Explainer: PACE Loans, Feed In Tariffs and Net Metering
How a feed-in tariff works | Infographic: uSwitch/Flickr/Creative Commons License

Until it becomes cheaper to invest in renewable energy capacity than to just buy power from your local utility, governments that want to encourage small-scale renewable energy will use financial incentives to promote it. These incentives often consist of rebates or tax credits on equipment purchases, streamlining and discounting building permits for installation of rooftop solar, and other incentives aimed at costs of installation, or guaranteeing a financial return on the energy produced once installation is complete.

Three such incentives that are commonly mentioned in California are PACE loans, which help property owners finance the installation of renewable energy generation (and, in many cases, energy efficiency measures as well); Net Metering, which provides financial credit against the electric bill for energy the customer feeds back into the grid, allowing customers to "zero-out" their utility bill; and Feed-In Tariffs, an opaque and jargony name for programs in which small-scale producers can sell every bit of power they feed into the grid at a favorable rate.

PACE

Property Assessed Clean Energy (PACE) loans are loans made to property owners for financing renewable energy and energy efficiency capital improvements, which the property owner then repays as an add-on to their property tax bill. The government agency offering the PACE loans typically funds them through sales of bonds to investors.

There are several key benefits to PACE lending arrangements:

  • Property owners are able to defer payment on the capital investments needed to install rooftop solar and other renewable energy generation, or on what can be expensive energy conservation retrofits (insulating and weatherstripping, installing smart thermostats and energy efficient appliances, etc.)
  • The loan attaches to the property rather than the property owner: if the property is sold, the buyer takes on the burden of repaying the loan. This removes the risk that investment in an energy retrofit will not be recouped if the property is sold during a buyers' market.
  • The city or county issuing the loans need not spend tax dollars to fund them, as the costs are borne by investors and participants. Participation is thus completely voluntary.

PACE loans were first offered in the mid-2000s by the city of Berkeley, California, and spread quickly throughout the state. Twenty-eight states now have laws allowing PACE or similar loans.

Most PACE programs in the US have been on hold since 2010. In that year, the Federal Housing Finance Agency (FHFA), which includes the mortgage agencies Fannie Mae and Freddie Mac, instructed its staff to refrain from underwriting mortgages on properties with PACE loans attached. The rationale was that such loans constituted additional encumbrances on the property, adding additional financial risk for the lender. This decision came down despite the fact that PACE loans are generally designed to ensure the property owner's energy savings more than offset the annual increase in property taxes, thus increasing their ability to pay their mortgages. After a federal court ordered FHFA to revisit their decision with public comment periods, the agency essentially reaffirmed its decision in June 2012. The future of PACE programs in the US is in doubt until FHFA's opposition to the loans is resolved somehow.

Net Metering

Net metering is so called because the utility subtracts the power you've supplied to the grid from the power you've consumed, then bills you for the difference -- your net energy consumption. Credit for electricity produced is thus tied closely to the retail cost of the energy consumed.

Most net metering programs do not provide an opportunity for income from sale of powert to the utility, and so their value as an incentive for small producers is somewhat limited. Consumers of large amounts of power, however -- server farms, large office buildings, or industrial facilities, for example -- can often reap sufficient financial benefit just from running their electric meters toward zero that installing renewable energy capacity becomes worthwhile.

Feed-In Tariffs

This type of incentive really needs a more transparent name, one that describes at a glance what the incentive does: it guarantees that the local utility will buy the power you produce, at an attractive price. Though Feed-In Tariffs (FITs) are often mentioned in the context of small-scale rooftop solar, they're often set up for just about any kind of small- to medium-scale renewable energy generation, from wind installations to landfill gas digesters.

California has had a limited FIT since 2008,, which initially authorized utilities' purchase of power from up to 480 megawatts' worth of small-scale renewable energy generators. What constitutes "small-scale" for the purposes of California's FIT is a bit of a moving target: when first enacted, the maximum size of an installation eligible for the FIT was 1.5 megawatts. In May 2012 that was upped to 3 megawatts, and the total power eligible for FITs increased to 750 megawatts. That's about the generating capacity of a mid-sized coal-fired plant, and could supply something like 2% of California's peak power consumption on a typical summer day. Critics point out that the 750mw cap on California's FIT comes nowhere near addressing the state's requirement that a third of its electrical power use come from renewables by the year 2020. Additional local FTs, such as the one LADWP announced this year, may help close that gap somewhat.

The most prominent FIT is Germany's, which recently offered rooftop solar power suppliers the equivalent of about 30¢ per kilowatt hour. Germany's program has attracted some criticism, especially since the FIT is funded by a per-kilowatt-hour surcharge on electrical bills, constituting about a 3% rate hike. Nonetheless, germany's FIT is inarguably the most successful renewable energy incentive in recent history. The nation now gets about a fifth of its power from renewable energy, three percent of the total being solar: a notable achievement in a country with about the same amount of sunshine as Seattle. Germany's installed PV capacity in 2011 was 25 gigawatts, up 7.5 gigawatts from 2010.

Australia also has a notable and more or less successful FIT program. Unlike Germany's, which pays producers at a premium rate for any energy they feed into the grid, Australia's FIT program "net-meters" electricity production until the property owner's electric bill zeros out, then pays FIT price for any additional energy. The utilities see this as a better deal than a German-style FIT, and the system may actually serve as an incentive toward building larger installations than the property owner would have under a German-style FIT.