By Ron Keonig

Consider the following scenario:

After taking environmental classes at SIPA, you decide to do your part to combat climate change by putting solar panels on your roof.  Your first encounter with the solar market quickly becomes frustrating and confusing as you spend weeks in researching contractors.  Nevertheless, you persevere your way through the process and decide to move forward with a 3 kilowatt solar system.  Your next surprising discovery is the approximately $24,000 in upfront costs you now need to find.   Persisting onward, you apply for and receive a home equity loan at 8% to finance your down payment.   Mustering all your persuasive powers, you try to explain to reason that although you won’t break even for 8 years, this is a good idea.

This simple example illustrates issues which are typically called ‘transaction costs’.  There is no mention of Net Present Value (NPV), Internal Rate of Return (IRR) or other academic terms.  Rather, these transaction costs are the real roadblocks which a consumer worries about:

• A significant time commitment to research contractors.
• The need to finance $24,000 from a home equity loan.
• Additional time and effort needed to arrange a home equity loan.
• Breakeven after eight years, whereas most homeowners are uncomfortable with anything over two years.
• Uncertainty of investment recovery if you decide to move.

Would the average American agree to this deal?  A 2009 study by Yale and George Mason University measured American’s attitude towards climate change and their propensity to take personal action.  The report found that only 19% of Americans felt strongly enough about the dangers of climate change to take personal action.  While the remaining 81% of Americans may be concerned, they would only take action if the purchase made sense for their personal finances.    Thus, 81% of Americans would likely not take this deal given the transaction costs.  What would you decide?

Several municipalities are now embarking on an innovative financing program which is designed to solve many of these challenges.  It is called Property Assessed Clean Energy (PACE aka ‘the Berkeley Model’).   Successful PACE pilots are now underway in Berkeley, CA, Boulder, CO, Annapolis, MD and several other places.  A forthcoming National Renewable Energy Laboratory (NREL) report provides an example of how the Berkeley program would benefit the (hypothetical) consumer of the previously discussed 3kW solar system.  Simply put, the Berkeley PACE program can convert a large upfront payment ($24,000 for the 3kW system) into a fairly small monthly payment of $26.51.   To a consumer, this represents a pay-as-you-go plan similar to cell phone or cable television payments – and less than both in many cases.   Further, the loan is tied to the property rather than to the homeowner.  Thus, if the house is sold, the new homeowner simply assumes the payments.

Clearly, the PACE model presents a situation which is more likely to be accepted by the 81% of Americans who may not otherwise take action.  Moreover, it doesn’t require new technology or significant governmental spending.    PACE and other innovative programs simply minimize the transactions costs and remove the roadblocks.

However, like most programs of this sort, the limiting factor is loan funding.   Again PACE differentiates itself through the quality of its collateral.   The Waxman Markey bill recognizes this potential and further supports credit through federal guarantees .   Hopefully, an energy and climate change bill will get passed in 2010.  If so, I predict that that this little advertised section will eventually be recognized as one the most significant drivers of change in U.S. energy usage and efficiency.