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Financial instruments for energy efficiency in housing

  1. Innovative financing for energy efficiency in housing under the 2014-2020 EU Cohesion Policy Prepared by Peter Sweatman, Chief Executive of Climate Strategy and Axel Volkery, Senior Fellow at IEEP Policy Clinic, IEEP Offices 9.30am to 1.30pm Thursday, 26th September, Brussels
  2. Objectives for this meeting • Exchange views and lessons learnt with regard to financing energy-efficiency in buildings under Cohesion Policy • Highlight and discuss issues which arise when public-private finance is required to deliver on policy objectives • Develop perspectives to frequently asked questions about financial instruments • Establish a common understanding of the functioning, success conditions and do‟s and don‟ts when discussing innovative financing models with Member States
  3. Climate Strategy & Partners Executive Management Peter Sweatman - Chief Executive Officer and Founder Climate Strategy specializes in the  strategies  markets  and opportunities created by the need to combat climate change. We provide strategic advice and first class project execution to our clients in areas of: Climate Strategy understands the interdependent relationships between:  Environment  Society  and Government and their roles in guiding the global transition to a low carbon economy. Founded in 2009, Climate Strategy is a Madrid – Spain based consulting firm specialized in the transition to a low carbon economy  Engineer from Cambridge University  9 years at JPMorgan  5 years as Social Entrepreneur  5 years as MD for Iberia for Climate Change Capital Clients include:  Clean Energy  Clean Technology  Energy Efficiency  Policy  Environment  Sustainability
  4. Institute for European Environmental Policy (IEEP) IEEP is an independent, not for profit institute dedicated to advancing an environmentally sustainable Europe through policy analysis, development and dissemination Axel Volkery, Senior Fellow and Head of Environmental Governance Programme  15 years of work experience, including the European Environment Agency and the Advisory Council on the Environment of the Federal Government of Germany  Key subject areas: climate and environmental policy, EU budget  Diploma in Ph.D. from Free University of Berlin IEEP is specialised in policy analysis and strategic advice in a number of core policy areas. Work Areas:  Agriculture & Land Management  Climate Change & Energy  Environmental Economics  Industrial Pollution  Ware, Marine & Fisheries  Resource Use, Waste & Chemicals  Biodiversity  Global Issues & External Action  Governance Our clients include:  European Commission, mainly DG AGRI, CLIMA, ENER, ENTR, ENV, MOVE, REGIO, RTD.  European Parliament  Public authorities in Member States  Foundations (e.g. European Climate Foundation)  NGOs (e.g. WWF, Greenpeace)  Business (e.g. Novozymes)
  5. Part 1: The context for Public Intervention in Energy Efficiency: Rationale, objectives and barriers
  6. Energy efficiency: increasing relevance on the EU‟s policy agenda 5  Europe 2020 Strategy and the 2050 Low Carbon economy Roadmap set out objectives for the transition to a low carbon, climate resilient and resource efficiency economy.  European Council has endorsed a cut in GHG emissions by 80-95% compared to 1990 levels we have to push for more public and private investment in energy infrastructure by 2050  EU is deliberating the 2030 framework for climate and energy, and energy efficiency will have a key role to play  Energy efficiency is a key objective for the 2014-2020 MFF  Underpinned by the EU acquis: Energy-Efficiency Directive, Energy Performance of Buildings Directive etc. “It is in our cities that the greatest potential for energy saving lies… I believe that Cohesion policy and its solid financial instruments will have to play an important role in that sense.” (J Hahn, 2013) “We have to push for more public and private investment in energy infrastructure… Member States can also devote a bigger share of their structural funds to investing in energy and energy efficiency”. J.M. Barroso, 2013
