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Innovative financing

EU supports the development and scaling up of innovative energy efficiency financing products and schemes.

Innovative approaches to financing energy efficiency investments is at the centre of the EU energy efficiency policy, legislation and funding.

Many EU projects directly supported the development and scaling up of innovative financing products and schemes dedicated to energy efficiency and addressing the shortcomings of the traditional financing products available on the market.

Such projects were previously funded under Horizon 2020 programme Societal Challenge 3 and will continue to be supported by the LIFE programme 2021-2027- the Clean Energy Transition sub-programme.

Horizon 2020 project examples

Even the more classical financial instruments can get a “green” twist and be adapted for energy efficiency investments. One example is the Energy Efficient Mortgages initiative, which aims to create a standardised “energy efficient mortgage”, through which building owners are incentivised to improve the energy efficiency of their buildings or acquire an already energy efficient property by way of preferential financing conditions linked to the mortgage.

The assumption is that energy efficiency has a risk mitigation effect for banks because of its impact on a borrower’s ability to service their loan and on the value of the property. This means that energy efficient mortgages represent a lower risk on the balance sheet of banks and could therefore qualify for a better capital treatment.

The Property Assessed Clean Energy (PACE) mechanism, originally developed in California, is an innovative model where investments in renewable energy, energy efficiency and water saving upgrades to homes and buildings are repaid through property taxes. The EuroPACE project is set to deploy private capital as up-front financing to homeowners and have the costs repaid over time as a special charge added to the existing property tax bill.

Another example is ESI Europe, which replicates an innovative financing mechanism for energy efficiency specifically targeted at Small and Medium-sized Enterprises(SMEs). Based on standardised contracts, the project integrates an energy savings insurance mechanism with retention guarantees by technology providers and provides for (simplified) validation/verification by independent specialised entities. This financing scheme will enhance trust between SMEs, suppliers of energy efficiency technologies and financial institutions.

Guarantee facility

As part of the Smart Finance for Smart Buildings initiative, the Commission developed, together with the European Investment Bank (EIB), a flexible guarantee facility model, which was approved by the EIB Board on 6 February 2018.

It aims to make investments in energy efficiency for residential buildings more attractive for private investors, by using EU grants as guarantees to de-risk investments. Such investments could also contribute to new jobs in the sector, help establish a renovation market for small businesses and take many European families out of energy poverty.

The Guarantee facility aimed at unlocking, together with other tools from the ‘Clean Energy for all Europeans’ package, a total of €10 billion in public and private funds for energy efficiency projects by the end of 2020.

One stop shops for building renovation

The “one-stop-shop” business concept for buildings renovation has become a critical element of the “Smart financing for smart buildings” policy initiative and the Renovation Wave strategy. The “one-stop-shop” addresses an important challenge of effectively matching the financing supply with the fragmented demand side of building renovations.

Energy performance contracts

Energy performance contracting is a promising financing and services model, strongly supported by European energy efficiency policy and legislation.

Several provisions of the Energy Efficiency Directive have direct or indirect impact on the market uptake of the energy performance contracts (EPCs). The provisions on energy services directly contribute to EPCs services development, while the provisions on the exemplary role of the public sector, as well as the provisions establishing energy savings obligations have an indirect triggering effect on the demand for EPCs.

EPCs are used in particular in the public sector. Energy performance contracting is a form of innovative financing of energy efficiency investments, where the contractor gives a financial guarantee for the expected energy savings on a project. They are a practical way of making public buildings and other public infrastructures more energy efficient. An energy service company carries out the works and guarantees a certain level of energy savings. The initial investment is covered by the energy service company or by a private partner (usually a financial institution) and repaid through the guaranteed energy savings.

The major barrier of application of the energy performance contracting in public sector resulted from the increase of public debt that the EPCs created in public accounts. To address this barrier, Eurostat updated in 2017 the guidance for accounting treatment of energy performance contracts in the public sector – and together with the European Investment Bank (EIB), they published a practitioner’s guide to the statistical treatment of EPCs in 2018.