White Paper: Property Assessed Clean Energy (PACE) for Jamaica

This Policy Paper recommends the adoption of a Property Assessed Clean Energy (PACE) programme in Jamaica. Such programmes play the primary role of eliminating the intimidating upfront cost of clean energy installations such as solar power, wind turbines and water conservation devices. It eliminates those costs by loan financing, which is uniquely attached to land rather than an individual, so that homeowners may benefit fully from their investment, even if they sell their property soon after installation.

PACE facilitates the growth of clean energy at a household and commercial level, allowing a country to lower its carbon footprint while growing investment in one of the world’s most promising new sectors. In lowering its own greenhouse gas emissions, Jamaica stands to benefit by taking yet another step towards fulfilling its Paris Climate Accord and Vision 2030 obligations, while joining the world’s largest powers in facilitating the growth of the industry of renewable energy.

Simply, a PACE programme would benefit Jamaica’s physical, environmental and financial health. No monumental amendments would need to be made to claim these benefits. The main necessities would be express adjustments to the Property Tax Act, the Tax Collection Act, and the Land Valuation Act to recognise the unique requirements of a PACE programme, including:

a.    A lien which takes priority over other charges on property;

b.    A property tax assessment which takes into consideration the improved value of the land;

c.    Notice to other right-holders on property if the property is to be sold.

PART 1: INTRODUCTION TO PACE PROGRAMMES

WHAT IS PROPERTY ASSESSED CLEAN ENERGY (PACE)?

Property Assessed Clean Energy is a method by which Governments encourage the growth of energy efficiency and renewable energy installations to property. It takes the form a loan attached to the property on which the installations are made. The loan is repaid by assessment of property taxes on the property at a higher rate for the period of loan repayment. That higher rate takes account of the added value to the property and is paid by whoever owns the land, rather than following the individual who initially took the loan. The loan, therefore, runs with the land rather than the individual.

WHAT IS THE PURPOSE OF PACE PROGRAMMES?

The main purpose of PACE programmes is to fund clean energy improvements to private property, thereby reducing a country’s carbon footprint and contribution to climate change. However, PACE programmes also carry the corollary purpose of increasing investment in clean energy both at a customer and retailer level, since it eliminates inhibitory up-front payments for the customer thereby increasing the number of individuals willing to purchase energy efficient equipment. The duration of a PACE loan can be also extended up to 30 years allowing for lower monthly payments for borrowers.

WHERE HAVE PACE PROGRAMMES BEEN IMPLEMENTED?

PACE programmes have been implemented in 31 US states, and Washington DC.[1]Similar programmes have also been implemented or are currently under development in South Africa, France, Australia, Canada and Germany.[2]

PART 2: BENEFITS OF PACE PROGRAMMES

BENEFITS SEEN IN IMPLEMENTED PACE PROGRAMMES

1.    Growth of solar power installations

Studies have shown that in California counties, PACE programmes have increased the purchase of solar power installations in households. A study published in the Elsevier Journal of Applied Energy found that Sonoma County in California had shown that in the first year of PACE implementation residential solar installations increased by 45%, while the yearly impact raises to 82% in the 2009–2010 period, before slightly decreasing to 76% in the 2011–2012.[3]

2.    Maintenance of higher residential house values

Studies have shown that the installation of clean energy systems have contributed to homes maintaining their market value for longer periods than those without. The abovementioned study found that Sonoma’s house-price growth rates decreased much less (45 percentage points) than in other neighbouring countries (69 percentage points on average) or in the whole California.[4]

3.    Heightened investment in clean energy

Removal of financial barriers to attaining clean energy is thought to lead to significant investment by customers in clean energy, which makes the industry more profitable. A study by the United States-based Lawrence Berkeley National Laboratory, relying on market data provided by PACENation,[5] found that California residential PACE programs funded $1.8 billion in clean energy improvements between 2010 and 2015 (See Appendix A).[6] While less investment has been seen in commercial PACE projects in the US, this has been primarily because early iterations of PACE legislation did not include notice to commercial mortgage providers and a US constitutional requirement for a statement of the primary purpose of legislation. These deficiencies have been subsequently addressed in most US legislation and commercial PACE has been expanding rapidly.

