More states authorizing local governments to provide loans for small-scale renewable energy projects
In collaboration with Amanda Zidek-Vanega (DSIRE)
A growing number of states have adopted a policy that encourages development of renewable energy and energy efficiency projects: Property Tax Financing Authorization. The concept began in Colorado and California and has now gained momentum in a number of other states. These policies begin with the state legislature granting local units of government the authority to create a program that provides loans to property owners for the installation of energy efficiency upgrades and distributed renewable generation projects. It is then up to the local government to decide if and how they want to implement such a program. The key element of these programs is that repayment of the loan is through a special assessment fee on the property tax. Participation by local government is voluntary and only a handful of communities, described below, have implemented such programs.
The authorizing statutes promote on-site distributed renewable energy generation in addition to energy efficiency improvements. The authorizing statute may not specify the eligible renewable energy project size and instead leave that determination to the local government. Distributed generation projects are generally smaller-scale projects that consist of one to two wind turbines or solar panels that are geographically dispersed and located near the site of electricity demand. This type of project differs from large-scale solar arrays and corporate wind farms which are often located in remote, sparsely populated areas and can require transmission lines over significant distances to deliver the electricity.
The upfront costs of distributed generation can be, and often are, a significant barrier to homeowners and small businesses. Although many states offer tax credits, rebates, incentives and grants, these incentives only cover a portion of the costs of purchasing and installing a wind or solar system for on-site use. At some point an individual will need to come up with cash to move the project forward.
Property Tax Financing programs provide a direct way for individuals to cover some, if not all, of the costs of energy efficiency upgrades and distributed generation systems. This type of financing mechanism offers several major benefits. First, access to credit can help cover much of the upfront costs, and during tough economic times this program offers an alternative to people who cannot tap into home equity lines or gain low-interest personal loans. Second, the obligation to repay the loan stays with the property. Therefore, payments become the responsibility of whoever owns that property and is benefiting from the on-site electricity generation.
This type of program encourages participation by providing a way for individuals to access financing for the development of small-scale distributed renewable energy generation projects in their community. This in turn promotes local economic development by allowing energy dollars to remain in the community. It also provides opportunities for job creation in manufacturing, installation, and maintenance of the renewable energy systems. Local distributed generation projects can also decrease reliance on an overburdened and congested transmission grid and may reduce the need for expensive new high-voltage transmission lines. Distributed renewable energy generation teaches individuals and communities about the impact of human activity on our natural resources by self-generating a portion of their own electricity. To learn more about the benefits of local-ownership, visit:
As of July 2009, 11 states have passed legislation authorizing local units of government to provide loans to their residents for renewable energy and/or energy efficiency improvements: California, Colorado, Louisiana, Maryland, New Mexico, Ohio, Oklahoma, Texas, Vermont, Virginia, and Wisconsin. As seen in the chart above the details of each program, including eligible technology, project size, loan amount, repayment terms, are often determined at the local level. So far, only two of these states have local governments that have implemented such loan programs: Colorado and California.
In Boulder County residents can obtain a loan for a variety of energy efficiency improvements and renewable energy technologies. The loans are available in amounts ranging from $3,000-$50,000 and repaid over 15 years through a special assessment on the property tax. Applications for the first round of funding were due on April 10, 2009. According to the ClimateSmart Loan Program staff, 394 projects were funded. Two-thirds of the projects were directly related to energy efficiency, and one-third were directly related to solar installations. There were no applications for wind energy projects in this first round because of publicity and timing—the majority of the applications came from property owners in the city of Boulder, an urban area that is not suitable for wind energy installations. Although the ClimateSmart Loan Program focused heavily on energy efficiency improvement in this first round of funding, it hopes to reach out to rural areas in their county to encourage more applicants interested in wind energy.
See the Database of State Incentives for Renewables and Efficiency for more information on the Boulder County ClimateSmart Loan Program.
Three communities in California have implemented clean energy financing programs: Palm Desert, Berkeley, and Sonoma County. Specifics of their programs vary; in Berkeley financing is only available for photovoltaics, while in Palm Desert and Sonoma County certain energy efficiency technologies and solar water heating are eligible as well. The diversity of these programs highlights the importance of allowing individual local governments to create and implement their own program. This flexibility allows local governments to tailor their programs to promote certain renewable or efficiency technologies over others based on resource availability and conditions or preferences of the community.
See the Database of State Incentives for Renewables and Efficiency for more information on:
For more information and updates on these types of financing programs across the country, see the recent report published by the Institute for Local Self Reliance "Municipal Energy Financing: Lessons Learned".
Frequently Asked Questions
1. How is this different from other loans for home improvements?
The major differences are that repayment happens through a special assessment on the homeowner's property tax and that the loan would transfer (along with the distributed generation benefits) to the new homeowner if the property were sold before the loan matures. These loans are intended to be low-interest loans, but that does not guarantee that they are the lowest available. Interested applicants are advised to shop around as they would normally do when seeking a loan (the local bank might have lower rates). Keep in mind that unlike the Property Tax Financing programs which are repaid through taxes on the particular property, you will remain personally responsible to pay off a lower interest bank loan even if you sell the property.
Additionally, a study by the Lawrence Berkeley National Laboratory and the Clean Energy States Alliance has found the interest paid on Property Tax Financing loans will likely be tax deductible for federal tax purposes. As more states adopt this policy, the IRS may specifically address this issue. However, until they do be sure to consult with a tax professional to discuss your particular situation.
2. What about using rebates and grants to help pay for these improvements?
In the states that offer rebates and grants, the available funding is usually limited—leaving some interested parties without support. When grants and rebates are available, they cover only a portion of cost of the distributed generation system and significant up-front costs can remain. Property Tax Financing programs can help cover these remaining costs and fill-in gaps that grant and rebate programs may not cover, such as for certain technologies or renewable energy applications. However, keep in mind that the local government will implement their own Property Tax Financing program and the rules may vary from location to location.
3. How does the local government get the money for these loans?
It depends; in certain states local governments are authorized to issue bonds to cover the costs of the programs. In other states local governments are authorized to enter into a partnership with a local financial institution to implement the program, where the financial institution would issue the loan but repayment would still happen via an assessment on the property tax.
4. Can a business owner access this type of financing for renewable energy sited at the business?
Local and state governments determine eligible participants. For example, the Boulder program is only open to residential customers; while the programs in California are open to commercial and residential (and in Palm Desert agricultural property owners as well). The state laws in New Mexico and Wisconsin limit the programs to providing financing to residential property owners. In the other states, commercial and residential property owners would be eligible if the local government program implemented includes them—that determination would be up to the local government.
5. When will there be a clean energy financing program near me?
If you live in one of the states where this policy has been adopted, you may be able to expect certain local governments to start adopting and rolling out programs over the next year. It takes time for the local governments to get approval (in some states, they need voter approval or they have to pass an ordinance) and develop the program specifics. Some local governments do not even know about this yet, so there can be a time lag before some local communities realize they can implement such programs. There may also be other concerns the local government is likely to address first, such as a troubled housing market or significant job losses. And, even though a state may have a policy authorizing this type of program, local governments are not obligated to participate. If you are interested and you live in a state that has authorized local governments to implement these programs, encourage your local officials to explore the possibilities.