed commercial building program is much less ambitious than LEED, in that it focuses exclusively on energy use. However, if every building has a "[High]rise Star," commercial building owners may be less likely to seek LEED to verify the green-ness of the facility.  Since Highrise Star will be free, the incentive to invest in LEED may be significantly reduced.  The ultimate test will be one of reliability--if Highrise Star is seen as robust, reliable and easy to use, LEED will have its work cut out for it to compete.  If it is viewed as too "easy" to achieve high marks for energy efficiency or if the interface is too cumbersome, then LEED will not be so directly effected.   

In any event, since government programs are often VERY slow to be developed, it may be a while before [High]rise Star comes on line.

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Yesterday, Judge Sands dismissed Henry Gifford's suit against the USGBC.  A copy of the Order is available here.  In a major win for the USGBC, Judge Sands dismissed Gifford, et al's Federal claims with prejudice, which means they cannot be brought again, Because the Federal claims were dismissed, the Judge also dismissed Gifford, et al's state claims for lack of jurisdiction. 

Particularly gratifying for me is that Judge Sands dismissed the case for exactly the reason I anticipated in my prior posts on the case that the plaintiff in this case lacked standing to bring the case.  The posts are available here and here.

In summary:

To the best of my research, Mr. Gifford is not a LEED AP, and indeed, from his website and publications, he has outspokenly denounced the USGBC and LEED.  Mr. Gifford does not appear to own any property certified LEED.  In short--the USGBC's actions have not harmed him or his career, if anything, has been enhanced by the USGBC's position.

Similarly Judge Sands held:

With the exception of Gifford,  each Plaintiff designs and consults on specific elements of individual buildings, including heating and cooling systems, moisture and mold remediation, and architectural design. Plaintiffs do not allege that LEED certified buildings do not require such services or that those services must be provided by a LEED-accredited professional in order to attain certification. Because there is no requirement that a builder hire LEED-accredited professionals at any level, let alone every level, to attain LEED certification, it is not plausible that each customer who opts for LEED certification is a customer lost to Plaintiffs.

With respect to Gifford's Lanham Act "False Advertising" claim, I wrote:

In alleging a violation of the Lanham Act, the Federal act prohibiting false advertising, the Amended Complaint states: USGBC's misrepresentations have an will continue to deceive consumers, voters, taxpayers, developers, municipalities and legislators at the local, state and federal levels. However, fraud requires "reasonable reliance" on the false statements. The difficulty here is that, although more plaintiffs have been added, they are still not plaintiffs that were "duped" by the USGBC's representations. Judge Sands concluded that the USGBC and Gifford, et al are not competitors:

 Judge Sands similarly held that Gifford, et al cannot prove reliance:

Even if Plaintiffs were to amend the [First Amended Complaint]  to include the proffered allegation that a single developer, Steve Bluestone, chose a LEED certified consultant rather than Gifford, Plaintiffs would not establish the required causal nexus: that Bluestone did so in reliance on the alleged false statement contained in a 2008 press release.

This order may not be the end of the Gifford v. USGBC story.  Gifford may appeal, and he retains the opportunity to file his state claims in New York state court.  Moreover, since the Judge did not resolve the merits of the claims, the debate over whether LEED buildings save energy is likely to rage on.

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Utilities are often dismissed or ignored in most discussions of energy efficiency and green building  I find this quite remarkable.  First, many state laws mandate that utilities engage in energy efficiency efforts.  Second, as utilities are directly connected to the energy consumer, utilities are often n the best place to advocate for energy efficiency and deliver energy efficiency programs.

The problem is that utilities are not usually incentivized, and are often disincentivized, from promoting energy effiiciency.  Historically, utilities have made money by selling electricity or natural gas, and recovering a return on their sales and investment in infrastructure from ratepayers.  The trouble with this scenario is that it does little to incentivize utilities to promote energy efficiency.  If the utility promotes conservation, thus selling less energy and reducing investment in infrastructure, they will make less money.   