Graphic of commercial PACE (C-PACE) projects in the US (Source: US Department of Energy, using data from PACENation)[7]

4.    Lower carbon emissions

No studies have yet been done on the impact of PACE programmes on carbon emissions. It should be noted that PACE programmes are seen by the US government as merely one tool in an arsenal which could not by itself achieve clean energy goals, though it estimated that such programmes could reduce greenhouse gas by 110 megatons per year.[8]

POTENTIAL BENEFITS TO JAMAICA

In addition to the aforementioned benefits, the following are effects from which Jamaica stands to benefit from the implementation of a PACE programme:

1.    Compliance with commitments under the Paris Climate Accord

Jamaica is a signatory to the Paris Climate Accord[9], which was ratified on April 10 2017.[10] Under the agreement Jamaica committed to implementing programmes which would lower the island’s carbon emissions by 0.04%.

2.    Achievement of Goal 4, and Outcomes 13 & 15 of Vision 2030[11]

Goal 4 of Jamaica’s Vision 2030 seeks to ensure Jamaica has a healthy natural environment by achieving outcomes 13 and 15 of sustainable management and use of natural resources and sustainable urban and rural development. PACE could go far in ensuring that citizens and companies are not dissuaded from taking actions which achieve those ends.

3.    Growth of energy industry and job creation

The International Renewable Energy Agency (IRENA) found in its 2017 review that the global renewable energy sector employed 9.8 million people in 2016 – a 1.1% increase over 2015. Jobs in renewables, excluding large hydropower, increased by 2.8% to reach 8.3 million in 2016.[12]  It found that continued mechanisation, and growth of various clean energy industries were the motivators behind such growths which keep the industry as one of the fastest growing job creation industries in the world.

4.    Improve financial inclusion

In addition to the benefits apparent to consumers and the government, PACE financing presents several advantages for banking professionals and mortgage companies in keeping with the National Financial Inclusion Strategy.[13]  First, repayments can be amortized through the useful life of the projects (up to 20 years) which means increased cash flow to the property owner, increased net operating income, and ability to repay existing mortgage or other expenses. Secondly, improvements to buildings save on operating costs, which increases the Debt Service Coverage Ratio. Finally, renewable energy upgrades increase the resale value of property and therefore the existing collateral value.[14]

PART 3: LEGISLATIVE FRAMEWORK IN SELECT COUNTRIES WITH PACE

UNITED STATES

The following is the general format of PACE-enabling legislation in the United States[15]:

1.    Statement of public purpose of legislation, i.e. energy conservation

-          The United States does this to satisfy the second prong of a three-prong test which the United States Supreme Court uses to determine whether a piece of legislation has abrogated the rule that no state shall pass any law that impairs the obligation of contracts. The second prong requires a legitimate public purpose for any impairment of such an obligation.[16] Jamaica has no such similar Constitutional requirement.

2.    Authorisation of local government to establish a PACE program

-          Such provision is unlikely to be necessary or prudent in Jamaica since laws are not delegated based on state autonomy, but Jamaica’s law-making functions reside solely with the singular Parliament.

3.    Allowance of programs to be administered by third-party providers

-          Jamaica does not often utilise such systems, however, a public-private partnership similar to the Economic Programme Oversight Committee (EPOC), could be useful in administering a PACE programme in Jamaica and garnering commercial confidence in the new programme.

4.    Broad definition of improvements which qualify under clean energy purpose

-          A good example of a definition may be found in the PACE-enabling legislation in Texas known as the Property Assessed Clean Energy Act.[17] That legislation allows a “qualified improvement” to mean “a permanent improvement fixed to real property and intended to decrease water or energy consumption or demand, including a product, device, or interacting group of products or devices on the customer's side of the meter that uses energy technology to generate electricity, provide thermal energy, or regulate temperature.”

-          Such a definition is wide enough to apply all major clean energy devices, while making sure that the property value itself is affected by ensuring that the devices must be permanently affixed to the property.

