PACE-setter by the Bay: San Francisco's Buildings to Consume Less Energy

Armed with a new green financing program, America's 14th largest city makes a bid to become the home of the nation's most energy efficient buildings

Buildings are power hogs, accounting for 40 percent of the world’s energy and causing 40 percent of global carbon emissions. In fact, in the United States, they consume more energy than the transportation and industry sectors combined.

In 2009, America's estimated 4.9 million commercial buildings—more than 71 billion square feet of floorspace—accounted for 19 percent of the nation's total energy. And by 2035, commercial building floor space is expected to reach 103 billion square feet, a staggering 43 percent increase over 2003 levels.

Mitigating the environmental and energy security dangers of such explosive, fuel-hungry real estate development means achieving emission reduction goals that include retrofits to make current buildings more energy efficient. And an added benefit about that part of the solution is more jobs and a giant boost for the economy: The total value of residential and commercial repairs and retrofits reached nearly $400 billion in 2005.

RAMPING UP THE PACE OF SMART ENERGY USE

That kind of triple bottom line-thinking of "people, planet, profit"—a bulwark of the sustainability movement—is behind a new green financing program in San Francisco that seeks to transform the city's large commercial buildings (some 226 million square feet in all) become national energy efficiency leaders.

Part of the Property Assessed Clean Energy (PACE) program, GreenFinanceSF is a municipal initiative in which the government offers investors a specific bond and then turn that money into loans to consumers and businesses to put towards energy retrofits and clean energy upgrades of commercial and residential buildings. The loans—unique in that they are attached to a property and not an individual—are typically repaid over 15 or 20 years through an annual property tax assessment.

The program is starting with an energy efficiency upgrade to the corporate headquarters of Prologis, a real estate developer located in a historic property at San Francisco's famous Pier 1. The project will be designed and implemented by Johnson Controls, a Milwaukee-based company specializing in optimizing the energy efficiency of buildings. The company, which also produces batteries for hybrid and electric vehicles, has a long history in energy efficiency, having invented the electric room thermostat in 1885.

HUGE POTENTIAL FOR BIG RESULTS

Some concerns have arisen about PACE financing; in particular the disputed notion of "involuntary subordination," which the Federal Housing Finance Authority (FHFA) argues may increase the financial risk of the lender's security, as it is considered a subordinate lien, secondary to mortgages. But for the moment, this issue is primarily impacting the discussion around residential—not commercial—PACE programs.

In the long run, such concerns are outweighed by PACE's "potential to achieve dramatic results for our economy and environment," suggests Casey Diehl, project specialist at WegoWise, a Massachusetts-based startup that has launched a Web-based building efficiency analysis platform. "Once its lien status under default has been resolved, this progressive financing mechanism could open the floodgates for widespread energy efficiency investment."

In an ideal scenario, the program would be the source of lower operating costs for property owners, lower emissions for the environment, more jobs for the green sector and gains for the investor.

"San Francisco has a whole new claim to fame—in addition to the Bay and the bridges, it will be known for better buildings, with the help of PACE," said Chuck McGinnis, the director of building efficiency at Johnson Controls. "Billions of square feet of office space could be transformed into more valuable property to save money, create jobs and reduce greenhouse gas emissions and it's all beginning at Pier 1."

PATH OF LEAST RESISTANCE: ENERGY EFFICIENCY

Energy efficiency is an area that has made a significant difference in the California's energy consumption. Better building standards, for example, saved approximately 15,000 gigawatt hours (GWh) in 2006, up from around 5,000 GWh in 1990. In California's 2008 summary of greenhouse gas regulatory strategies, both the state's energy and public utilities commissions noted that energy efficiency is "the least expensive, most preferred strategy to achieve AB 32 goals," referring to the Global Warming Solutions Act, landmark legislation that then-governor Arnold Schwarzenegger signed into law in 2006. Going into effect on January 1, the act mandates the state's goal to reduce greenhouse gas emissions to their 1990 levels by 2020.

San Francisco's PACE district was established in 2010. Last year, the city became one of the first in the United States to launch an "open market" PACE program when it made $100 million in bonding capacity available to owners of commercial properties.

"Since buildings contribute 53 percent of greenhouse gas emissions in San Francisco, it is essential that we address inefficiencies in the built environment," said Melanie Nutter, director of the San Francisco Department of the Environment. "Projects like this exemplify the successful combination of our policies and programs to both reduce emissions and help save businesses money. As more businesses take similar action, we'll continue to grow our economy while decreasing carbon emissions to help ward off the worst effects of climate change."

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NOTES

United States Department of Energy. Energy Efficiency Trends in Residential and Commercial Buildings. October 2008. Accessed November 29, 2012.
Center for Sustainable Systems. Commercial Buildings Factsheet. September 2011. Accessed November 29, 2012.
United States Energy Information Administration. 2003 Commercial Buildings Energy Consumption Survey—Overview of Commercial Buildings Characteristics. 2003. Accessed November 29, 2012.
United States Energy Information Administration. Annual Energy Outlook 2012 with Projections to 2035. June 2012. Accessed November 29, 2012.
United States Department of Energy. Energy Efficiency Trends in Residential and Commercial Buildings. October 2008. Accessed November 29, 2012.
PACENow. About PACE. August 16, 2012. Accessed November 29, 2012.
United States Federal Housing Finance Agency. Mortgage Assets Affected by PACE Programs. Federal Register. January 26, 2012. Accessed November 29, 2012.
Casey Diehl. PACE Financing: Controversial, Innovative Green Lending. WegoWise blog. March 15, 2012. Accessed November 29, 2012.
PRnewswire. San Francisco buildings qualify for affordable energy and water upgrades starting with Johnson Controls’ project for Prologis at Pier 1. November 13, 2012. Accessed November 27, 2012.
California Energy Commission & California Public Utilities Commission. Proposed Final Opinion Summary on Greenhouse Gas Regulatory Strategies. September 2008. p. 4. Accessed November 29, 2012.
Ibid.
Ibid., 7.
Ibid.

image: San Francisco at sunset. (credit: Digon3, Wikimedia Commons)