Some energy efficiency advocates are beginning to promote different utility rate structures which pay the utilities for the lost revenue attributable to energy efficiency, so that the utilities are made whole for thheir investment. An article on energy efficient rate making is available here.

These new rate structures are not without their challenges.  For example, the Public Regulation Commission of New Mexico put in place a rate scheme which allowed utilities to collect one cent for each kilowatt hour of electricity that was saved through energy efficiency programs.  The average increase on a residential customer was 17 cents a month. 

On August 3, the New Mexico Supreme Court struck down the surcharge, holding:

The PRC did not inquire into any of the utilities’ revenue requirements, nor any of
the traditional elements of the ratemaking process. At the evidentiary hearing, the utilities merely presented evidence on what the impact of [the surcharge] would be. Without inquiring into a utility’s revenue requirements, we fail to see how the PRC could adequately balance the investors’ interests against the ratepayers’ interests when adopting [the surcharge]. The PRC’s adoption of the adder rates was arbitrary and unlawful in that they were not evidence based, cost-based, nor utility specific.

The full opinion is available here.

Energy efficiency advocates seeking to use utility ratemaking as a mechanism for promoting energy efficiency must pay careful attention to ratemaking regulations, and realize that attempts to change the historical rate structures will face opposition from many sides, including consumer advocates.   

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Contributions to this post were made by Nadia Washlick, a Cozen O'Connor intern.

One of the most under-discussed and under-valued aspects of green building law is regulatory enforcement.  Most of the discussion among experts, myself included, tends to analyze new laws and new incentives as they develop.  Frequently, these new legislative and regulatory initiatives pay little attention to the implementation and enforcement requirements that are required for realizing the energy efficiency and environmental benefits the regulations were intended to foster. 

New York's Greener, Greater Buildings Plan compliments its sweeping new regulatory initiatives with recognition of and attention to code compliance and enforcement.

Released in 2007 and designed by Mayor Bloomberg, PlaNYC has brought together over twenty-five city agencies to collectively equip the city for one million more residents, bolster the economy, fight climate change, and enhance the quality of life for all city residents.  Most importantly, these agencies are working hard to enforce the regulatory changes necessary to achieve these goals. 

The City Counsel believes that focusing on buildings will help achieve most of these broad citywide goals as buildings account for almost 80% of greenhouse gas emissions, 94% of electricity use, and 85% of potable water consumption. In December of 2009, the City Council passed four laws known as The Greener, Greater Buildings Plan (GGBP). Collectively, these laws require energy efficiency upgrades and energy transparency in large existing buildings, including annual benchmarking, energy audits, retro-commissioning, lighting upgrades, and sub-metering of commercial tenant space.  The City Council believes that these laws will reduce GHG emissions by at least five percent citywide by 2030. In addition, GGBP will save New Yorkers more than $750 million per year in energy costs and create around 18,000 construction-related jobs, thus helping to bolster the economy. 

Needless to say, PlaNYC is attempting to transform the construction industry in New York City. This daunting task requires developing new regulatory procedures, defining new terms, and codifying these procedures. The New York City Green Codes Task Force, led by Urban Green Council, was established to develop new regulations, amend current laws, and provide new rules for enforcement. The task force consists of more than 200 experts in design and construction and has the duty of developing rules to enforce these new laws.  It has already developed over a hundred proposals to modify City codes and regulations that impact buildings or hinder green building practices, twenty-two of which have since been adopted.   Furthermore, the task force now requires progress inspections during the construction period, as well as energy analyses and drawings from engineers and architects before construction begins to prove the designs meet current energy code requirements. The task force aims to achieve 90% energy code compliance by 2017 through both stringent enforcement and energy code training for designers.