5.    Establishment of mechanism for the government to provide or arrange funding of PACE programs

-          Methods of funding separate from those taken from the public purse generally rely of the US’ unique financial system and therefore would not be of much use to Jamaica, however a graphic of different methods and their benefits is seen below.

-          The only unique funding mechanism that may be of use to Jamaica is provision for funds to be provided by a third-party in return for the contractual right to receive assessment payments

6.    Empowering of government to impose a PACE charge that should be expressly stated to create a lien that is superior to mortgage rights, and:

a.    Is collected in the same manner as property taxes,

b.    Runs with the property.

7.    Allowance of funds provided to property owners to include all costs associated with clean energy installations including application fees

-          It should be noted that the US set out their ideal PACE application process from start to finish from pages 10-11 of the earlier cited 2010 White Paper.[18]

8.    Qualification requirements including:

-          Proof of ownership and ability to pay

-          Currency on payment of property taxes

-          Currency on payment of any mortgage which may be attached to the land

9.    Notice requirements before PACE funding is granted

-          Notice should advisably be required to be given to mortgagees to avoid lawsuits[19] which have affected PACE programs in the US. Lawsuits and concerns have centred on whether a mortgagee is rightfully entitled to payment before local councils which hold a tax lien over the property due to PACE financing. However, this argument only has valid grounds due to: a) failure to mandate that the tax lien has superiority over mortgagors, b) the requirement that no state shall pass any law that impairs the obligation of contracts, and c) agreements which specifically require homeowners to prepay assessments upon sale.[20]

AUSTRALIA

Australia refers to a system which facilitates PACE-like arrangements as building upgrade finance, as it also includes and finances upgrades in areas outside of clean energy.

Australia’s legislative arrangement takes the form of regulations made under the Local Government Act and facilitates a third-party financier being repaid by assessed charges, as shown in the graphic below.

Source: Australian Government Building Upgrade Agreement template

The legislative framework includes the following unique elements:

1.    Broad definition of “environmental upgrade works” as meaning:

-          works that improve the energy, water or environmental efficiency or sustainability of a building

2.    The power for the Minister to require for reports of the environmental performance of the building, including:

a.    any improvements in the environmental performance of the building relating to the efficiency or consumption of energy or water; and

b.    any other improvements in the environmental performance of the building resulting from the environmental upgrade works; and

c.    any cost savings resulting from the environmental upgrade works; and

d.    the environmental performance rating (if any) given by an accredited body designated by the Minister,

3.    The power of the local council to sell the land for non-payment of building upgrade charges

-          The Building Upgrade Agreement[21] to be concluded prior to the provision of financing allows for the local council as a party and this statutory provision allows for the sale of land for failure to pay.

-          It should be noted that if the system of homogeneity with property taxes is adopted as suggested, this would not be necessary in Jamaica as under section 46A of the Tax Collection Act,[22] the Commissioner General may already apply to the Supreme Court for an order of sale of land for which property tax has been in arrears for four consecutive financial years.

Other legislative provisions are unique to Australia’s circumstances.

CANADA

Canada, by 2013 amendment to its Local Improvement Charge Regulations,[23]launched the Home Energy Loan Program (HELP) which incorporates several PACE ideas. The legislation is similar to Australia’s as it allows for the imposition of an entirely new land charge, rather than simply adjusting property tax rates. The system requires voluntary application to HELP, after which the City and the homeowner would conclude an agreement.[24] The local council will then impose a Local Improvement Charge (LIC) equal to the cost of the improvements, plus interest and an administrative charge incurred by the City. That LIC appears as a surcharge on the property tax bill of the ratepayer.

Unique features include:

1.    Neutral definition of “works” which may qualify for improvement

-          Works include, however, “constructing energy efficiency works or renewable energy works.”[25]

2.    Requirement for assessment of costs before special charge is imposed

-          Before imposing a new land tax, the City of Toronto requires at Regulation 22 that the engineer and the treasurer of the City shall prepare and certify a statement showing the actual cost of the work.

