Andy Levin: ‘Lean & Green’ Can Help Efficiency, Clean Energy Soar
MI’s local governments can use assessments to manage private business loans
Efficiency First | July 2, 2013 | By Jim Dulzo
About the Author
Jim Dulzo is the Michigan Land Use Institute’s senior energy policy adviser. Reach him at firstname.lastname@example.org.
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When he worked for the State of Michigan, Andy Levin successfully used government to create private-sector jobs.
Today, however, the former Lansing official spends way less time in the state capital and way more time on the road, talking to local officials. But the former Michigan’s Department of Energy, Labor, and Economic Growth chief is still working for jobs and growth.
Levin urges local leaders to adopt an ordinance he designed based on a 2010 state law, known as PACE, that would put tradesmen to work on efficiency and renewables projects for local businesses to boost their profits without spending public dollars.
“PACE” means Property Assessed Clean Energy. It allows local governments to raise bonds to finance energy efficiency and renewable energy projects for local firms—and use special property tax assessments for paying off the loans.
But Levin offers an innovative twist: Instead of public bonds, his project, Lean & Green Michigan, uses long-term, low-interest private capital for 10 to 20 year loans at competitive market interest rates.
That allows businesses to launch building efficiency or renewable energy projects without their own cash, and pay back the loans so gradually that the saved energy dollars cover the special assessments.
Businesses immediately see bigger bottom lines.
“There are no new government departments, no new staff needed,” Levin said. “It’s private-sector-led economic development.”
Michigan Land Use Institute: Who’s joined your Lean & Green PACE district so far?
Andy Levin: Southfield joined in late June 2012. Ingham County joined in late November 2012. We’re talking to about three-dozen others. Rochester Hills joined on June 24. Farmington Hills is working on it. Macomb County had its first hearing and is moving forward. And Saginaw County passed its resolution of intent and hopes to wrap up in August.
There are also at least four areas where we are talking to groups of governments. In Michigan Economic Development Corporation Region 5, we’re talking to Saginaw, Midland, Bay and that whole group—they want all eleven counties to join. The Northeast Michigan and Northwest Michigan Councils of Government are both talking about their regions following suit.
We’re also talking with Dearborn, Wayne County, Zeeland. We’re really all over the state with all different stages of development.
MLUI: What is the main objection?
Andy Levin: It’s not really an objection; whenever you try something new, there is a bit of inertia, fear of change, or just wanting to understand it better. So it is really an educational process.
This is a brand-new finance market. Banks don’t do 20-year loans. Almost by definition, when I show up, it’s the first they’ve heard of this.
The questions are about how the process works, and what happens if there’s a bankruptcy or foreclosure or other problem. Those are really important questions.
MLUI: So, what about bankruptcies and foreclosures?
Andy Levin: I don’t think bankruptcy will be much of a factor in PACE, but if you are adopting a new program you’d better figure it out before going forward.
Sonoma County, California, is a lot like Grand Traverse County. It has the most mature PACE district in the country, with loans to 58 businesses and more than 1,800 residences. They’ve had zero bankruptcies and one late payment in their commercial program.
I think it’s because PACE is not some magic bullet or savior for distressed properties. This is a market program, where the local government is only saying, ‘We’ll let property owners take on a special assessment.’ There’s nothing at risk for the government, so there’s not much of a downside.
But lenders don’t view it as charity…they are going to make money on their loans for 10 or 20 years. The key is to use strong underwriting criteria to filter loans only to healthy properties.
MLUI: Some say that this isn’t for small businesses: They don’t use enough energy to make efficiency projects worth it.
Andy Levin: There is a legitimate point about small business. I was at DELEG when we provided seed money for Michigan Saves [which arranges loans and contractors for homes and small businesses], and it may be that this could be more practical for real small projects.
But, really, saying energy doesn’t matter to smaller businesses doesn’t make a lot of sense to me. Their costs are smaller, but so is their revenue. Whatever size business, if you can cut 30 to 60 percent of the energy use out of your operation, pay nothing down, and the contractor is almost paying you to do it, I don’t think it’s a big vs. small business thing.