New York City was recently ranked number seven on a list of the nation’s top ten most “climate ready” cities. In coming years, the city’s ranking is likely to rise as PlaNYC comes into effect. With such rigorous enforcement, it is no wonder why PlaNYC has been deemed “the most comprehensive set of efficiency laws in the nation.” If successful, the plan will surely be a blueprint for other cities hoping to achieve climate readiness. 

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Yesterday, the City of Kansas and the County of Wyndotte sued the General Services Administration for moving the EPA Region 7 headquarters from an older LEED building in the Kansas City central business district to a former Applebee's headquarters in Lenexa, Kansas. The complaint is available here.

This is a fascinating suit in that it highlights the paradox of a green building on an unsustainable site. Lenexa can only be described as a typical midwestern sprawling suburb, and the proposed new EPA headquarters is in an office park.  A Google earth map of Lenexa is available here and the proposed building is available here. 

The lawsuit alleges that the GSA violated two executive orders mandating that Federal facilities be sustainable and located in urban cores.

EO 12,072 requires:

Federal facilities and Federal use of space in urban areas shall serve to strengthen the Nation’s cities and to make them attractive places to live and work” and mandates that such Federal space “shall conserve existing urban resources and encourage the development and redevelopment of cities.

and Executive Order 13,514 which mandates, among other things, that

the head of each Federal agency to “advance regional and local integrated planning by . . . (iii) ensuring that planning for new Federal facilities or new leases includes consideration of sites that are pedestrian friendly, near existing employment centers, and accessible to public transit, and emphasizes existing central cities. . . ."

The GSA defends its decision to move from a green building in the central business district to a suburban office park on two grounds--it is cheap and it is green: 

GSA spokeswoman Angela Brees said she could not comment on the lawsuit, but reasserted the agency's claim that the Lenexa building was the cheapest available, even when considering the cost of moving to a new office. [The building] also scored highest on technical criteria that include sustainability and design, she said. The owners of the building, which has been given a Silver rating by the U.S. Green Building Council's Leadership in Energy and Environmental Design program, have vowed to upgrade it to meet LEED Gold standards and get a Platinum rating for operations and maintenance by the time employees arrive.

Putting aside the environmental implications, I would argue (and the Complaint alludes to it as well) that the Lenaxa decision does not hold up on a purely economic basis, let alone an environmental one.   The new site is located outside of the central business district, and has little access to transit.  This means that every time an EPA employee has to go to a  meeting, the courthouse and to other businesses in the course of their official duties, they must do so by car.  

Currently, the Federal government reimburses private vehicle travel at $.51 per mile.  Previously, the distance from the EPA headquarters to the Kansas City Federal Courthouse was .6 miles.  The distance from the Lenaxa facilitiy to the Federal courthouse is 21 miles.

According to the New York Times, the Applebee's HQ rent is more than the current rent.  On top of that, based on the above calculation, the taxpayer will be paying a $20 surcharge for every trip of an EPA Region 7 lawyer, paralegal, witness to the courthouse.  Of course, it will also mean the same $20 surcharge for any other trip of any Region 7 employee travelling to the Kansas City CBD on official business. 

Utilmately, it appears that this will not be a green decision, in either sense of the word.

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Recently, there has been some momentum behind energy efficiency legislation, both in the House and the Senate.  There is the Shaheen-Portman ESICA bill, an energy efficiency only bill; Conrad's FUEL Act, a broader energy bill; Lugar is prepping an energy bill that incorporates strong energy efficiency language; and now a bill reviving PACE is being prepped in the House.

PACE, Property Assessed Clean Energy, allows the upfront costs of property owners’ clean energy and energy efficiency projects to be financed by local governments, and paid back by homeowners as an increase in  their property taxes. 

The concept behind the PACE program is that the energy savings from energy efficiency and clean energy projects would outstrip the costs over time, but that the upfront costs were a barrier to many people in implementing the badly needed changes. 