  7. Multiple benefits from energy efficiency investment 6 Reducing GHG emission The most cost-effective way of reducing GHG emissions Additional co-benefits from reduced air pollution Reducing energy demand Reduced global energy demand of 28,000 Mtoe -> 8% lower electricity demand between 2012-2035 (IEA 12) Required investments in generation capacity and transmission/distribution infrastructure would be 16% lower Cost savings For every EUR 1 of direct energy cost savings, an additional EUR 1 could be saved due to lower energy prices (Ecofys 2013) Net direct savings of €107 billion annually by 2020 for European businesses and consumers while net additional annual cost savings are estimated in the order of €100 billion (Ecofys 2013) GDP growth/jobs If EU reduces its energy demand by 13% in 2035 as compared to 2010, a 1.1% increase in GDP can be expected in OECD Europe (IEA 2012) The implementation of the EED is expected to lead to an increased in EU GDP of € 34 billion and increased net employment of 400 000 jobs (EC, 2011)
  8. Multiple benefits from energy efficiency Investment in buildings 7 Creating jobs and additional social benefits Relatively labour intensive; jobs are local and cannot be easily exported 12-17 jobs are created per million euro invested (Ürge-Vorsatz et al. 2010, Meijer et al 2012) Swiss energy efficiency programme „EnergieSchweiz‟ in 2006 a net employment benefit of 2,600 person years was achieved as a result of the implementation of energy efficiency measures with a total investment volume of CHF 315 million of which around CHF 32 million were public subsidies (INFRAS, 2007) Reducing energy poverty „Energy poverty‟ includes appr. 52 million people in Europe (CECODHAS 2012) Households supported by the Irish „Home Energy Saving Scheme‟ between 2009-2011 are expected to save €450 per year on their energy bills (Scheer and Motherway, 2011) Between 2006 and 2010, under the KfW energy efficiency programme on average 280,000 flats were renovated leading to annual energy savings of 2.1 TWh and total investments of €14 billion based on an average public budget contribution of €1.4 billion (Prognos 2013) Fostering innovation and export markets €6.5 billion of venture capital and private equity has been invested into energy efficiency markets since 2007 worldwide (Bloomberg) and future market prospects are positive Global market for green building and construction materials to grow from $116 billion in 2013 to $254 billion in annual market value in 2020 (NAVIGANT 2013) Markets for insulation, lighting and building controls to grow at a range of between 3-6% on average up to 2030 (Mulki and Hinge 2010) Buildings are responsible for around 40 per cent of energy consumption and GHG emissions in the EU. Residential and tertiary buildings have particularly high energy requirements for heating, hot water, and cooling needs.
  9. Challenges 8  Investment needs are considerable: an increase by up to €200 billion by 2020 is forecasted by the Commission (EC 2011)  Credit crunch: New financial regulations (ie Basel III) and related needs to deleverage balance sheets reduce bank‟s interest in lending to SMEs. Note: Banks provide for roughly 80% of corporate finance in the Eurozone.  Oftentimes, information and knowledge gaps persist, and other barriers such as split incentives (landlord-tenant dilemma) distort interest.  Setting the right regulatory framework remains the main lever for the EU to mobilise private investment into energy-efficiency.  But the EU budget can play an important support function and boost certainty among investors. A greater focus on financial instruments is needed, and there is broad agreement to simplify and expand the use of financial instruments in 2014-2020.
  10. 9 “Union measures of financial support provided on a complementary basis from the budget in order to address one or more specific policy objectives of the Union. Such instruments may take the form of: • equity or quasi equity investment, • loans or guarantees, • or other risk sharing instruments, and may, where appropriate, be combined with grants.” Regulation 966/2012, Title I of Part One. Art. 2 (p) (own accentuation) What are EU financial instruments? Essential requirements: • Should focus on situations of market failure and imperfect market conditions (ie where projects that are principally bankable receive no funding because they are perceived to be too risky) • Should not crowd out private finance Regulation 966/2012, Title I of Part One. Art. 140 (2)