MLUI: You have long used government to help develop the private sector. How does Lean & Green’s PACE model fit with that philosophy?
Andy Levin: PACE is the best example of a small government economic development program I can think of.
With my version of PACE, there’s no government money involved. It’s purely private sector-led economic development. The private sector partners do the work; it’s their risk.
We don’t care if you’re a warehouse, a hotel, a factory; if you have a business property of any kind and use energy, we can help you.
It’s the ultimate shared-services economic development program. It saves counties money. It eliminates duplication, creates a bigger market so that Michigan businesses all over the state that own property can do the same thing. There’s one set of rules for all the jurisdictions, to maximize markets.
Nobody could claim to be a free-market elected official and oppose this. This is the most free-market program around.
MLUI: But the county has to administer the loans through special assessment. Isn’t that a cost to taxpayers?
Andy Levin: The county or city can collect a fee in each deal to cover administrative expenses. We make sure that they don’t experience any increased cost.
There is a performance guarantee for all projects of $250,000 or more. The energy services company (ESCO) has to guarantee savings, something the state statute requires. Each PACE project’s special assessment will include that guarantee, which I have to approve. There is a prescription in the contract for how to deal with problems. If the guaranteed savings are not realized, the ESCO can either go back in to make the project work right or write a check for any shortfall.
MLUI: Who do you think your initial market will be?
Andy Levin: My expectation is the first 10-30 projects will be larger. For example, the first one looks like it will be for about $750,000 for a four-story office building that’s a company headquarters.
I don’t know what a lower limit might be, but probably under $100,000 or $50,000. At some point the transaction costs soften the deal. But my goal over time is to make it work for every small business.
MLUI: Aren’t you competing with ESCOs, which bring their own capital to a project?
Andy Levin: No. On June 12 traveled to Washington to speak at the Pick Up the PACE conference. I was invited by the convener, Johnson Controls Inc. (JCI), a very large ESCO. JCI was involved in getting our PACE statute established here. They are committed to doing business in the space Lean & Green Michigan is creating. It’s the same with Siemens and other large ESCOs.
They like Lean & Green because they’ve made much of their money in the “MUSH market”—municipalities, universities, schools, and hospitals. They have not done as much in the commercial or industrial sectors, so they are jumping on the bandwagon.
Our PACE deal turns it into more of a free market. You have an entity [Lean & Green] sponsored by the county that is an honest broker. You get an energy guarantee from the ESCO, and you can shop around for the best loan terms.
That’s a huge deal. It’s like performance contracting plus…the business gets secure, longer term financing via the special assessment and they can shop around for both the work and the financing.
MLUI: How do you see this affecting smaller contractors? Won’t this hand a bunch of business to big ESCOs?
Andy Levin: What this really does is blow open the market for clean energy projects. It allows much more clean energy work to be done by everybody from Johnson Controls to the most local businesses – say, “Fred’s HVAC.” Now Fred—who’s had all these projects with local companies gathering dust because he presented it to them but the company has to wait until the equipment breaks because it doesn’t have $300,000 on hand and doesn’t want to borrow—can go back and say, ‘You don’t have to borrow any money; you are going to make money.’
So everyone from giants like Johnson and to local contractors like Fred are going to be able to sell their projects.
MLUI: What kind of criteria do you apply when approving projects?
Andy Levin: Every project must reduce the carbon footprint. What’s allowed is anything that saves energy, saves water, or increases renewable generating.
So it’s a powerful tool to get that whole market going. ESCOs can go into this corporate area now. And for the smaller guys, I could give you a list of companies that are excited by this, like the man in Macomb County who comes to all commissioners’ meetings.
These people come out of the woodwork. Think about it: If you were trying to survive as a geothermal installer over these past years, it’s been very difficult. Now you can sell your stuff in a PACE district. My fondest hope is to unleash these companies.
Jim Dulzo is the Michigan Land Use Institute’s senior energy policy adviser. Reach him at email@example.com.