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OVERVIEW | De-risking energy efficiency investments for the EU building stock

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Increasing the energy performance of the EU building stock is key for the EU to achieve its climate and energy goals. However, annually only around 0.2% to 0.3% of buildings across Europe are undergoing deep renovation (aiming at achieving energy savings of at least 60% compared to pre-renovation energy consumption levels) and the average owner or user often considers such actions as too expensive. Currently, risks related to energy efficiency investments in buildings are still largely evaluated on a case-by-case basis, without a standardised approach. This is due to a lack of sufficient track records related to financial risk. In particular, there is a lack of generally accepted key performance indicators and benchmarks providing a clear and comprehensive economic rationale for improving energy efficiency in buildings.  The evaluation of these investment risks are also often grounded on simplified business modelling approaches based merely on payback expectation. The availability of such indicators will be warmly welcomed as it will allow the comparison of energy efficiency investment projects with other capital market investments.


Sustainable energy investments are an essential pillar of such strategies, which require significant public financing as a lever for private investment, as was expressed by different representatives from various countries reporting on the ongoing work of designing a solid response to the COVID-19 pandemic crisis whilst building in a strong emphasis on a green recovery. While energy efficiency investments are in many cases expected to be paid back exclusively through the reduction of the energy bills, there is increasing evidence that non-energy benefits play a key role in the decision to invest in energy efficiency. These benefits include, for instance, increased building value and lower tenant turnover or vacancy rates.


As set out in the recently published Communication A Renovation Wave for Europe - greening our buildings, creating jobs, improving lives, activity in construction fell by 15.7% in relation to 2019 and energy efficiency investments have dropped by 12% in 2020. Even if a recovery is expected, there is likely to be a lasting impact on the sector. The EU’s recovery instrument NextGenerationEU, alongside the EU’s Multiannual Financial Framework, will make available an unprecedented volume of resources that can also be used to kick-start renovation for recovery, resilience and greater social inclusion. On such basis, this Communication presents a strategy to trigger a Renovation Wave for Europe, with the objective of doubling the annual energy renovation rate of residential and non-residential buildings by 2030 and to foster deep energy renovations.


The overall investment uncertainties often cause financial institutions to attribute high-risk premiums to energy efficiency investments. The European Commission recognises that investing in energy efficiency must become more secure. De-risking is part of the European Commission smart finance for smart buildings (SFSB) initiative, which is part of the Clean Energy for all Europeans package and aims at achieving a better understanding of the risks and benefits of energy efficiency investments. As a way to changing the risk perception of financiers and investors, the De-risking Energy Efficiency Platform (DEEP) has been created. This consists of a pan-European open-source database containing detailed information and analysis of energy efficiency projects, and builds performance track records to help project developers, financiers, and investors to better assess the risks and benefits of energy efficiency investments across Europe.


Recently, the webinar ’Energy transition: new business models to de-risk investments and kick start the EU building renovation wave’ focusing on effective ways to de-risk investments in the building sector, presented how the EU is supporting the identification of transparent and predictable investments. This includes practical examples of existing and emerging financing and technical tools that are facilitating building renovation projects and targeting recommendations on policy framework and market architecture.


To effectively de-risk investments in the building sector and facilitate the upgrading of building performance and energy efficiency services in Europe, policy, financing and technical tools need to work together in a co-ordinated and coherent manner.  Accordingly, the EU has been supporting innovative financing, to allow for energy efficiency to uptake the market, and has financed a number of aimed at overcoming the obstacles to access private finance for energy efficiency and integrated renewables, such as the lack of common understanding of smart financing between government, public sector, private sector, and the financial sector. Projects for private finance for energy efficiency have been financed to foster the gathering, processing and disclosing of large-scale data on the actual financial performance of energy efficiency investments to create a track record for energy efficiency across different sectors (buildings, industry, transport, etc.).


EU funding driving investment for renovation

Several Horizon 2020 projects are already working to overcome barriers to achieve the doubling of the building renovation rate needed to reach the EU’s ambitious 2050 goal of becoming the 1st 'Climate-Neutral Continent' (EU Green Deal). EU projects support the energy transition through co-operation in research and innovation and market uptake, aiming to design and disseminate new business models, technical and financial tools, frameworks for standardisation and benchmarking of sustainable energy investments, as well as educational material and guidelines for European energy markets.