  11. 10 Lessons learnt in 2007-2013 Positive + Leverage of private finance, positive effects on access to finance during financial crisis + Additional levers for EU policy objectives + Provision of experts skills – capacity building across governance scales + Revolving funds improve the quality of projects and fiscal discipline Negative - Inconsistencies and overlaps - Concerns about the ‟additionality‟ of actions (deadweight situations) - Lack of capacity and resistance due to perceived complexity and difficulty - Lack of information, visibility and acceptance – need for cultural change underestimated Need for: 1. Clear, coherent regulatory framework 2. Fewer instruments with streamlined and simplified implementation modalities 3. Greater visibility and transparency 4. New risk-sharing agreements to leverage higher finance volumes  Financial instruments are no “silver-bullet”
  12. 11 Grants and financial instruments in context
  13. 12 Common rules for all funds under shared management in 2014-2020: • Expand scope of FI to all types of projects, sectors and beneficiaries • Allow combination (blending) of grants and FIs from EU sources • Three implementation options • FI at EU level (ring-fencing) • FI at national/regional level (2 sub-options: „off-the-shelf and „tailored‟ instruments) 1. Loan for SMEs based on a portfolio risk sharing loan model (“RS Loan”) 2. Guarantee for SMEs (a “partial first loss portfolio” or “Capped guarantee”) 3. Equity Investment fund for SMEs and start-up companies based on a co-investment model (“Co- investment Facility”) 4. Loan for energy efficiency and renewable energies in the residential building sector (“Renovation Loan”) 5. Loan for sustainable Urban Development (“UD Fund”). • FI consisting solely of loans and guarantees. • New annual reporting requirements Ex/ante demand assessment required Need for limited, clear set of relevant, measurable indicators Links to COSME/Horizons 2020? Financial instruments in funds under shared management
  14. Why Cohesion Policy should support energy efficiency through financial instruments 13  Smart and cost-effective investment in energy efficiency in buildings contribute to multiple objectives of 2014-2020 Cohesion Policy – growth, jobs, cohesion, sustainable regional and urban development  New regulatory framework, revolving nature, possibility of upfront receipts of EU co-financing, higher EU co- financing rate, external financial expertise and management  EIB‟s 2013 survey showed that 79% of respondent (managing authorities) are interested in setting up financial instruments  Already existing experience and capacities with such investment across regions through grants and more recently financial instruments  Limits of capacity, ie JESSICA funds for energy efficiency slow in uptake  Perception of complexity/ low added value: Opinion that Fis are too complex, expensive (fees), not suitable for types of projects, little interest in the past etc.  Lack of pipeline: is there interest from the financial sector? Underlines the need for sufficient understanding and guidance, but also capacity-building
  15. Part 2: Financing Energy Efficiency – The Challenge and its Characteristics
  16. Energy Efficiency is a “Big Deal” for Europe: Why? 15 • Imports of 1,4 billion barrels of oil result in € 107 billion being „exported‟ • Construction of 550 coal power plants and accompanying infrastructure • EU GDP will lose the net positive impact of energy efficiency of at least € 34 billion …AND IF NOT
  17. Europe needs to invest Euro 60-100 billion per annum in Buildings Energy Refurbishment from 2012-2020 16  Solving Regulatory and Market Failures: Methodology  An accurate view of the size of the financing needs for European buildings  A clear pathway towards securing them in the timeframe required  An adequate mix of public and private finance  “Three Methodologies” + Their Investment Figures  Bottom-up Approach (EuroACE): fn (# Retrofits x Value) ▪ Annual European investment capital budget range of Euro 50 billion to Euro 180 billion  Top-down Using the IEA‟s 2050 GHG targets • Annual investment figure for buildings in the EU27 countries of Euro 110 billion each year until 2050  Procurement and Development Cost Approach (Barclays/ Accenture) • Total cost of Low Carbon Technologies by 2020 of Euro 2.9 trillion, from which Buildings require a total 2011-2020 procurement and development cost of Euro 600 billion (approximately Euro 67 per annum). “While there are many regulatory proposals aimed at filling the policy gap identified by the Energy Efficiency Plan 2011, there have been fewer attempts made to quantify and resolve the commensurate and considerable financing gap.”
