PACENow’s Kristina Klimovich talks with Mike Wallander, Founder and President of Demeter Power and Co-founder of EcoCity Partners
June 3, 2014
Kristina Klimovich:Mike, tell us about yourself and how you got involved in the PACE market?
Mike Wallander: It was confluence of events. I was always very passionate about the environment and for many years I was trying to figure out how to do something beneficial for the environment while enabling me to earn a living. This challenge took on a real significance shortly after I got married and my wife and I started a family. I was working at a big law firm and making a transition from corporate securities law to solar and sustainable energy within the firm. In 2008, our first son, Jack, was born and I wanted more flexibility over my schedule and more control over my destiny. In 2009, I left to focus on two entrepreneurial projects: one was solar project development and the other one was PACE. In fact, I got a phone call out of the blue from Simon Bryce with Renewable Funding, a California-based PACE service provider, who was interested in the Florida market. I have Renewable Funding to thank for introducing me to the PACE universe.
MW: In 2009, I was introduced to Amy Elliot and Mo Eppley and together we formed EcoCity Partners L3C with the goal of establishing PACE in our home state of Florida. We teamed up with Erin Deady, who was working on PACE issues and had the knowledge of local government law and we also partnered with an existing and knowledgeable PACE provider – Renewable Funding – to bring their concept to our state. In 2010, we set up the Florida Green Energy Works Program as an “open market” program – we believe that PACE provides a public good and financing should be open to competition and not be monopolized by any single capital provider. We launched the commercial component of the Florida Green Energy Works program in the summer of 2012. Two years later, we have the broadest PACE program in Florida that stretches across four, soon to be five, counties. We funded our first commercial PACE project in West Palm Beach. The project is a perfect example of how powerful PACE is as a local tool – a local bank provided financing for a family-owned business, which worked with a local contractor to implement a comprehensive retrofit. Recently, we have determined that now is the right time to move forward on residential given that the residential landscape has shifted. We are partnering with Renovate America on offering the residential program and we expect it to significantly catalyze growth of the program.
KK:As president and founder of Demeter Power, a company that skillfully blends solar leasing with PACE, you pioneered two new financing instruments: PACE3P® and PACE Lease®. Please tell us a bit more about Demeter Power and these instruments.
MW: Since 2010, I have been thinking about how PACE can help a property owner who wants to buy solar panels but cannot use the tax credits to make the improvement economically competitive. Being a lawyer helped, as the laws are complicated and one has to draw from various legal disciplines, such as real estate, tax, and local government law. I developed a structure that reconciled PACE requirements (that the solar asset be a permanent improvement) with a typical solar provider’s desire that the solar asset remain its personal property. I formed a separate company to offer a customer access to solar energy with no upfront costs, by paying for the energy via a tax assessment fee. This annual fee is structured to cost less than the anticipated utility savings. We like this concept of helping customers to spin their electric meters backwards – that is where the name “De-meter” comes from.
KK: What is the main difference between PACE Lease® and PACE3P®?
MW: PACE3P® is a platform, while PACE Lease® is a finance product offered through this platform. We view PACE as a tool for credit enhancement for a lease or PPA arrangement. With PACE Lease®, customers receive energy at a fixed price, repaid as a PACE assessment. It’s a simple and straight-forward arrangement. While, we have other products, they all have some common characteristic: the collection mechanism is always through a PACE assessment attached to a property.
KK: Is PACE3P® better suited for certain asset classes? In other words, is it addressing a specific market need?
MW: The application to the market is broader than you might think. Initially, we thought PACE3P® would be a natural fit with tax-exempt entities, such as hospitals, churches, and REIT structures that can’t use tax incentives because they simply don’t pay taxes. In addition, we realized that PACE3P® can be used by a much larger portion of the market where credit risk is either difficult to assess or customer credit risk is difficult to mitigate. Brad Copithorne with the Environmental Defense Fund recently wrote a nice blog post about application of third-party ownership PACE for the commercial space. At least 90% of commercial buildings are not credit-rated and it is difficult to get an understanding of a building owner’s personal credit. Moreover, most commercial real estate is held in Special Purpose Vehicles and often is highly leveraged. While the owners may want to switch to solar, obtaining a personal and corporate guarantee turns them off. Additionally, if they do not have sufficient rental income over and above their expenses they cannot use the tax incentives. PACE3P® ties underwriting to a building and more economically uses the tax incentives. Therefore, many commercial real estate owners will find PACE3P® an attractive option.
KK: Does it have an application on residential side?
MW: Absolutely. Mike Mendelsohn with NREL, who has always been at the forefront of EE/RE financing issues, wrote a great piece for RenewableEnergyWorld about challenges with financing solar on the residential front. He points out that 50% of homeowners do not have sufficiently high credit scores to enter into a solar lease or a solar PPA agreement. If they own their homes, PACE3P® could be an ideal solution for them. The bottom line is this – PACE is the most secure finance structure for funding building improvements that has ever been invented. Having an ability to offer a lease or PPA structure through PACE could rapidly scale the both residential and commercial markets.
KK: What are some of the basic steps for executing a PACE Lease® agreement?
MW: PACE Lease® works like a typical PPA. A customer enters into an agreement with a solar provider, but instead of doing the math to figure out how much it would cost in terms of paying for the system, we help them translate this into a bottom line cost for the energy. Customers want to know whether they are saving money through solar improvements and Demeter Power can help them with a total-cost of ownership solution expressed as a cost per kilowatt-hour like their electric bill. Then, we work with a local PACE program to arrange financing and collect the lease or a PPA fees. The customer is responsible for paying these fees, as they would have done though a basic PACE or PPA structure.
KK: Are these financing options available to building owners in California? And are you planning to expand to new markets in the future?
MW: PACE3P® can be implemented in any PACE area. In fact, Demeter Power is funded by an award from the U.S. DOE SunShot Incubator Program and one of the requirements is to fund deals in at least two states. California is our first target market; it presents a great mix of good sunshine, relatively high utility rates, and a mature and active PACE market place. Our next step is to activate the Florida market. We are also looking at CT, NY, DC, MI, and MN.
KK: Are you working with existing PACE programs?
MW: We designed our financing products to work within existing PACE programs, ideally without any major program changes and without administrative hassle. Demeter Power will help activate the solar contractor community and essentially will be a new source of deals for PACE programs. Contractors already know how to sell technologies, but they may need an explanation of how PACE works. Our goal is to make it easy for solar contractors to develop projects, after verifying basic PACE eligibility. We do that by providing software technology that can be easily used either by a solar provider or by a PACE program administrator to manage projects. We are enabling lead generation by reducing the cost of acquiring a customer. For instance, even before meeting with property owner, using our software, a contractor can find out the utility rate on a building and learn whether the owner has sufficient equity to qualify for PACE financing. Moreover, we enable contractors to present a customizable proposal to a building owner that identifies a project’s value proposition. Basically, we are trying to close two sales: one with building owners, who want to know how much they will save on their utility expenses, and another is with contractors, who want to know what they are going to get paid for the projects.
KK: Where do you see the market in one year from now?
The marketplace is primed and ready for this solution. A year from now this concept will be scaling rapidly since the market is huge and completely underserved. We can demonstrate that a PACE Lease® is simple to execute and offers a great value proposition to all parties. Once we complete our first project and have capital in place, it is not out of the question that we could be doing $50 million worth of projects each quarter in each market we enter. We expect 2015 to be a very big year.