Clean energy finance in Connecticut just got a major boost. On Dec. 17, Hannon Armstrong agreed to provide up to $100 million in funding for the Connecticut Green Bank’s C-PACE (Commercial Property-Assessed Clean Energy) program.
The deal represents a major milestone for an initiative that has already funneled upwards of $70 million toward renewable energy and energy efficiency.
The simple structure of C-PACE
C-PACE’s investment model is simple but powerful: allow property owners to finance energy efficiency and clean energy via an assessment on their property tax bills.
The benefits of this financing model are numerous.
First, the model lowers the risk of a loan default because property taxes typically take priority over other mortgages. This, in turn, drops the costs of financing, making clean energy and energy efficiency more attractive to a wider swath of building owners.
Second, the program offers long-term financing that can extend up to 20 years. Such financial structures allow owners to “green” their buildings while staying cash-flow positive from day one.
Third, and perhaps most importantly, participants who sell their properties pass the unpaid portion of their C-PACE loans onto the next titleholders. This means that building owners only have to pay when they are directly benefiting from the clean energy upgrades.
The expansion of Connecticut’s C-PACE program
As the 28th state to create a C-PACE program, Connecticut was something of a latecomer to the game. However, the state has more than made up for the lost time. In less than three years, Connecticut’s C-PACE initiative has closed 111 projects worth more than $70 million in total. In terms of cumulative PACE funding, Connecticut trails only California, which began experimenting with C-PACE legislation back in 2008.
Moreover, Connecticut’s program shows no signs of slowing down. Approved C-PACE applications are on the rise, with more than $50 million currently in the pipeline. This continued growth is perhaps unsurprising, given that the C-PACE model works for a wide spectrum of property types.
Case in point: industrial facilities have produced roughly a quarter of C-PACE’s projects, while office, nonprofit and retail properties are each responsible for about a fifth of the program’s project flow. At the same time, the program can fund building upgrades of nearly any size.
For instance, as of Q4 2015, the program had supported energy improvements ranging from as little as $31,000 to as much as $8.3 million. Given the program’s wide-ranging versatility, the C-PACE market is potentially huge.
Importantly, C-PACE financing has translated into real benefits for the environment and the economy. According to the green bank’s calculations, it has already eliminated more than 17 thousand tons of greenhouse gas emissions, deployed 15.4 megawatts of clean energy, and generated $172 million in energy savings.
The roles of outreach and standardization
C-PACE’s rapid progress stems, in part, from the bank’s early outreach efforts.
The bank needed the cooperation of Connecticut’s municipalities, said Alysse Lembo-Buzzelli, an associate in the green bank’s commercial and industrial program.
Although C-PACE is a statewide initiative, individual town tax collectors are responsible for remitting property taxes back to the capital providers. For the program to work, municipalities had to voluntarily opt into it.
Explaining the program to 169 municipalities was no small feat, Lembo-Buzzelli said. However, these efforts ultimately paid off. Today, 116 municipalities – representing more than 90 percent of the state’s commercial market – participate in the program.
At the same time, the green bank had to get out the word to Connecticut’s banking and industry representatives.
“They didn’t know what PACE was,” said Bert Hunter, executive vice president and chief investment officer at the Connecticut Green Bank. “It really took some convincing.” However, he said that those early days of “pounding the pavement” and pitching the program to the banking industry laid the foundations for its eventual success.
Standardization and transparency also played pivotal roles in C-PACE’s development. According to Hunter, the green bank’s upfront efforts to standardize documentation and energy savings assessments helped bring down transaction costs and facilitated the aggregation of loans.
To build public and investor confidence in the program, the green bank also posted C-PACE documentation online. According to Hunter, these efforts to improve standardization and transparency returned big dividends when the green bank sold a $30 million portfolio to Clean Fund, a specialty PACE finance provider.
A partnership with Hannon Armstrong
Recently, C-PACE’s strong growth has begun to stretch the green bank’s individual financing capacity. While the $40 million warehouse that the bank's board initially authorized was enough to kick-start the program, realizing the program’s full potential will require outsourcing financing to the private sector.
The green bank, however, did not want just any capital provider for this initiative.
“We wanted a partner who really knows this market,” said Hunter, adding that Connecticut could complete more upgrades at a faster rate with a private investor who understood these projects from an underwriting and deal structuring perspective.
At the same time, the green bank wanted to achieve greater leverage with its taxpayer dollars. While the first batch of C-PACE projects leveraged roughly four dollars of private capital for every dollar of green bank capital, was aiming to double this ratio.
The bank pursued these goals by partnering with Hannon Armstrong.
“Hannon brought decades of experience in financing energy-efficiency projects and, more recently, solar PV,” said Hunter. Moreover, of the eight bids that the green ban received from around the globe, Hannon Armstrong was one of the few willing to commit its full balance sheet to the C-PACE program. As a result, the final deal involved a highly favorable leverage ratio: $90 of Hannon Armstrong capital for every $10 of green bank funds.
For its part, Hannon Armstrong took particular care to craft a C-PACE bid that fit the needs of the green bank.
“I think the reason we were successful is that we understood the business problem that the Connecticut Green Bank had at the time,” said Hannon Armstrong President and CEO Jeff Eckel. In particular, his company recognized the challenges of scaling up inherently small transactions, like energy-efficiency upgrades.
As a result, Eckel made sure that Hannon Armstrong’s bid accounted for the costs that the green bank would incur from servicing C-PACE assets, such as the costs of reporting, billing, and collecting the clean energy loans.
“In a portfolio like this, not everything works perfectly,” said Eckel, signaling that Hannon Armstrong would be flexible in its partnership with the green bank.
Ultimately, both parties have high hopes for this budding relationship.
“We have every expectation that Hannon Armstrong will be an excellent partner,” Hunter said. “We intend to leverage their team’s capability and experience with our origination ability in the state so that we can go much farther than the $100 million.”
Eckel echoed this sentiment.
“What the Connecticut Green Bank is doing to address underserved markets is unique,” Eckel said. “We congratulate the green bank for its leadership and insight, and we are glad to be a partner with them.”
What’s next for C-PACE?
More private-public partnerships like the Hannon Armstrong deal may be in store. Lembo-Buzzelli said the green bank’s vision is to grow the private capital market for C-PACE.
Hunter said he agreed. “The Hannon Armstrong facility is a great example of how green banks and private capital can collaborate to achieve far more in clean energy and energy efficiency than we could each do independently.”
The implications of the Hannon Armstrong deal may, however, extend beyond Connecticut borders. Attracting private capital is important to PACE programs across the country, and the Hannon Armstrong agreement demonstrates the potential of using large-scale public-private partnerships to facilitate C-PACE financing.
“We are showing proof of concept here,” said Lembo-Buzzelli, adding that the green bank would continue to strive to be a leader in the field of clean energy deployment.
Bryan Garcia, president and CEO of the Connecticut Green Bank, is the chair of the Clean Energy Finance Forum advisory board. This article was written at Yale Center for Business and the Environment without external review. Join our LinkedIn group or visit us on Twitter to discuss this article. You may also email the author directly using our contact form.