Decarbonization of Buildings in Canadian Cities: Using Property Assessed Clean Energy (PACE) Financing to Attract Private Capital

This paper discusses property assessed clean energy (PACE) financing as an arrangement to support building decarbonization efforts in Canadian cities. PACE financing allows building owners to acquire debt financing for energy efficiency upgrades to their property, secured through a property tax lien on the building, and the debt is repaid through the property tax. The debt is bonded to the property and not the owner, and the property tax lien provides a collateralization feature that may support more favourable borrowing terms. This paper outlines and examines the three general approaches used to deliver PACE financing: government administered and financed; privately administered but government financed; and privately administered and financed. It further makes a recommendation for privately administered and financed programs to support the scaling up of PACE financing in Canada. Privately administered and financed programs can bring significant private capital to PACE programs while also reducing the public administrative burdens associated with program delivery. This paper then presents sustainability-linked debt as a funding tool to attract private capital to PACE programs. Sustainability-linked debt is debt that is linked to sustainability performance outcomes. The paper details the characteristics of sustainability-linked bonds (SLBs) and discusses how they could be used to attract impact investors by linking the greenhouse gas (GHG) emissions reductions from buildings to the return (coupon) rate of the SLBs. SLBs could be used by private PACE program providers to raise capital or by local government administered programs to acquire private capital to support PACE financing. In the latter case, the paper suggests that municipalities establish special purpose entities dedicated to PACE financing and capitalize these entities through SLB issuances.