Of Fannie, Freddy and PACE Bonds

If you are not familiar with the story of PACE Bonds, you can follow it here www.pacenow.org

Fanny Mae and Freddie Mac objected to the priority of PACE bonds over mortgages, and thereby scuttled one of the biggest hopes for a recovery in the real estate market.

What should have been done instead is to develop a set of clear engineering and financial test criteria to ensure that the types of investments that are made are never in mere energy efficiency, which face diminishing returns in the long term, but always in multiple renewable infrastructure producing compounding returns over time.

In the urban setting in particular what should be understood is that the investment decision is not primarily about energy costs, it is about grid costs. With transport and delivery costs at 50-70% of the energy bill already, the much ballyhooed volatility of energy prices has little to do with the price of beans, or energy for that matter. As far as the eye can see transport and distribution costs will go up ahead of inflation due to aging infrastructure and utility regulation and politics, so the fluctuating energy costs are a diminishing portion of the problem.

Conversely, if you know today that 50-70% portion of your bill will rise faster than inflation for the reasonable future, and that can be forecast with certainty, then the uncertainty of the price forecasts of the remaining 30-50% are less relevant. Meanwhile no reasonable person expects energy costs to be going down anytime soon, though we may have plenty of volatility.

Thus again to become more efficient at consuming a resource which will cost steadily more forever with substantial certainty, is a death trap, and a stay of execution, yet the financial sector wants to encourage that, and make sure that like lemmings the entire city will throw themselves off the same cliff at the sight of the next energy crisis.

The fork in the road is simple. It is not available to all properties, but by and large it applies to older multi-family buildings in NY of 50 units or more, and for those integrated renewable energy strategies are feasible today, and the priority of PACE bonds over mortgages should be conducive to long term appreciation of the underlying real estate assets. So Fanny and Freddy should become more selective, and resist any energy loans that focus only on energy efficiency, while supporting PACE bond financing WITH priority over mortgages if a well engineered compound strategy of integrated renewable technology is applied, which demonstrably faces continuous asset appreciation.

The current stalemate means the financial sector is creating the next energy crisis, not avoiding it.

Local generation of energy from renewable sources on the demand side of the grid reduces dependence on the grid, and can help improve economics for the grid operators as well, and so once the grid operators understand the new model they should also financially support it.