  18. At a country level, the EU Investment Target is consistent with 0.5-0.8% GDP Investment Annually 17 “Our methodologies allow us to determine an order of magnitude investment capital figure for European buildings which, through the use of existing successful national financing models, allows us to develop a European financing framework which can scale to deliver levels of national retrofit activity required to meet Europe’s 2020 energy efficiency targets.”  Appropriate “Order of Magnitude”  Investment required in European buildings between now and 2020 is Euro 100 billion per annum.  In the context of the EU 27 2010 gross GDP, the figure is 12 trillion • This implies an approximate annual investment into energy efficiency in buildings on average per country of just over 0.8% of gross GDP to deliver Euro 100-150 billion in annual savings by 2020.  Cross-Check of Comparable Research  The figures above are consistent with Mckinsey‟s work on the capture of NPV - positive savings in the USA: • At a minimum, the US should be investing approximately $67-79 billion (c. 0.5% of US GDP) per annum in building energy efficiency measures  And coincides with UNEP‟s 2010 research which calls for annual investment of $308 billion in green buildings globally (0.5% of 2010‟s global GDP) until 2050
  19. The Problem is not only the Aggregate Amount of Finance: It is the AGGREGATION itself… 18 Customers Energy Efficiency + $ ee 1 + $ ee 2 + $ ee 3 + $ ee 4 + $ ee 5 + $ ee 6 + $ ee 7 Re Financing Capital Markets
  20. Energy vs. Energy Efficiency: “from a Finance Perspective” 19  Few concentrated assets  Few large sophisticated owners  „Known‟ commoditized finance approach  Well organized, funded and credit worthy counterparties  Deal track records  Mature consolidated industry Energy Energy Efficiency  Many distributed assets  Many unsophisticated small owners  “Innovative finance”  Varied counterparties, limited credit history  Limited track records  Immature fragmented sector
  21. Buildings Investment Capital comes from Six Sources and in Eight Instrument Categories 20  Sources of Capital  Government, Building Owner, Building Occupier, Bank, Renovation Contractor and Energy Supplier  Availability of Capital depends on: • The source‟s access to and cost of funds • Perception of the risk / return characteristics of the renovation investment • Other competing investment priorities  Instrument Categories  Preferential Loans, Subsidies, Grants, Third Party financing, Trading (White/Energy Certificates), Tax Rebates, Tax Deductions and VAT Reductions “In 2010, EuroACE identified in excess of 100 financial or fiscal instruments which were in place across Europe which represented a total investment in the order of tens of billions of Euros One of the most important roles of Government Policy is to lever private capital to invest alongside its own orders of magnitude which reach 0.5-0.8% GDP every year from now until 2020”
  22. All Potential Sources of Value MUST be contemplated in the Financing and Policy Solutions 21 Energy and CO2 Savings Green Premium Other material Improvements Sometimes referred to as “co-benefits” Image source:  Value Framework and Economic Incentive  In the context of a building retrofit, there are three key sources of value: “Refurbishment activity can be driven by any one, or a combination, of these three value sources: Energy savings (classic ESCO activity), implied emissions reductions (white certificate programs like the UK’s CRC Energy Efficiency Scheme) or the other material improvements (eg. Commercial property refurbishments which include improved energy performance alongside a more sizeable general renovation).”
  23. Policies and Finance go “hand in hand” and 10x leverage can only be achieved with Strong Alignment 22 “From a structuring perspective, we believe that, independently of originating channel (Bank, ESCO, Energy supplier), the broad primary source of capital (debt capital markets) required for such significant sums are those which can guarantee the most permanent access to such low cost funding”  Successful Polices  If successful policies and programmes are implemented, the total amount of energy efficiency activity funded in Europe by 2020-25 could reach Euro 1 trillion.  If levered 1:10, this implies Euro 100 billion of public funding together with Euro 900 billion of private sector co-funding. Equivalent to 15% of the total EU27 residential mortgage market in 2008. • Of similar magnitude to the expected energy infrastructure investments required of European Utilities.  The role of Government “policy bank” balance sheets is key (eg. KfW, CDC, ICO, CDP) together with local retail banks working alongside the policy banks making low cost customer retrofit loans a priority and sharing the risk. 1x 5-9x 2x 2-3x ?
  24. Part 3: Energy Efficiency Case Studies and Barriers
  25. 24 Challenge: How to Use the Commission‟s Financial Instruments to Deliver more Energy Efficiency Sources: EIB Energy Efficiency in Buildings (2012) SEB loan agreement in fourth JESSICA fund loan in Lithuania (2012) QUESTIONS: WHAT MIGHT STRUCTURAL FUNDS ACHIEVE IN DIFFERENT CONFIGURATIONS WORKING ALONGSIDE PRIVATE SOURCES OF FINANCE ? HOW TO STRIKE THE BALANCE BETWEEN TA AND OTHER INSTRUMENTS ?
