Proposed legislation would allow municipalities in Indiana to finance residential and business clean-energy projects, such as solar-panel or geothermal systems.

Concern that neither lenders nor taxpayers would be held responsible for property owners defaulting on payments appears to be a major roadblock, however.

Last month, virtually identical measures—House Bill 1457, sponsored by Rep. Tim Neese, R-Elkhart, and Senate Bill 260, by Sen James Merritt, R-Indianapolis—were filed as a way to help property owners make clean-energy upgrades that otherwise wouldn’t be practical.  

Both measures would allow municipalities to form “clean-energy-improvement financing districts” to foot the bill for clean-energy retrofits. A special tax levy would be placed on the property.

Forms of this legislation have been passed in at least 23 states as a way to make clean-energy and energy-efficiency upgrades affordable by stretching payments over 20 or more years.  In some states only commercial properties are eligible.

Currently, investments such as solar panels, which can cost $30,000 or more, are not practical for homeowners because many don’t live in a house long enough to earn a return on the investment.

In such a district, however, a property owner might be inclined to make a retrofit because the cost would be inherited by a subsequent owner of the house, with the special levy remaining with the property.

While environmental groups have applauded the legislation, it has not been well received in some circles.

Merritt’s SB 260 was gutted in committee, removing its original authorization to allow municipalities to issue bonds to fund improvements. Instead, SB 260 would allow municipalities to solicit private equity, federal grants and loans.

Merritt said lenders have expressed concerns that the municipality would receive a priority claim in the event a property owner defaulted on payments. Concerns were also raised about risks to taxpayers from homeowners who default.

He concedes that he’s not certain whether private-equity investors would be willing to take such a risk to back these projects, but that it’s possible federal money might be available to place into a pool for upgrades.

“I thought at least we could get a start” on this concept, Merritt said.

Supporters of such so-called clean-energy financing districts said they’re disappointed at the reception in the Indiana General Assembly.

The type of non-bond funding contemplated in the revised SB 260 would appear to significantly reduce the size of the potential pool of recipients and could potentially shut out households with more modest incomes, said Jesse Kharbanda, executive director of the Hoosier Environmental Council.

But such financing techniques, better known as Property Assessed Clean Energy, or PACE, are facing headwinds on the national level as well.

In mid-2010, the Federal Housing Finance Agency determined that some of these programs raise safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

FHFA cited “difficult risk management” challenges for lenders, loan servicers and mortgage-securities investors posed by PACE programs that have first liens.

A handful of bills in Congress seek to reverse Fannie Mae and Freddie Mac directives that such liens under PACE programs cannot take priority over a mortgage.