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OVERVIEW | Financing energy efficiency in buildings

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The challenge

The EC estimates that about 35% of the EU's buildings are over 50 years old, and almost 75% of the building stock is energy inefficient.


At the same time, only 0.4-1.2% of the building stock renovated each year (depending on the country) [1].


This means that buildings are a key target to reduce primary energy use, GHG emissions and to generate renewable energy rather than consuming fossil fuels. Indeed, buildings should move from energy consumers to producers, contributing a significant share of renewable energy generation.


As mentioned above, a very small number of buildings are undergoing deep renovation (aiming at achieving energy savings of at least 60% compared to pre-renovation energy consumption levels [2]) and the average owner or user often considers such actions as too expensive.


Moreover, the lack of technical expertise makes deep renovations more niche market, which is less interesting for investors and financers, except with a form of aggregation still to be fully developed.


Access to financing is not the only bottleneck in the building renovation value chain. In addition, the risk assessment methods currently available are lacking enough certainty to meet the requirements of investors.


Risks related to energy efficiency investments in buildings are still largely evaluated on a case-by-case basis, without a standardized approach, due to the lack of sufficient track records related to financial risk.


This is ascribed to the presence of several information gaps along the building value chain, which are deemed to generate the so-called investor´s dilemma, e.g. a lack of the complete set of expertise needed to evaluate and prepare an investment in energy efficiency. These missing bits of information can be summarized as:


(I) technical market fragmentation - lack of standardization with regards to technologies and implementation processes, generating limited control on project development costs, quality and achieved energy performance;


(II) investment yield unpredictability - lack of generally accepted key performance indicators and benchmarks providing a clear and comprehensive economic rationale for energy efficiency in buildings as, at the current state, they are often grounded on simplified business modelling approaches based merely on payback expectation;


(III) lack of one-stop-shops, structured databases and reliable tools, to make the investors journey easier, evaluating the combined effect of energy efficiency in terms of real estate increased value, operation and management (O&M) cost reduction, increased productivity of the building and other non-energy related benefits.


This lack of information is particularly relevant in the case of existing buildings that need renovation. In such cases (existing buildings) there is an intrinsic difficulty in determining the exact performance and commercial value of energy efficiency actions using a standardized approach.


In this context, there is a need to demonstrate more cost-effective and practical ways of achieving high energy performance targets for both new and deep renovated buildings while reducing the time needed for retrofitting, and therefore the impact on building users, and at the same time promoting a viable approach for decarbonising consumption through on-site renewable energy generation.


Currently, the financial sector lacks sufficient indicators to compare energy efficiency investment projects with other capital market investments, as there is no generally accepted quantification available related to the increase of the building’s intrinsic and real estate value when performing energy renovation.  


The overall investment uncertainties often cause financial institutions to attribute high-risk premiums to energy efficiency investments. Some of the issues can be summed up here:


- single energy efficiency actions represent high transaction costs for rather small investments, which is not financially very attractive;


- the lack of standardisation of projects also prevents securitisation [3] of energy efficiency assets. Financial institutions are thus not able to refinance their debt on the capital markets.


While energy efficiency investments are in many cases expected to be paid back exclusively through the reduction of the energy bill, there is increasing evidence that non-energy benefits play a key role in the decision to invest in energy efficiency. This includes for instance increased building value, and lower tenant turnover or vacancy rates etc.


These benefits need to be quantified through data collection and monetised to evolve the parameters used by financiers to assess an energy efficiency investment.


The EC policy

To meet the objectives of the Energy Union and support the transition to a clean energy system, there is a need to further unlock private financing, in particular for energy efficiency investments.


To tackle this, the Smart Finance for Smart Buildings (SFSB) initiative has been conceived to promote solutions that mobilise private financing for energy efficiency and renewables, and it is based on three main pillars:


I. More effective use of public funds


II. Aggregation and assistance for project development


III. De-risking


More effective use of public funds (I) aims to maximise the effectiveness of the use of available public funding e.g. via financial instruments addressing identified market failures and by better targeting grants towards vulnerable consumers.


At the EU level, the European Structural and Investment Funds (ESIF) are allocating €18 billion to energy efficiency in the period 2014-2020. Boosting investment in sustainable energy projects is also one of the strategic priorities of the European Fund for Strategic Investments (EFSI).


In addition, the EU has developed a number of other support schemes and funding programmes aiming to help businesses, regions, and countries to successfully implement energy efficiency projects.


Some of these activities include the development of sustainable energy financing models as well as the delivery of assistance to public fund managers with the structuring and deployment of financial instruments.