3.    Requirement that the agreement between the City and the owners include:

a.     the estimated cost of the work;

b.    the estimated lifetime of the work;

c.    a description of the apportionment method and the amount of the special charges for the lots to be specially charged;

d.    without limiting clause (c), the manner in which a cost overrun or under run is to be dealt with, if the actual cost of work differs from the estimated cost of the work; and

e.    when the special charges for the lots are to be paid.

-          The above subsection (e) allows for greater flexibility in the time for which the special charge will last on the land. Generally, PACE agreements/legislation stipulate a period between 5 and 30 years.

Other features are specific to Canadian circumstances.

PART 4: JAMAICAN LEGISLATIVE FRAMEWORK AND REQUIRED AMENDMENTS

NEW PACE ACT

The implementation of PACE in Jamaica can be achieved by amendments to existing legislation through a new PACE Act which:

a.    establishes a method for application for PACE status;

b.    expressly recognises that a PACE lien has superiority over mortgages and other liens;

c.    allows for third-party financiers or a public-private partnership;

d.    requires that notice of a PACE lien or pending sale be given to other mortgagee/s or lien holder/s; and

e.    incorporates the basic elements of the US framework for PACE.

Amendments to existing legislation would include the following:

PROPERTY TAX ACT[26]

SECTION 2(2)

Section 2(2) of the Act allows the Minister to amend the First Schedule of the Act, which is what allows him/her to issue Orders that create bands on which property tax is calculated. Pursuant to an Order, effective April 1, 2017 property tax is now levied in 9 value bands, all on the unimproved value of the land.

SECTION 4

All property tax collected is required to be credited to the Parochial Revenue Fund, pursuant to section 4 of the Act.

-          If the Government intends to reuse tax funds in order to fund loans to property owners, this section would need to be amended to allow that use.

Section 4 of the Act already provides for a first charge and lien on the property until property tax is paid, however, the Parliament may wish to make this express in relation to a PACE regime.

LAND VALUATION ACT[27]

SECTION 2

The Land Valuation Act allows for Orders by the Minister for the assessment of property taxes and gives the definition of “improved value” and “improvements”.

-          The Parliament may be required to include in the definition of improvements, an express definition giving the scope and meaning of clean energy improvements.

-          To preclude against a claim of legitimate expectation that taxes would be consider on the bases on unimproved value, Parliament may wish to expressly include the power to calculate taxes on the basis of improved PACE value.

SECTION 11(2)

Section 11 provides the intervals at which new valuations may be made, and 11(2) prescribes that the Minister may require a fresh valuation for a district.

-          This section should be amended to expressly include the circumstance of fresh valuations for specific PACE lands.

SECTION 11(4)

Section 11(4) provides that no alteration to the value of land before the prescribed interval should be made unless in specific circumstances.

-          This section should be amended to expressly include the exception of PACE improvements.

TAX COLLECTION ACT

SECTION 46A

The Commissioner General may already apply to the Supreme Court for an order of sale of land for which property tax has been in arrears for four consecutive financial years.

-          Parliament may wish to consider shortening the period before which the Commissioner General may apply, in the case of arrears on PACE land so as to ensure payment of any financiers.

Further reference may be made to the Legislative Checklist at Appendix C which provides an excellent summary of inclusions for successful PACE legislation that balances the interests of Government, consumers and traditional mortgage companies.

[1] PACE Legislation, PACENation <http://pacenation.us/pace-legislation/> accessed 15 April 2018.

[2] 'It's Coming At A Rapid PACE' (Tmf-group.com, 2018) <https://www.tmf-group.com/en/news-insights/articles/2017/august/rapid-pace/> accessed 15 April 2018.

[3] Ameli N, Pisu M and Kammen DM, “Can the US Keep the PACE? A Natural Experiment in Accelerating the Growth of Solar Electricity” (2017) 191 Applied Energy 163 available at <https://gspp.berkeley.edu/assets/uploads/research/pdf/Ameli-Pisu-Kammen-PACE-Applied-Energy-2017.pdf>

[4] Supra, at 168

[5] PACENation is an organization of stakeholders which monitor PACE programmes. They were formerly known as PACENow.

