Sonoma County's energy retrofit program, a pioneering effort that has financed $42.4 million in power and water-use upgrades in homes and businesses, is headed for a major expansion.

Through a grant of $3 million from the California Energy Commission, the county plans to further promote and develop the two-year-old program among contractors. More financing for retrofits, discounted energy audits and utility rebates for residential customers also are planned.

The grant, drawn from federal stimulus funding, also will pay for county work geared towards creating similar retrofit programs statewide.

"We've proven the model," said Liz Yager, manager of the Sonoma County Energy Independence Program. "I'm just looking forward to the quality and quantity of the work improving from here."

The Board of Supervisors on Tuesday approved the expansion, which includes the addition of five county jobs, all of which would end when the grant runs out in March 2012.

The move comes at time of nationwide uncertainty for government-run energy retrofit efforts known as Property Assessed Clean Energy, or PACE.

Most of those programs were suspended or shuttered last year after new federal rules clamped down on home lending practices.

Sonoma County's program, the nation's first ongoing countywide effort, was initially halted before supervisors reversed their decision and filed a lawsuit challenging the new regulations.

That case is working its way through the federal courts. Meanwhile, participation in the county's program has taken a hit. Applications and signed contracts dropped by 58 percent and 75 percent, respectively, in the six-week period after the rules were issued in July. Contracts are down about 35 percent from this time last year, while applications remain at 57 percent below 2010 levels.

County officials blame the drop mostly on the new lending rules, which can pose an extra hurdle for participating homeowners.

Those with mortgages controlled by loan giants Fannie Mae and Freddie Mac have been required to pay off the entire retrofit, an average of $30,000, as part of any sale or home refinance.

County officials said most of those deals have worked out, allowing the program to continue. "We've had a number of very positive transactions," said County Auditor Rod Dole, the program administrator.

At least two local lenders, Redwood Credit Union and Exchange Bank, also are holding home mortgages connected to retrofit program on their own, allowing them to exist outside the federal rules that control Fannie Mae and Freddie Mac.

"We're in the lending business. We don't put people in boxes," said Brett Martinez, president and chief executive of Redwood Credit Union.

However, until legislation or a court ruling clears up the matter on the residential side, commercial retrofits — because they aren't affected by the new home mortgage rules — are seen by county officials as the best area for growth.

So far, only 39 of the county's 1,329 retrofits have been on commercial properties. Supervisors added to that tally, approving a jointly financed $1.6 million solar panel project at Sonoma Mountain Village, the mixed-use Rohnert Park development.

"We need to get our message out there. This is a wonderful program," Dole told supervisors.

"It's still a little lonely out here," Yager added.