Aggregation and assistance for project development (II) is required because many project promoters – cities, public authorities, individuals or businesses – lack the skills and capacity to set up, implement and finance ambitious sustainable energy projects.


For this reason, this pillar aims to support projects through the development and financing process and to encourage the development of regional or local one-stop-shops covering the whole customer journey. In this context Project Development Assistance (PDA) facilities have been set up to help promoters, e.g.:


- ELENA is a joint initiative by the European Investment Bank (EIB) and the European Commission under the Horizon 2020 programme. ELENA provides grants for technical assistance focused on the implementation of energy efficiency, distributed renewable energy and urban transport programmes. The grant can be used to finance costs related to feasibility and market studies, programme structuring, business plans, energy audits and financial structuring, as well as to the preparation of tendering procedures, contractual arrangements and project implementation units. ELENA covers up to 90% of project development costs.


- The European Commission has also set up a series of other facilities funding Project Development Assistance (PDA) to support e.g. ambitious public authorities - regions, cities, municipalities or groupings of those - and public bodies in developing bankable sustainable energy projects. The Horizon 2020 PDA facility managed by the Executive Agency for Small and Medium-sized Enterprises (EASME) assists public and private promoters to develop sustainable energy projects, focusing on smaller and medium-sized energy investments and covering up to 100% of eligible project development costs. The PDA facilities aim to bridge the gap between sustainable energy plans and real investment through supporting all activities necessary to prepare and mobilise investment into sustainable energy projects.


Finally, as a way to changing the risk perception of financiers and investors (III), the De-risking Energy Efficiency Platform (DEEP) has been created.


This platform is a pan-European open-source database containing detailed information and analysis of over 10,000 industrial and buildings-related energy efficiency projects. It builds performance track records and helps project developers, financiers, and investors to better assess the risks and benefits of energy efficiency investments across Europe.


The EC keeps encouraging all market players to support this initiative by sharing available data and performance track records. Related to this initiative, the Energy Efficiency Financial Institutions Group (EEFIG) has developed the Underwriting Toolkit, a guide to perform risk appraisal and asset evaluation for energy efficiency financing.


It aims to help financial institutions to scale up the deployment of capital into energy efficiency. It also helps promoters to develop bankable projects and can be used by public authorities to better assess energy efficiency projects that receive public funding.


Horizon 2020 projects

The European Commission has been funding the low-carbon transition via several Horizon 2020 research, innovation and market uptake projects, under the work program called Secure, Clean and Efficient Energy that will run until 2020.


Within this, the Building a low-carbon, climate resilient future call accepts proposals until the 10 September 2019. Under this Call, a number of topics target the financing of energy efficiency investments, including:


- Topic LC-SC3-EE-9-2019 Innovative financing for energy efficiency investments, which addresses the need to set up innovative financing schemes at regional or national level in order to create the conditions for adequate supply of private finance for energy efficiency investments;


- Topic LC-SC3-EE-10-2019 Mainstreaming energy efficiency finance, which covers bottom-up solutions to further de-risk the energy efficiency finance market; 


- Topic LC-SC3-EE-11-2019 Aggregation - Project Development Assistance, which provides support to public and private project promoters, building technical, economic and legal expertise needed for project development and leading to the launch of concrete investments.


Currently, several Horizon 2020 projects are dealing with technology as well as financial issues around energy efficiency.


In these projects, the major energy efficiency solutions to improve building performance include a wide variety of technologies, covering on-site energy generation and distribution systems (including steam and hot water systems), space heating, building fabric, building mechanical and electrical environmental systems, controls technologies, lighting, electric motors and drives, industrial process heating and heat recovery, and others.


Despite this variety, there is a set of standard and well-proven technologies that are most likely to be those encountered by investors and lenders.


The major categories include building envelope measures (insulation and airtightness), controls, heat recovery systems, storage systems (enabling both shifting and shaving of power peak demand), renewable sources harvesting and exploitation, co-generation, retro-commissioning, etc.


One of the major European initiatives in terms of financing energy efficiency in buildings is the EeMAP project. The EeMAP Initiative aims to create a standardised energy efficient mortgage, according to 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 EeMAP Initiative fits well within the European Commission’s own framework for climate and energy policies, which aims to encourage investments and boost private finance for energy efficient investments/buildings.


It is important to highlight that to reach the 20% energy saving target by 2020, the Energy Efficiency Directive’s Article 4 includes a requirement for Member States to establish and periodically update ‘a long-term strategy for mobilising investment in the renovation of the national stock of residential and commercial buildings.