[6] Deason J and Murphy S, “Assessing the PACE of California Residential Solar Deployment: Impacts of Property Assessed Clean Energy Programs on Residential Solar Photovoltaic Deployment in California”, 2010-2015 available at <http://eta-publications.lbl.gov/sites/default/files/berkeley_lab_r-pace_pv_deployment_-_final_03202018.pdf>

[7] Full document available at: https://www.energy.gov/sites/prod/files/2017/05/f34/Pace%20Comparative%20Analysis%20Webinar%202-26-15_r1%20%282%29.pdf

[8] Property Assessed Clean Energy (“PACE”) programs, White Paper 2010, p. 14, available at <http://www.pacenation.us/wp-content/uploads/2012/07/PACE-White-Paper-2010.pdf >

[9] United Nations (2016). Paris Agreement. Paris: United Nations, pp.1-27.

[10] “UN, United Nations, UN Treaties, Treaties” (United Nations) <https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXVII-7-d&chapter=27&clang=_en>  accessed April 27, 2018

[11] Integrated Vision 2030 Jamaica – National Development Plan, available at: <http://www.vision2030.gov.jm/Portals/0/NDP/Vision%202030%20Jamaica%20NDP%20Full%20No%20Cover%20(web).pdf>

[12] International Renewable Energy Agency, ‘Renewable Energy and Jobs: Annual Review 2017’, available at <http://www.irena.org/documentdownloads/publications/irena_re_jobs_annual_review_2017.pdf>

[13] National Financial Inclusion Strategy 2016-2020 Brochure, available at <http://boj.org.jm/pdf/Jamaica_NFIS_Final_Draft.pdf>

[14]Goodman, Laurie. “PACE Loans: Does Sale Value Reflect Improvements?” Journal of Structured Finance, Volume 21 Number 4 (2016), available at <http://www.iinews.com/site/pdfs/JSF_Winter_2016_PACENation.pdf>

[15] Legislative Checklist, PACENation, available at

<http://pacenation.us/wp-content/uploads/2016/09/2016.09.27-PACE-Legislative-Checklist.pdf> accessed 21 April 2018

[16] Property Assessed Clean Energy (“PACE”) programs, White Paper 2010, p. 22, available at <http://www.pacenation.us/wp-content/uploads/2012/07/PACE-White-Paper-2010.pdf >

[17] See Appendix B, available at: <http://www.statutes.legis.state.tx.us/Docs/LG/htm/LG.399.htm>

[18] Property Assessed Clean Energy (“PACE”) programs, White Paper 2010, pp. 10-11, available at <http://www.pacenation.us/wp-content/uploads/2012/07/PACE-White-Paper-2010.pdf >

[19] Gruszecki D, “MORENO VALLEY: Homebuyer Files Lawsuit over HERO-Financed Transaction” (Press Enterprise; March 5, 2015) <https://www.pe.com/2015/03/05/moreno-valley-homebuyer-files-lawsuit-over-hero-financed-transaction/> accessed April 27, 2018

[20] Gruszecki D, “INLAND: Realtors Offer Word of Warning about Solar Financing Program” (Press Enterprise; January 19, 2015) <https://www.pe.com/2015/01/19/inland-realtors-offer-word-of-warning-about-solar-financing-program/> accessed April 27, 2018

[21] A template of a building upgrade agreement can be found at: <https://www.environment.sa.gov.au/files/sharedassets/public/climate-change/buf/building-upgrade-agreement-template-gen.pdf> 

[22] The Tax Collection Act, available at <http://moj.gov.jm/sites/default/files/laws/The%20Tax%20Collection%20Act_0.pdf>

[23] O. Reg. 596/06, under City of Toronto Act, available at <https://www.ontario.ca/laws/regulation/060596>

[24] Supra, 35.2

[25] Supra, (2)(q)

[26] The Property Tax Act, available at <http://moj.gov.jm/sites/default/files/laws/The%20Property%20Tax%20Act.pdf>

[27] The Land Valuation Act, available at <http://nla.gov.jm/sites/default/files/Land%20Valuation%20Act.pdf>