Across the U.S., stricter laws around carbon emissions are continuing to be passed by cities and states. As those laws proliferate, office building owners and developers are being forced to reckon with the energy source of their properties, which in many cases, are fossil fuels that are costly, will eventually run out, and don’t align with the new regulations. As a result, renewable energy sources like wind and solar are in big demand.
New office developments are incorporating renewable energy sources into their new projects more than ever, but while the decision will eventually lead to cost savings and energy reductions, it can be expensive upfront to build out for both new and existing buildings. In addition to new rules around emissions, many companies made ESG commitments of their own around emissions reductions and energy efficiency, increasing the pressure to upgrade to renewable energy sources. Fortunately, there are tools that can help. Programs like the locally-operated C-PACE model that is being activated in more states around the country and federal tax deductions that were recently expanded to incentivize more renewable adoption are helping office owners meet their commitments while making clean energy pencil out.
Greener pastures
Renewable energy sources like solar and wind have been growing rapidly on a global scale over the last several years. Since 2015, the number of wind and solar farms has exploded, jumping from 1.7 percent of global electricity generation to 8.7 percent between 2010 and 2020, a number far higher than what experts had previously predicted. The exponential growth has mostly been attributed to the falling costs of renewable energy. For solar photovoltaic electricity, prices have fallen 85 percent since 2010, while the costs of both onshore and offshore wind electricity have been cut nearly in half. A study from the International Renewable Energy Agency (IRENA) last year found that the majority of new renewable energy sources cost less than the cheapest fossil fuels. “Today, renewables are the cheapest source of power,” said IRENA’s Director-General Francesco La Camera.
There are several financing options that are available for owners and developers looking for building out renewable energy at their properties. One way is through an Energy Performance Contract (EPC), a low-risk way of financing and delivering energy-efficient upgrades and renewable projects. An EPC is created between a client and an external organization, and the upgrades are funded through cost reductions. Income from the cost savings, or the renewable energy produced, goes toward repaying the costs of the project, including the costs of the investment. Financing renewable energy through tax credits and deductions is a popular method for many commercial and residential owners around the country. The 179D Energy Efficient Commercial Building Deduction was expanded as part of the Inflation Reduction Act of 2022, which was signed into law by President Biden over the summer. Starting in 2023, the expansion allows for more owners to use the deduction and to claim larger amounts than before.
Keeping PACE
But one of the most popular and widespread products to finance renewable energy upgrades at office buildings is through the Property Assessed Clean Energy Programs, or PACE, model. The first PACE program launched in 2007 in Berkeley, California, and has since expanded and been rolled out by more than 30 states and Washington, D.C. For commercial properties, C-PACE programs offer a financing framework that eliminates the typical barriers to paying for expensive clean energy upgrades: it erases down payments and spreads the cost over longer terms than traditional bank loans. If a property is sold, the repayment responsibility of the C-PACE financing transfers to the buyer, so owners can think in a more short-term way about recouping cost savings.
Jessica Bailey is the CEO & President at Nuveen Green Capital, an affiliate of global asset management firm Nuveen. Launched in 2015, the company lends money to commercial building owners to update their buildings with more energy-efficient equipment, build above code, and finance clean energy. The company is one of a growing number of private lenders that focus specifically on PACE lending. Much of Bailey’s firm’s work is done through PACE, the framework that her company lends through. Bailey said she’s added to her team this year and will continue to do so next year as the C-PACE program grows and her firm continues to expand C-PACE lending across the country. “We’re seeing demand for our product increase because new laws mandating building owners update to code or reduce emissions a certain percentage,” Bailey said. “We’re also seeing large portfolios of commercial real estate like Nuveen make commitments to carbon neutrality by 2040 to 2050, so they’re putting together plans to achieve it, and part of the plan necessitates upgrading and investments in buildings.”
The PACE model is not a federal program but is instead implemented at the state level once legislation is passed to activate the program. After that, cities, counties, and jurisdictions must opt-in to the financing program, and then property owners can begin to apply for funding. The first step is to work with a contractor to recommend specific upgrades, assess any upfront costs, and determine how much money owners will save as a result of the upgrades. After those steps are done, a property owner can submit their application to the administrator of the C-PACE program. Through PACE, a state is able to essentially designate clean energy as a public benefit. By doing that, building owners are able to finance upgrades in the same way they finance other public benefits like sewers, roads, and other infrastructure, by putting an assessment surcharge on their property tax bill, which is paid back in installments over time. “It definitely pencils out pretty well,” Bailey told me. The idea is that her firm is able to match the term of financing with the life term of equipment in buildings. “Our financing allows you to not pay out of pocket. As you pay back the loan over 20 to 30 years, you’re seeing energy savings with that,” she said.
