Property Assessed Payments for Energy Retrofits (PAPER) Background Paper for Project Neutral Neighbourhood Summit June

9, 2012
by

Sonja Persram, B.Sc., MBA, LEED AP

An innovative municipal financing mechanism called Property Assessed Payments for Energy Retrofits (PAPER) has been gaining interest in Ontario and elsewhere because of its potential to help make homes more energy efficient and provide many benefits to society, at no net cost to the municipality. These benefits are building support from all political stripes.

With PAPER, participating owners can be responsible stewards of their homes, their wallets and the environment no matter how long they own the property.

PAPER financing runs with the property In a PAPER program homeowners would obtain upfront financing from their municipalities using an existing method called Local Improvement Charges (LICs), for renovations to improve the energy efficiency of their homes. The financing would be associated with the property (not the owner) and repaid as a temporary fee on the property tax bills of only those homeowners who opt in to the program. When the homeowner sells the house, any remaining amount owing on the PAPER financing would continue to be repaid by the new owner, who would also benefit from the improvements. Local improvement charges are currently used by many municipalities to finance infrastructure improvements that benefit homeowners like sidewalks and sewers.

A PAPER program reduces one of the major barriers to home energy retrofitting: many homeowners need upfront financing to increase their homes energy efficiency, but people who expect to move before their financing would be repaid are less likely to borrow. Toronto homeowners typically move every 8-10 years, according to Bill Johnston, immediate past President of the Toronto Real Estate Board.

How does PAPER work? PAPER financing would be for cost effective measures like insulation and air sealing. The goal would be to target a net annual savings on the homeowners energy bills by having annual savings greater than annual payments, so homeowners would save money on their energy bills. An energy evaluation would identify a package of cost effective measures for eligible homeowners, based on the anticipated energy savings and the cost of installing the measures (for example $10,000 including labour, materials, fees and pro-rated administrative costs). Collaboration among all levels of government, industry and NGOs would reduce overall program costs. Having many properties opting in within a single neighbourhood would allow cost savings from bulk-buying. Homeowner payments would be further reduced by the lower interest financing rates obtained from the municipality as well as a longer PAPER financing term such as 10-15 years instead of the usual 5-year borrowing terms.

Property Assessed Payments for Energy Retrofits Sonja Persram, B.Sc., MBA, LEED AP Background paper for Project Neutral Neighbourhood Summit June 9, 2012

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In a PAPER program, homeowners eligibility would be determined based on factors like the amount of debt they have in relation to the value of their property, and on-time payments for their mortgage and property taxes. Homeowners would participate in workshops to learn how to reduce their energy use, and to help make sure that they dont use more energy when their homes are more energy efficient. When a homeowner is approved for the energy retrofit package, everything would be turnkey. A prequalified contractor would conduct the work, and once the homeowner and energy evaluator signed off on the completed work, the contractor would be paid by the municipality. Some additional PAPER program benefits: Program design would target no net cost to municipalities. Financially responsible homeowners at all income levels could benefit from low interest rates (homeowners with the highest incomes usually obtain the lowest borrowing rates). This would provide an economic stimulus. The job creation potential would be sizeable: $1 million invested in energy efficiency produces between 14-70 jobs. And, people who are employed locally spend locally. Homeowners would be less vulnerable to rising and spiking energy prices, and money saved on energy bills could be spent elsewhere in the economy. Higher-level government budgets would benefit through avoided expenses for power generation plants, cost savings on health care1 and unemployment, and increased income tax revenues. Both homeowners and governments would contribute to achieving reductions in energy use and greenhouse gas emissions.

The PAPER program is a winner for homeowners, all levels of government, and future generations. The program makes it very easy for homeowners to do energy-saving retrofits by funding them out of energy cost savings. Homeowners get healthier, more comfortable indoor environments while saving money and reducing their impact on the environment. As energy-saving retrofits gain popularity, homeowners with more energy-efficient homes will realise a greater return upon sale of their properties. Future generations benefit by inheriting a more energy-efficient housing stock, and a healthier environment generally due to our reduction in energy usage.

Because of the many benefits of the program, I anticipate that it will be adopted by all progressive governments.

