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Making energy efficiency projects pay off, right away

Jan 5, 2017

The U.S. EPA estimates that companies in Michigan waste up to a third of the energy they buy because of inefficient buildings and equipment.

But most of the companies just keep paying those high energy bills, month after month, because they can't make a business case for a big energy efficiency project. The payback for the upgrades takes too long – often ten or more years.

Andy Levin is the CEO of Lean and Green Michigan.

“There just are very few businesses, and certainly non-profits," says Levin, "that can do anything where they're going to spend $200,000 or $500,000 or $1 million – and break even in 2025 or 2030 or something.”

The problem also means more heat-trapping gases, like carbon dioxide, for the planet.

But thanks to a new financing tool, there’s a way for companies, non-profits, and government agencies to save energy and save money.

Lean and Green Michigan runs Michigan's PACE program, which stands for Property Assessed Clean Energy.

It works like this: a company takes out a 15 or 20-year loan, but it's not paid back the traditional way. It's paid back through an assessment on the company's property taxes.

The loan costs the company nothing or very little up front – but it gets the benefit of lower energy bills right away. And the assessment (along with the lower bills) transfers from one owner to the next.

"The property owner saves more in reduced energy costs than the payments on the PACE loan," says Levin.  "Effectively, they finance the whole thing out of the energy savings."

Heller Machine Tools of Troy is one of the latest to take advantage of a PACE loan.

On a recent early winter day, a few Heller employees and their kids gather for what the company is calling "Helicopter Day." They sit on overturned work buckets, sip hot chocolate, and watch as a helicopter carefully lifts one of the company's nearly 30-year-old heating and cooling units from the roof of the factory, flies it to a nearby field, and sets it down.

By the end of the day, 34 of these outdated units will be replaced with new energy efficient ones. A company called ABM is doing the work. ABM's Martin Wilke says they're not just replacing heating and cooling units.

"We're also replacing the old ballasted roof with a nice white, TPO energy-efficient roof," says Wilke, "All new LED lighting throughout the entire facility, and window film and fenestration, which means getting rid of the leaks and cracks in the building.”

Now, had Heller replaced just the lighting, it probably would have paid for itself within a few years. But Heller CEO Keith Vandenkieboom says "we wanted to do everything in one shot."

Except doing everything was nearly $1 million, up front – something that Heller's board would not approve.

The PACE loan made it possible for Vandenkieboom to present a strong business case to the board for all of the improvements. Heller will save about $170,000 a year in lower energy bills for the next 15 years.

And company employees will enjoy additional benefits like a more consistent temperature throughout the building, and better, brighter LED lighting.

"The whole workplace is brighter," says Vandenkieboom. "And it has to be, because our people are working out here, crawling around, assembling machines, they're inside the enclosures, so we need really strong lighting.”

Levin says PACE projects in Michigan are starting to really take off. Since counties collect property taxes, they have to join the PACE program for companies to be able to participate. Twenty Michigan counties have already joined. Michigan had one PACE project in 2015. There are nearly 50 in the pipeline today.

Currently, PACE is for commercial projects only. Homeowners in Michigan cannot get a PACE loan to pay for energy efficiency projects like geothermal systems, solar panels, and weatherizing. 

Colin Bishopp is with Renew Financial, a company that helps homeowners get PACE loans in the few states that have set up successful residential programs.

He says a big reason residential PACE is not available in Michigan and most other states is because Fannie Mae and Freddie Mac, the two big government lenders, are skeptical. Right now, they won't buy home mortgages that have a PACE loan as part of the property tax assessment.

"Bankers are also skeptical," he says. "They want to be in charge of all the loans."

Bishopp says California decided to set up a fund to secure mortgages with PACE loans, to convince Fannie Mae and Freddie Mac to take them on. He says PACE is also taking off in Florida. 

Bishopp thinks it is only a matter of time before there's enough data to persuade the government and private lenders that homes with PACE loans are actually less risky than regular mortgages, because the homes are proving to be more attractive to buyers.

And there's a virtually unlimited thirst among pension funds, insurance companies, and global investors to invest in mortgages with PACE loans, according to Mansoor Ghori, President of Petros PACE Finance, the company that lent money to Heller Machine Tools for its project.

"Our investors have a need for these long-term, fixed income securities that are fairly safe," says Ghori. "And over the last seven or eight years, there's been very, very low interest rates on Treasury securities.  Investors are almost making no money on those. So now you have something that is fairly stable, a secured asset, that's earning significantly more than a T-note."

Andy Levin of Lean and Green Michigan says one of his favorite things about Michigan's PACE program is it doesn't involve taxpayer funds. While some states are running their own PACE programs, in Michigan, Lean and Green Energy is an independent group that links companies with financing. 

So PACE can appeal to conservative counties, that want to help their businesses save money – which means they are more competitive.

"And is there a corollary benefit that we are reducing our carbon footprint and substantially reducing the problem of global warming in Michigan? Yes, every single project moves us to a more sustainable future."