Living conditions created under the COVID-19 pandemic situation provided a spotlight on the inadequacies of our cities for green open space.

Since its inception in 2005, America has rapidly expanded its Property Assessed Clean Energy (PACE) program, with legislation currently available across 37 US states, and programs operating in 26 of them. By the end of 2021, US$9.3 Billion had been invested across 308,000 projects, with many more in the pipeline.

PACE programs allow a property owner to finance the up-front cost of energy upgrades, or other eligible improvements, on a property. They then pay the costs back over time through a charge placed on the property, rather than the individual.

On the surface, Australia’s Environmental Upgrade Finance program (supported by the NSW, SA and VIC Governments) and the PACE program look similar; they both provide council-enabled finance for environmental upgrades to a building by raising the charge on the land, and they both attach the loan to the property, meaning the owners can transfer the loan to a new owner if they decide to sell up and move.

However, in Australia, Environmental Upgrade Finance is only available for non-residential properties, while in the US, PACE is available for both residential and commercial properties. Let’s look at the key differences between PACE and Environmental Upgrade Finance, and the six lessons Australia can learn from the program in America.

1. Council’s role in the process adds extra protection

Scott Bocskay – Chief Executive of the Sustainable Australia Fund – had the privilege of learning about the PACE program while it was still in its infancy.

“I wanted to know more from the start,” he said. “You can’t assume that something that works in the US will also work in Australia. But then I saw it for what it is; a program that overcomes a number of barriers to environmental upgrades.”

He says that PACE and the concept of Environmental Upgrade Finance were two separate financial models that gathered momentum alongside each other, with both being put into practice in 2008, during the Global Financial Crisis.

PACE was engineered for the residential sector, while Environmental Upgrade Finance was geared towards commercial buildings.

“When Environmental Upgrade Finance was first legislated, I advised that we shouldn’t provide it to the residential sector just yet,” Mr Bocskay said. “We’ve decided we won’t lend to that sector until we’re satisfied that councils can handle the high volume of Environmental Upgrade Agreements and handle what could happen in different scenarios.”

2. Additional protections in Australia safeguard owners

Regulations support Environmental Upgrade Finance programs in Australia to provide added layers of protection to the businesses, lenders, and local councils.

In the US, the lack of regulation about some PACE programs for residential properties has left some homeowners facing repayment issues. In Australia, government regulations and Responsible Lending Obligations mean that owners are more protected.

Ed Cotter, Executive Manager of Better Building Finance, works with local governments to help them enable Environmental Upgrade Finance legislation.

“Council’s role is to collect the repayments of the loan against the property, and councils want to do their best for their business community,” says Mr Cotter. “That’s why there are a range of measures that reduce risk to both the borrower and council in Australia.”

Property owners are not able to borrow more than the value of the property (called over-leveraging) and council will review the property owner’s rate paying history to check that they are a good candidate for this type of loan. The lender, such as the Sustainable Australia Fund, will also undertake their checks to ensure they are lending responsibly; in total, there are 24 levels of risk management to protect owners and finance providers and manage risks.

“The process is set up to get the best result for everyone involved,” says Mr Cotter. “After all, no council wants to be involved in chasing repayments from owners over time.”

“We really understand what councils are about,” Mr Bocskay added. “There could be reputational risk for councils if something goes wrong, and we want to protect them from that. As a lender, I wouldn’t want to sell someone something they didn’t understand.” As learned in the US, councils that self-administer the finance mechanism have ‘hobbled’ themselves with ongoing administration, whereas third-party providers can simplify and streamline the initiative across multiple councils and states.

3. Consumer protections also come from working with trusted, vetted installers

Christine Gross – Channel Partner and Account Manager at Sustainable Australia Fund – has previously worked with PACE in the US, and so is an expert in the finance mechanism.

She says that the program has made an incredible impact and opened the door for property owners to make improvements that both save them money and increase the value of their property.

“So many property owners just don’t have the cash lying around to make these upgrades, even if they will make a big reduction in their operating costs,” says Ms Gross. “The PACE Program in the US, and Environmental Upgrade Finance in Australia, gives them another option that has no impact on their cashflow.”

Unfortunately, some of the stories that make it across to Australia about the PACE Program have been negative ones, such as property owners not being able to repay their loan. Ms Gross suggests it’s not the program itself that’s the trouble, but the limited protections surrounding it in America, with some salespeople there ushering clients into deals before they understand the terms and conditions.

In 2021, PACE responded to these concerns by announcing several consumer protection policy principles, for both residential and commercial properties. They require PACE administrators to periodically review any applications for funding, including providing a ‘know-before-you-owe’ financial disclosure before any work is agreed upon. They also allow PACE to help maintain control over the cost of any upgrades they finance to prevent them from becoming exorbitantly expensive.