Several municipalities and states had implemented these programs, and it sounded like such a good idea that $150 million in the ARRA was dedicated to support them.  Unfortunately, in mid-2010 the Federal Housing Finance Agency, which regulates government sponsored mortgage buyers Fannie Mae and Freddie Mac, and the Office of the Comptroller of the Currency, which regulates national banks stopped the PACE programs in their tracks by refusing to issue mortgages that had a PACE loan in first priority. Go here for the full story. 

Now, there is draft legislation being sponsored by Representatives Hayworth (R-NY19), Thompson (D-CA1) and Lungren (R-CA3) to restructure PACE and allow it to move forward.  According to supporters of the Bill, it is due to be dropped in the House next week before the summer recess.  A draft of the proposed bill and more information is available here.

The PACE bill requires Fannie, Freddie and the other banking regulators not to "greenline" PACE properties by restricting lending or requiring higher underwriting standards.

To assuage the concerns of the banking regulators, the PACE bill:

• Requires homeowners to have at least 15% equity in the home
• Puts a cap of 10% of the value of the home on the PACE assessment
• Requires the homeowner to have a solid history of tax payment
• Requires an energy audit to ensure cost effective energy efficiency projects are undertaken
• Requires that there be no liens, bankruptcy, defaults, etc.
• Prohibits the PACE loan from being accelerated at foreclosure

Notably, the Bill does not take away the first lien priority of the PACE, but only requires payment of the delinquent PACE payments upon foreclosure, not the entire debt.

Notably, the Shaheen-Portman ESICA Act also incorporates PACE-enabling language at Section 202, although it is in the context of credit support for PACE bonds, which does not necessarily solve the PACE lien problem. 

Fannie and Freddie have gotten so far out ahead of this issue, the agencies probably could not dial back their objections if they wanted to at this point.  Only legislation will override their "veto" of residential PACE at this point.   

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One of the bitter complaints about energy management and energy efficiency has been the lack of standardization in energy benchmarking, management, measurement and verificiation.  Policymakers don't like it because it is difficult to verify compliance, consumers can't trust the information they receive and financiers don't like it because they cannot forecast the risk associated with investment.  This lack of standardization has been cited over and over again.  According to a World Economic Forum analysis for accelerating energy efficiency:

Despite differing views of the market, all stakeholder groups acknowledge the gap between opportunity and implementation, recognizing that a standardized method of measurement, verification and enforcement would help create market transparency, a more stable environment and an upscaling of investments. This should be considered of high priority going forward.

A new tool for industry and regulators alike was issued last week.  The International Standards Organization launched ISO Standard 50001 for energy management.  Unlike LEED or Energy Stat, the ISO standard does not set energy targets or how to comply, but rather provides a standardized framework for planning, measuring, verifying and improving energy performance. 

Pilots of the ISO 50001standard demonstrated  cost and energy savings in large and small businesses:

 One of them was a plant owned by a major company, Dow Chemicals. The plant reduced its use of energy by 17.9 % over two years. At the same time, ISO 50001 principles are also successfully implemented by small businesses as shown by the experience of the other plant, CCP, of Houston, Texas, employing 36 people. In two years, it achieved energy savings of 14.9 %, worth USD 250 000 a year with zero capital investment.

Why does it matter?  According to the ISO, Up to the end of December 2009, at least 223,149 ISO 14001:2004 (environmental management standard) certificates had been issued in 159 countries and economies.  ISO 50001 is designed to work with the other ISO management system standards, including ISO 9001 (quality management) and ISO 14001 (environmental management).  In addition, in at least several studies, ISO 14001 has been statistically correlated with significant positive market reaction, increasing the value of the companies that implement it. 

In theory, new regulations could be based on energy performance measured and verified using the ISO 50001 standard.  Financial institutions could have greater security if energy savings, verification and management were based on  the ISO 50001 procedures.  If you can't measure it, you can't manage it...and you can't regulate it and you can't finance it!

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