  26. German Case Study: KFW established a sizeable, low cost, retail EE renovation programme 25 ■ Size: KfW – with Euro 6 billion of federal funds was able to deploy Euro 27 billion efficiency investment through program activity stimulating a total and private investment flow totalling Euro 54 billion thus creating a “waterfall effect”. ■ Leverage: Germany has achieved impressive co-financing ratios of public to total funding for energy efficiency retrofits which started at 1:4 until 2006 which increased to 1:9 through the introduction of new programs coordinated by state bank KFW to 2009. ■ Parallel Grants: Grant subsidy of eligible measures and to encourage deep renovations are also available at a single KfW window. ■ Scale: Germany has refurbished around 200,000 buildings a year (equating to c. 400,000 homes). Estimates Germany has retrofitted 9 million units to high energy for heating efficiency standards. ■ Distribution/ Reach: Deployment through most German retail banks at very low interest rates (1-2.75%). ■ Branding: Creation of the KfW55/ 100 Home Standards helped to deepen customer awareness of energy efficiency standards. Image source: “This “waterfall effect” was created through several positive design features of KfW’s programmes including their deployment through the networks of private banks ensuring broad reach, levering banks’ retail transaction processing capacities and their subsidized 2.75% interest rates.” RESULT: LOW COST RETAIL BANK DEBT FUNDING WITH BANK BRANCH DISTRIBUTION AND GRANTS
  27. UK Case Study: Green Deal Standardized Process, Government Soft Guarantee and On-Bill Repayment 26  Ambition: Starting in 2013, UK anticipates the continued retrofit of over a million homes per annum, building on CERT‟s success. ► The Green Deal looks to provide some £10,000 investment capital per intervention.  Leverage: UK‟s Green Investment Bank targets 1:5 ratio from its initial £3 billion of capital and green infrastructure investment. GIB contributed £125 million to Green Deal Finance Company which will also be levered again.  Quality Assurance: UK provides “Golden Rule” cover with high quality design, oversight and procedures.  Use of On-Bill Channel: Green Deal repayments are included into Utility Bills.  Harnessing the Power of Energy Companies: Energy companies are obliged to provide the funding and distribution to support CERT (previously the retrofit of social housing) and now ECO programmes. RESULT: MEDIUM COST RETAIL FUNDING WITH ENERGY CO. AND INSTALLER DISTRIBUTION
  28. French Case Study: Low Rates, Tax Rebates and Nation Wide Distribution Domofinance/ “Bleu Ciel” 27  Ambition: 500,000 home retrofits targeted per year by 2017 (of which 120,000 in social housing) supported by Grenelle Law framework and White Certificates (phase 3).  Tax Credits: The French “crédit d’impôt développement durable” has been a key driver for primary home renovation demand for eligible measures.  White Certificate Pressure to Engage: The drive for EDF and GDF to source white certificates has driven their engagement in establishing certified installer networks (eg. Bleu Ciel‟s 5,000 partners) and specialist low interest rate debt provider banks (eg. Domofinance and Solfea).  Low Cost, Long-term Loans: Either through specialist private sector lenders (Domofinance, Solfea etc) with interest rates “bought down” (0.75% in some cases) by Energy company acquiring related white certificates, or “l’éco-prêt à taux zéro” a Ministry of Environment 0% 10-15 year loan for eligible projects. RESULT: LOW COST RETAIL DEBT FUNDING WITH ENERGY COMPANY AND GOVERNMENT DISTRIBUTION WITH TAX SUBSIDIES
  29. Case Study: EBRD Engaging Banks through Sustainable Energy Finance Facilities in Central Europe 28  Scale/ Reach: € 1.5 billion signed (through more than 100 loan operations) in 15 countries via 70 local financial institutions with over € 900 million on-lent to approximately 1,000 businesses, 500 housing associations and 30,000 households. Sub-loans range from € 2,500 to € 5 million.  Distribution: Local financial institution credit lines – mixture of institutional and retail channels with fees paid on eligible investments.  Technical Assistance Grants: Specialist consultants provide support to banks and sub- borrowers.  Example: Slovakia SLOVSEF through 9 credit lines to 6 local banks for a total of EUR 150 million complemented by 30 million EUR grant funding from the Bohunice International Decommissioning Support Fund (BIDSF) with results:  560 projects financed  >2.4 million m2 of floor area refurbished  >82,000 people benefiting from lower energy bills and improved thermal comfort  Average energy savings ~35% and 100 kt CO2 -eq. per year Sources: Financing Opportunities with EBRD (2013) Introduction to EBRD‟s Sustainable Energy Initiative (2013) (2013) RESULT: DEBT FUNDING WITH TA GRANTS DISTRIBUTED BY LOCAL BANKS TENDING TOWARD MID-SIZED PROJECTS