Bill Johnston, immediate past President, Toronto Real Estate Board and PAPER supporter

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1

A 2008 study by the Canadian Medical Association found that by 2031, ozone and small particulates from burning fossil fuels will have had the following total impacts in Toronto for the years from 2008-31: approximately 8.5 million people will have died prematurely, and we would have lost $26 billion in economic damages. See: Canadian Medical Association (CMA), No Breathing Room: National Illness Costs of Air Pollution (ICAP), 2008. Toronto data obtained from Jill Skinner, CMA, May 11, 2012.

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Challenges and next steps The Ontario government has just posted a notice that a regulatory change will take place to the Municipal Act and the City of Toronto Act to allow this use of Local Improvement Charges for energy retrofits. This is the result of several years research by the author with stakeholders in all levels of government, industry and NGOs; and working together with a growing number of PAPER supporters. However, there are still several actions that need to be taken: a) Provincial regulatory change: The province needs to state clearly that key features of existing LICs would also apply to the new, changed LIC for energy retrofits as requested by PAPER supporters.2 b) Council vote: If Toronto homeowners would like to use this LIC, Toronto City Council will have to approve it. Councillor Mike Layton has been involved in considering this type of LIC for the city (assisted by volunteer PAPER supporters). For it to be approved, Councillors who are of all political stripes will need to understand the possibilities for the city and for Torontonians. c) Develop a pilot: A pilot program will be needed. d) Partnering: It will be important to continue to work together. All levels of government, utilities, industry and NGOs need to collaborate so that costs are reduced for setting up this type of program and so we are not re-inventing the wheel for each municipality. This would also reduce the costs for homeowners. Examples in Existing Neighbourhoods Municipalities have a long history of using Local Improvement Charges to help cover the costs of infrastructure improvements, such as roads and sidewalks. Canadian authorization of LICs for energy retrofit purposes originated in Yukon Territory in 1998 for solar photovoltaic installations in outlying regions, and now includes other standalone renewables providing much-needed, off-grid electricity service for rural residential, small-load commercial, and other non-industrial property. Halifax Regional Municipalitys Charter was amended by the province of Nova Scotia to allow LICs for solar thermal installations which will provide substantial savings on residents utility bills. Legislation was also introduced on April 2, 2012 to allow LICs to be used throughout the province.3 19 municipalities of all sizes in Ontario have been considering this concept, including the City of Ottawa which conducted market demand research; and another 14 municipalities are interested in knowing more. Other provinces and territories have also been discussing this financing method, such as Albertas Climate Change Central which has sponsored several studies. A similar US mechanism called Property Assessed Clean Energy (PACE), which allows for both commercial and residential programs, is authorized in 28 states plus the District of Columbia. Several
2

For more information, see the document by: Bill Johnston, Peter Love, David McRobert & Sonja Persram: Request for a Review of Local Improvement Charges and Related Regulations and Legislation, Jan 11, 2012: http://www.sustainablealternatives.ca/EBR_Review_PAPER_Jan_11_2012.pdf 3 See: http://nslegislature.ca/index.php/proceedings/bills/municipal_government_act_-_bill_5.

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states created residential programs, most of which were then halted as a result of concerns expressed by the Federal Housing Finance Agency.4 A stellar residential program called Long Island Green Homes continued their program financing, completing over 800 energy efficiency retrofits to date. This initiative provided homeowners with almost twice as much annual savings on their energy bills as their annual retrofit repayments, while making their homes more affordable. There is currently a bill with 53 co-sponsors from both Republicans and Democrats in the US House of Representatives that is seeking the reinstatement of residential PACE programs.5 Commercial PACE programs have been proceeding in multiple states. Long Island Green Homes, Town of Babylon, New York State

Data courtesy of Dorian Dale, Energy Director & Sustainability Officer, Town of Babylon. Used with permission.

Image at right: http://www.greenforall.org Used with permission

Afterward, the FHFA was the focus of several lawsuits on this issue as a result of which the FHFA is now required to undergo a rulemaking process by which the public can provide comment to the FHFA on the merits of residential PACE programs and provide guidance on a rule FHFA could establish that would allow residential PACE programs to proceed with protections for all stakeholders local governments, homeowners, mortgage lenders, and Fannie Mae and Freddie Mac. See: Appendix II in the authors second report for additional analysis of the Canadian and the US situations: http://www.sustainable-alternatives.ca/PAPER_+_other_financing_options__Persram_for_DSF.pdf and also www.pacenow.org. 5 See: http://pacenow.org/blog/wp-content/uploads/2012.04.06House-Scorecard-.pdf .