Practices

Scalable innovative financing for smart buildings

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The clean energy transition represents a key opportunity for public authorities, investors and businesses to unlock financing for Smart Buildings and address the needs of European citizens while driving the energy transition forward.

 

Without effective and scalable financing schemes, it is impossible to reach the volume of investment required to upgrade European buildings. To date, the financing landscape has been dominated by bank loans, subsidies and grant programmes on national, regional and local levels. While some cities and countries have successfully experimented with innovative financing models, which do not require either tax-payer’s money or burden users with private debt, the uptake is still low. There is a need for a greater awareness of innovative financing mechanisms that best address the Smart Buildings’ renovation needs while being affordable and effective for buildings’ owners and users. These models are therefore key to tripling renovation rates, without negatively impacting the financial health of European citizens or burdening public budgets.

 

The benefits of Smart Buildings go beyond energy/cost reductions and direct CO2 savings, but also enable flexibility capacity and an array of societal and environmental improvements. Indeed, every building can be a source of decentralised energy resources (on-site renewables, energy storage and demand response) which can be exploited by innovative service providers. Increased flexibility contributes to the grid stability, and to the balancing of energy supplies – in other words, it enhances the efficiency of the overall energy system. Plus, as people spend 90% of their time indoors, people’s health, wellbeing and productivity can be boosted in more comfortable, healthy and intelligent buildings, which in turn can result in decreasing healthcare costs and increasing workplace performance. These non-energy benefits of Smart Buildings are key in addressing the real concerns of all Europeans.

 

However, the above-mentioned potential will remain untapped if policy will rely on a “business as usual” strategy which simply involves increasing public subsidies and higher lending volume from standard financial institutions. This will not be a sustainable strategy, given the existing constraints on public budgets and the capital requirements of the banking system.

 

Currently many viable and necessary renovation projects are not implemented, even those where project repayments are directly and immediately balanced by energy cost savings, because so many households and businesses do not have the capacity to finance them up front. This is particularly true in the very regions of Europe where building renovation is most urgently needed.

 

Much of the public discussion and support currently circle around enabling banks to engage in providing renovation loans, resulting in an unbalanced treatment of financing sources. Member States and the Commission should also look, with equal urgency, to reduce the barriers to innovative financing mechanisms that enable both commercial users as well as lower and middle-class consumers to finance smart and sustainable building investments. This paper addresses several innovative financing mechanisms that have the potential to dramatically increase the volume of building renovation projects: Energy Performance Contracting (EPC), on-tax financing, on-bill programmes, crowd financing mechanisms for local projects and energy efficiency mortgages. These mechanisms, provided by funds, banks or through crowd financing, have proven highly successful at creating a stable pipeline of projects internationally and much more can be done, if adequately supported by European and national policies.