  30. 29 Discussion Structure for a National Energy Efficiency Fund for Buildings Renovation Alternative Finance Structure Example
  31. What are the Key Characteristics expected in the Framework for Financial Instruments ? 30  Benefits = Applicability and Flexibility: The advantages of FI in the context of Structural Funds are specifically:  Use across all 11 thematic objectives;  “User-friendly” legal framework with interpretation guidelines (TBA);  Easier/ possible to combine grants and FI within the same operation;  Possible to consider an asymmetric remuneration of the private contribution to financial instruments (eg. Public “first loss” tranche etc.);  EC co-financing rate is increased by 10% if an entire priority axis is implemented through FI;  Alternatives = Four New Options to Implement FI:  Shared managed FI: Responsibility is the MA and FI is tailor made for the special conditions of the region;  Off-the-shelf FI: Offering a standard set of conditions to save time and difficulties in setting-up;  Make use of the existing FI: Directly or indirectly, such as the risk sharing facility, H2020 or COSME;  Direct: Provide funds directly by the MA in loans and guarantees, but not in equity.  Requirements = Additional Reporting and Monitoring:  Ex-Ante Assessment: EIB detailed methodology expected in October 2013;  “No Free Parking”: Provisions to require transferal of up to 25% of the total resources needed upfront;  Yearly Updates: Detailed rules to be published about monitoring on a yearly basis. Draft Characteristics of Financial Instruments (from June 2013 Stakeholder Discussions)
  32. What are the Advantages of “Off-the-Shelf” and what is a “Renovation Loan” OTSFI ? 31  Easier to Execute FI = “Off-the-Shelf”:  The “off-the-shelf” instruments are designed using the limits imposed by the different regulations, in particular state aid;  If the MA wants to set-up an instrument with different conditions, it has to be tailor made and the MA has to check if it is done accordingly with different regulations;  Considered as a good starting point to develop other financial instruments and approaches.  Five initial “off-the-shelf” Financial Instruments: 1. Loan for SMEs based on a portfolio risk sharing loan model (“RS Loan”) 2. Guarantee for SMEs (a “partial first loss portfolio” or “Capped guarantee”) 3. Equity Investment fund for SMEs and start-up companies based on a co-investment model (“Co-investment Facility”) 4. Loan for energy efficiency and renewable energies in the residential building sector (“Renovation Loan”) 5. Loan for sustainable Urban Development (“UD Fund”).  Renovation Loan: An FI made available by the MA in the framework of the operation which is part of the priority axis defined in the programme funded by the ESIF and defined in the context of an ex-ante assessment:  Primarily aimed at multi-apartment buildings where the energy saving potential of renovation is significant but where apartment owners still need appropriate incentives eg.:  Complementary grant assistance;  Long term subsidised loan conditions; and/or  Upfront advisory support and funding to prepare and implement “full envelope” building renovations.  Assumes two key conditions in Member State:  A financing market in which banks are essentially the only source of funding, but where this funding is either too little (due to the risk appetite of the bank), too short term, too costly or otherwise inappropriate for the long term payback nature of the projects being financed;  An inefficient system of identifying and procuring the works on behalf of multiple apartment owners; Draft Outline of “Off-the-Shelf” FIs and the Renovation Loan (from July 2013 Draft Standard T&Cs)
  33. What are the Advantages of “Off-the-Shelf” and what is a “Renovation Loan” OTSFI ? 32 Draft Outline of “Off-the-Shelf” FIs and the Renovation Loan (from July 2013 Draft Standard T&Cs)  Long term, low interest funding provided using European Structural and Investment Funds (ESIF), with an appropriate level of risk sharing by the financial intermediary determined through a competitive process and provided in the form of a shared loss component;  “Hands-off” Management: MA represented in supervisory committee of the Renovation Loan but not participating directly in individual decisions.  Transparency and Market Practice: Renovation Loan shall have a governance structure that allows for decisions concerning credit and risk diversification to be made transparently and in line with relevant market practice.  Can be used together with grants assuming final beneficiary benefits.
