Toronto Forges Ahead – “Local Improvement Charges” Offer a New & Promising Financing Mechanism to Encourage Energy Retrofits

Since then-Minister of Municipal Affairs and Housing Kathleen Wynne authorized municipalities to use Local Improvement Charges (LICs) to promote energy efficiency, renewable energy and water conservation projects last November, industry watchers have been waiting to see whether Toronto would take advantage of the opportunity.

Last week, they did: Toronto City Council unanimously approved its first pilot energy and water efficiency program. The three-year, $20 million pilot launching in late 2013 will include 1,000 single-family homes and 10 multi-residential buildings. It will permit participating property owners to undertake natural gas, electricity and water efficiency and conservation measures, with the City of Toronto (the City) covering all of the associated up-front costs. Beneficiary property owners will pay this investment back to the City via a special charge on their property tax bills. This charge is intended to be equivalent to or less than the energy or water savings accruing to the property owner.

There are two critical barriers to undertaking energy retrofits: (i) property owners often have trouble obtaining up-front financing and (ii) property owners who may want to sell their properties in the future are reluctant to make investments that they may not be able to recoup in the short term. The LIC program addresses these problems by allowing the City to leverage its ability to raise low-cost, long-term financing for property owners and by tying the repayments of such financings to the property rather than to the property owner.

What makes LICs even more compelling in the current era of government austerity is that LICs are intended to operate at zero net cost to the City, with the possibility of future positive returns if carbon credits are introduced. The priority lien status of the LIC further lowers the risk to the City of property owners defaulting on their payments.

The City, and other cities and municipalities across Ontario, will be able to use LICs to reduce greenhouse gas emissions while simultaneously stimulating the economy. The City’s stated aim is to reduce emissions by 30% below 1990 levels by 2020. The residential sector is the largest greenhouse gas emitter in Toronto, accounting for 54% of natural gas use and 30% of electricity use. With the majority of houses and apartment buildings in Toronto built pre-1980, encouraging cost-effective energy retrofits is a no-brainer.

Moreover, there are encouraging signs that there may be substantial economic benefits associated with LICs. The United States has a federal program in place similar to Ontario’s LIC program called the Property Assessed Clean Energy (PACE) program. One study cited by the Brookings Institute looking at the impact of PACE spending in Santa Barbara, San Antonio, Columbus and Long Island found that $4 million in spending could generate an average of $10 million of gross economic output, $1 million in tax revenue, and 60 new jobs.

The objectives of the LIC program include assessing the cost-effectiveness of a variety of energy efficiency measures and developing a clear business case to recommend a full-scale version of the pilot program to the City. Should the pilot results be positive, look for energy retrofits to skyrocket between 2017-2020.