The Sustainable Australia Fund have built similar protections into their practice. They make a point of only working with trusted installers who are thoroughly vetted, and any solar installers need to be licensed and certified with the Clean Energy Council before being trained in how to communicate the finance mechanism to clients.

“While installers price their own services in a free market, any responsible lender should vet the pricing of each deal for assurance the client is not being over-priced or under-priced which can be a risk for works to be completed,” says Ms Gross.

4. Clients can – and should – take their time

Environmental Upgrade Finance legislation provides further protection by only financing commercial properties. Ms Gross says these clients “tend to be more financially savvy,” and are less likely to enter into a deal without reading the fine print.

Thinking of getting environmental upgrades for your business? Christine advises you take your time. “In the US, everything is fast – including the finance,” she says. “But here, it’s a lot more of a thorough process built with checks and balances to protect both the installer and the client.

“I’ve learned that most installers genuinely want to do things right by the client. We don’t work with the installers who put lots of pressure on the client to do the deal then and there.”

In fact, it’s this slow and steady approach that has some businesses coming back for another slice of the pie. Lance Peterson, General Manager of the Hussey & Co lettuce farm, initially took out a small loan to install a 99kW solar system.

“Since then, our business has realised a $14,000 reduction in our power bills,” he said. After such a positive experience with Environmental Upgrade Finance, he has since returned to take out a second loan to finance an additional 505kW system, which is set to “multiply these savings five-fold.”

99kW -505kW systems at Hussey Co lettuce farm

5. The flexibility of this type of finance can be a win for businesses

Industry leaders like the Sustainable Australia Fund offer Environmental Upgrade Finance to help businesses transition to renewable energy and minimise their impact on the planet. While the argument for sustainability is a strong one, there are many other benefits for businesses that provide a compelling business case.

Ms Gross says that businesses own their new, energy-efficient assets from day one, and the property itself provides the security. Funding is provided by responsible lenders from the private sector, and councils secure the loan by placing a charge against the property.

Environmental upgrades stand to save businesses money on their energy costs, but they can also increase the value of a property.

Let’s say that you’re a landlord, and your tenant consistently has an expensive energy bill they want to reduce. If the tenant is willing to make the repayments on an Environmental Upgrade Agreement loan, you could essentially get a building upgrade for free.

The modernised building increases the tenant’s willingness to remain on the premises, because they’ve invested in it. But even if they did move out, the upgrades can make the building more desirable for a new tenant.

There’s also the fact that operational costs from most Environmental Upgrade Agreements consistently cover the costs of the repayments. Take John Haddrick, Co-Director of North East Funerals, who was delighted to find that his new solar panels didn’t negatively impact the business’ cashflow.

“The electricity savings turned out to be worth more than the cost of repayments,” he said. “It was certainly a winning combination – financially and environmentally.”

The loans are typically paid off between 10 and 15 years, allowing businesses to be cashflow positive and enjoy the benefits of their upgrades immediately.

Environmental Upgrade Agreements are unique in that the loan is attached to the property, not the people using it. A property owner may take out a 20-year loan and find themselves moving out of the space after five years. The new owner then takes over the rest of the loan and continues paying if off alongside their council rates.

Ms Gross says it’s an investment worth making.

“If you want to sell the asset five years down the road, it now has building improvements, which have been proven to increase the value of commercial and industrial properties – definitely a win-win scenario.”

North East Funerals install solar without affecting cashflow

6. Australian leaders are working towards a better system

It’s undeniable that the residential PACE program had early shortcomings. But to only focus on the negatives would ignore the significant economic and sustainable impact that the program – and others like it – is capable of.

PACE is responsible for the creation of 152,000 jobs and has invested US$9.3 Billion into renewable energy upgrades. They have succeeded in helping over 30,000 homeowners and businesses make critical improvements to their properties, increasing energy efficiency and reducing their monthly utility bills.

The projects also contribute to shared environmental, social and governance goals in the US, which are becoming increasingly important to policymakers and investors. It’s estimated that the completed projects to date will save 36 billion kilowatts of energy over their lifetimes and reduce building sector carbon emissions by 11 million metric tons – the equivalent of taking over two million cars off the road.

Ms Gross says that it’s important we learn from its mistakes and work towards a better system.

“We’ve learned much from the US and PACE,” she says. “There were some learning curves, and we’ve already put things in practice here to avoid what happened there. Now we know how we can best protect our clients; we look over deals with scrutiny and vet our installers so we can confidently minimise the risk.”

“We want to do the best by customers, council partners, and ourselves.”

By Robin Mellon & Melina Bunting