  34. Financing “a saving” /reduced cash out flows Energy efficiency measures result in a reduction of the cash outflow related to energy in a household or building. This has a financial return but it is derived from the underlying ability of the household to pay or company to continue operating. The challenge is to structure a business case in energy efficiency in such a way that the potential increase in free cash flow is secured and therefore used for interest and repayment requirements instead of discretionary spending by households or businesses. Split incentives The entity investing in energy efficiency is often not the same one that is benefiting from the investment. Without aligned or common interests, this makes it hard to develop a business case for renovation. This is apparent when the occupant of a building is different from its owner and also impacts the way the construction sector sees innovation to improve energy efficiency of its end-product: Unless homeowners and purchasers are more aware of the running costs of efficient versus inefficient buildings the “free market” mechanisms will require regulatory support. Aggregation Challenge Saving energy in buildings requires the upgrade of a series of complimentary measures (such as better insulation, energy measurement systems, changing behaviour, LED-lighting, replacing old appliances, etc) which can deliver impressive savings. This can then be repeated in many similar buildings and produce an interesting scale project for wholesale finance. Keeping the costs of aggregation down is critical. Perceived Higher Risk Due to the lack of an investment track record and many investors‟ unfamiliarity with energy efficiency project structures and economics there is a perception among many funders with low levels of specialist technical capacity that the risk of energy efficiency projects is high. Multiple Sources of Finance The multiple benefits of energy efficiency upgrades accrue to different stakeholders and hence a mixed multi-stream package of public and private source financing is appropriate, yet more complex to arrange and coordinate. Concentration of Banking Risk In Real Estate The built environment provides one of the most attractive and cost effective opportunities in Spain to save energy. But Spanish banks have large exposures to domestic real estate and the mortgage market. As commercial and residential property values continue to decline the built environment poses an increasing risk to banks balance sheets. Banks are reluctant to increase their exposure to real estate finance in a weak price environment even though there is strong international evidence that property values of energy efficient buildings hold up relatively well in comparison to less energy efficient buildings. Banks may prefer exposure to “on-bill” repayment channels than additional mortgage debt. Lack of Knowledge and capacity Energy efficiency requires specialised knowledge which is not widespread across the finance market. While many banks have this knowledge in specialist teams, like structured finance, this potentially restricts the deal size and appetite for energy efficiency through the retail channels and among generalist client managers to offer their institutional clients. Source: Adapted from ING (2013) supplemented with GTR interviews in Spain “Top Barriers” to Energy Efficiency Finance List of Financial Barriers to Energy Efficiency Deployment
  35. Contact Climate Strategy – @ClimateSt 34 Climate Strategy Headquarters Climate Strategy SL Calle Oretga y Gasset, 25, Planta Baja 28006 Madrid SPAIN Tel local: +34 91 576 4837 Tel UK: +44 (0)20 7193 4807 Fax: +34 91 435 5983 Follow us on Twitter @ClimateSt This document has been prepared for specific use and should not be published or circulated outside of its intended audience. The facts and figures are derived from public sources and have not been independently verified by Climate Strategy who provides no guarantees for its accuracy nor completeness nor will assume any liabilities for such arising from any third party use of the contents. Any opinions in this document constitute the present opinion of Climate Strategy which is subject to change without notice. There are no financial services marketed here nor intended as promoted herein. Please refer to website for further information.
  36. 35 Institute for European Environmental Policy (IEEP) London Office 11 Belgrave Road, IEEP Offices, Floor 3 London SW1V 1RB Tel: +44 (0) 20 7799 2244 Fax: +44 (0) 20 7799 2600 Brussels Office Quai au Foin, 55 Hooikaai 55 1000 Brussels Belgium Tel: +32 (0) 2738 7482 Fax: +32 (0) 2732 4004 More information about IEEP‟s work on the EU budget, Cohesion Policy and climate financing, please contact: Keti Medarova-Bergstrom: Axel Volkery: Or visit: Follow us on Twitter @IEEP_eu

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