Property Assessed Clean Energy (PACE) bonds are recent innovation some states have adopted to help home owners finance energy efficiency improvements. Roughly speaking, a PACE bond allows a home owner to avoid borrowing for up-front capital costs. Instead, those costs are paid by the home owner’s municipality and the home owner repays the city through a higher property tax. This question explores how they work.
Suppose a home owner is considering installing a residential photovoltaic (PV) system. The system would have an AC capacity of 3.1 kW, and would cost $4 per watt to build. It would last 30 years and would have a capacity factor of 17% (typical for PV in NYS). Every kWh generated by the system would allow the home owner to avoid paying $0.145 (average price in NYS) to buy that electricity from the grid. The system is expected to last 30 years and you may assume it has no annual costs—the only cost is the up-front capital. The home owner can borrow or lend at an interest rate of 10%.
Now consider the system from the city government’s point of view. Suppose that the system would provide $45 per year in external benefits (avoided damages from conventional electricity generation). Also suppose that the city has a good credit rating and can borrow or lend at 2%.