More than just a cost-saving measure, programs like C-PACE are looked at as a way to add value to a property and for cities and states to meet stricter rules and regulations around emissions. Connecticut was the first state to approve a C-PACE program back in 2012, and many more states followed over the last decade, including Maine, the most recent state to adopt the model. Officials in the northeastern state have taken steps to curb its greenhouse gas emissions ever since 2019 when then-incoming Governor Janet Mills announced climate issues were a priority for her administration. By 2020, the state’s climate change plan, Maine Won’t Wait, included a goal of cutting its greenhouse gas emissions by 80 percent over the next three decades. State officials estimate that Maine’s buildings are responsible for 11 percent of the state’s emissions and are looking to tools like C-PACE to help meet the ambitious emissions reduction goal.
While growing in popularity, PACE isn’t without its critics. John Oliver took aim at the program last year on his show Last Week Tonight, saying the business model was flawed by its lack of oversight, which could encourage predatory behavior. However, C-PACE hasn’t had the same issues, and one study found that there has only been one example of default in the history of the program and just a few delinquencies. With Maine on the cusp of rolling out the program, not everyone in the state is convinced it will make the impact leaders hope it will. Josh Steirman, director of government relations at the Maine Bankers Association, said he didn’t think it would have a significant impact, pointing out that before a loan can be granted, the city or town must have opted into the program and the borrower must get the consent of any other lenders holding a mortgage on the property. These steps, Steirman said, could be obstacles to adoption. However, many states are seeing the program make a major difference. In Connecticut, where C-PACE has financed 370 projects since the program launched there in 2013, the investments have reportedly generated more than $300 million in cost savings. And overall, states with active programs have enabled around $2 billion in private investment, according to the U.S. Department of Energy.
Making commitments
Renewable energy commitments are also coming from unexpected places. In Texas, the center of the country’s oil and gas industry, officials in one of the state’s largest cities just announced a plan to make all of its buildings run on renewable energy. Dallas County, the second-largest county in Texas and the third most populous county in the country said last week that it had entered into a contract with a non-profit to purchase solar from a farm in the Houston area. Cities are a big part of a growing movement toward decarbonization, and smaller cities like Ithaca, New York, and Des Moines, Iowa, are leading the charge. Both cities are part of the 24/7 Carbon-free Energy Compact, a consortium led by the UN. In the fall of 2021, Ithaca officials voted to decarbonize all of its buildings as part of a 100 percent carbon-free city policy. Earlier this year, the city began to explore ways to purchase renewable energy. Meanwhile, in Iowa, which uses more renewable energy than any other state in the country, Des Moines city leaders set a goal to reach 24/7 carbon-free electricity by 2035.
As the C-PACE program has expanded, so has the size of the loans going through it. One of the largest C-PACE loans ever received was for a hospital in California. Chinese Hospital, a historic, nonprofit hospital dating back to the late 1800s, received a $103 million loan from California-based GreenRock Capital to refinance existing PACE debt on an existing building at the property. The financing would also go toward reducing the cost of building improvements to protect against earthquakes, among other things. GreenRock said the owner will see more than $40 million in cash flow savings over the next 10 years with the financing.
In New York, state leaders recently expanded its PACE program to include C-PACE, opening the door for new office developments in the largest office market and largest city in the country to get on the renewable energy bandwagon. In the summer of 2021, Nightingale Properties and Wafra Capital Partners became the first building owners to participate in C-PACE, landing an $89 million loan for the partnership’s major renovation of 111 Wall Street, a 900,000-square-foot office tower in Lower Manhattan. With the retrofit, the building’s owners are estimated to save $2.5 million in annual energy costs and avoid $750,000 in annual Local Law 97 fines starting in 2030. “If you can retrofit a building in New York City, you can do it anywhere,” said Mayor Bill de Blasio at the time.
On a worldwide scale, renewable energy is making major progress. In 2022, renewable energy drew about $500 billion in investment, a figure that, for the first time ever, surpassed investment in fossil fuel systems, which attracted $450 billion, according to McKinsey. However, while it’s a big step for the renewable energy industry, for many leaders who want to make net zero emissions a reality, that number needs to grow and grow faster. “By the end of the decade, this one-to-one ratio would need to move to a four-to-one ratio,” said McKinsey Senior Partner Jukka Maksimainen.
As the renewable energy industry continues growing at a rapid pace, and more cities, big and small, make commitments to decarbonization over the coming decades, building owners will face more pressure to upgrade their buildings to run on renewable energy. As we have already seen, financing models like C-PACE and valuable tax deductions are critical tools in making the upgrades feasible for owners who might not be able to afford them otherwise. In many places, the journey to decarbonization and net zero is just getting started, and while renewable energy continues to become more affordable as wind and solar farms proliferate, these additional financing structures will no doubt help make renewable energy a real possibility for building owners everywhere.