The EeDaPP project that has designed and delivered a market-led protocol to enable the recording of data related to energy-efficient mortgage assets made accessible through the use of a common data portal and EuroPACE that has developed a scalable on-tax financing mechanism, modelled on a similar mechanism from the United States, to unlock the huge potential for energy-saving technologies for European households. Meanwhile, QualitEE, has provided a toolkit for quality assessment, financial assessment, best practices and a dedicated procurement handbook for energy efficiency projects that aims to build trust between consumers, suppliers and financiers. Finally, the SUNShINE project has undertaken the massive task of prolonging the lifetime of old Soviet-era residential buildings in Latvia whilst making them more energy-efficient. This was achieved through the use of energy performance contracting (EPC), of which a key feature is that the provider, an energy service company (ESCO), guarantees energy savings.


With the development of IT-based tools to evaluate and benchmark small-size energy projects, some Horizon 2020 projects are contributing to bridge the gap between developers and investors. For instance, the project SEAF (Standardisation and Communication of Sustainable Energy Asset Evaluation Framework) developed a holistic IT-based platform (‘eQuad’) for valuation and benchmarking of smaller sized sustainable energy projects (energy efficiency, demand response, distributed renewable energy generation, energy storage etc.). This platform includes valuation and optimisation as well as risk assessment and transfer insurance components.


The recently started project LAUNCH builds on the eQuad platform. It will further develop the aspects linked to standardisation of projects, de-risking and due diligence processes, which are essential in order to develop a secondary market where sustainable energy assets can become tradable securities. There will be a particular emphasis on the development of standardised contracts and risk assessment protocols as well as on tailored private equity finance support.


With the view to specifically increase the decarbonisation investment in the real estate and asset management domains, the H2020 funded Carbon Risk Real Estate Monitor project (CRREM) does so by integrating the down-side financial risk of climate change in investment decisions. The project provides investors with ad-hoc management and monitoring tools allowing them to specifically set up carbon reduction pathways.


Specifically addressing the housing sector and the large-scale unlocking of finance through a Green Mortgages/Green Homes scheme, the SMARTER project is gathering around the table developers and banking or financial institutions. This is allowing for scaling up and replicating an already successful programme emerging from Romania into 11 new countries. In a recent event the project partners discussed how the so-called co-benefits of green and energy-efficient construction are the real benefits (comfort, value, etc…) and are real drivers for investment. Sheding light on the benefits of greener homes and help potential buyers understand how best to sign up, at the same time helping investors and developers understand energy performance criteria.


The EEnvest project aims at supporting the decision making process of investors by translating building’s energy efficiency technical requirements into economic indicators. These indicators are in turn used to evaluate financial risks associated with deep renovation investment, and includes non-energy benefits in asset evaluation models. EEnvest is currently developing effective evaluation methods for the technical/financial risk correlation by categorising several major technical risks and quantifying their impact on investors´ confidence. Those risks are first evaluated by exploiting existing databases on building energy efficiency (e.g. DEEP database of the Energy Efficiency Financial Institutions Group) and then the risks are organised into an investor friendly benchmark track record.

triple renoa project



Finally, it is important to mention the recently started Triple-A project aiming to reduce the respective time and effort required at the crucial phase of the investments conceptualisation, as well as to increase the transparency and efficiency of respective decision making.


By introducing its new scheme, Triple-A seeks to make energy efficiency investments more transparent, predictable and attractive for investors/financiers and project developers. By assessing Member States risk profiles and mitigation policies, the project will enable national and sectoral comparability, reducing uncertainty for investors. The project takes into account eight specific diverse case study countries: a leading European economy (Germany), an innovation front-runner in energy (The Netherlands), an economy that has gone through one of the longest and most severe recessions (Greece), an economy going through an economic recovery process (Italy), a diversified economy with a strategic geographical location having some of the largest European firms (Spain), a country that has experienced one of the fastest economic recoveries in Europe (Lithuania), a progressing country with a once sceptical stance towards low-carbon development (Czechia), and a country performing a transition to a market economy, with a growing regional strategic role (Bulgaria).


The above projects are addressing de-risking of the financing of energy efficiency by promptly understanding issues of finance and market confidence while simultaneously considering the local specificities.  Considering these diverse approaches and multiple efforts, it is expected that a positive transformation in the market and business models will take place. This new context would prevent investments in harmful practices, instead fostering the transition to clean energy and investment in a high-quality energy-efficient and sustainable building industry.