Parallel to EeMAP, the development of the EeDaPP project intends both to complement and to build upon it by addressing the current lack of large-scale standardised energy efficient asset datasets.


This should support the development of a true market for energy efficient financing by enhancing transparency, viability and comprehensive risk analysis.


EeMAP and EeDaPP projects are shaping the so-called Energy Efficient Mortgages Initiative, an overall knowledge framework intended to bring energy efficiency into the conversation between banks and consumers by means of a standardised approach to the financing of energy efficient buildings/renovation.


The ultimate success of the Energy Efficient Mortgages Initiative rests on two assumptions, which a series of market and academic studies already support.


The first assumption is that improving the energy efficiency of a property has a positive impact on property value, reducing a bank’s asset risk. The second assumption is that energy efficient borrowers have a lower probability of default because of more disposable income in the household due to lower energy bills, reducing a bank’s credit risk.


The EeMAP pilot scheme started data collection and analysis in 2018, aiming at establishing this correlation in the form of an EeMAP Energy Efficient Mortgages Pilot Scheme, which will also be used to ensure a workable and energy efficient mortgage design.


The principle is that all stakeholders derive a concrete benefit since lower capital requirements will deliver a strong incentive for banks to enter the market and, as a result, drive a broader incentive chain, in which all stakeholders, including EU citizens, issuers, investors, and society as a whole will benefit.


Another remarkable project financed by the European Commission is EuroPACE. The project found its inspiration in the successful Property Assessed Clean Energy (PACE) schemes launched in the USA since 2008 [4].


It builds on the concept of ‘Home-Based Financing’, a category of financing schemes in which the debt contracted to invest in housing improvement is attached to the property itself and not to its owner.


Three features shall be considered in such schemes:

1) the link created between the debt and the property, 2) the seniority of the debt created (senior or pari passu in PACE schemes) compared to other debts  and 3) the recollection mechanism (in the particular case of "on-tax financing" for example, property tax may be used as repayment vehicle).


EuroPACE project aims to develop a scalable home-based financing mechanism to unlock the huge potential for deployment of energy saving and generation technologies to European households.


The SMARTER Finance for Families project aims to improve citizens’ health, comfort and financial well-being by supporting banks, residential investors and solution providers with Green Homes and Green Mortgage programs.


A main objective is to effectively communicate the benefits of Green Homes to citizens and other key stakeholders to bring about a systemic solution to a systemic problem that inhibits the financial industry to design and offer green finance products, and for the citizens to understand and request them.


The project tries to avoid suboptimal decisions in the design and construction choices for renovation approaches and new home purchases.


The EEnvest project ‘working in risk reduction for building Energy Efficiency iNVESTments’, starting in July 2019, aims to support the investors´ decision making process by translating building’s energy efficiency technical requirements into economic indicators.


These indicators are used to evaluate the financial risks associated with deep renovation investment and to include non-energy benefits in asset evaluation models.  


EEnvest needs to increase financers’, investors’, owners’ and users’ mutual trust, by identifying, quantifying and mitigating technical risks associated to those investments.


The project will achieve this by developing effective evaluation methods for the technical/financial risk correlation, categorising a number of major technical risks and quantifying their impact on investors´ confidence.


A way of evaluating those risks will be by exploiting existing databases of building energy efficiency, e.g. DEEP database of Energy Efficiency Financial Institutions Group.


In a similar vein, the project QUEST ‘Quality Management Investments for Energy Efficiency’, has the objective of promoting investments in Sustainability and Energy Efficiency by identifying and empirically risk-grading factors that influence performance.


QUEST will develop a simple toolkit to evaluate these investments. The toolkit should be easily applicable to all types of Sustainability and Energy Efficiency investments and covers project design-construction-operation risks. Financial institutions applying the QUEST toolkit will be able to reduce risk while significantly increasing investment.


This will be achieved by identifying and statistically classifying Project Risk Factors (such as energy consumption) as well as Quality Management service features (e.g. energy measurement) to reduce the gap between predicted and real performance in operation, again by exploiting existing databases like DEEP.


Another project that deserves attention is the STUNNING project, which aims at building up a stakeholder community around a Renovation Hub designed as a knowledge-sharing platform.


The platform provides information about innovative solutions for building renovation and novel business models for their adoption and large-scale replication. This Portal has recently hosted a dedicated webinar.


Finally, a unique annual gathering dedicated to finance of energy efficiency is the Covenant of Mayors Investment Forum – Energy Efficiency Market Place.


The Covenant of Mayors Investment Forum - Energy Efficiency Finance Market Place has focused on the topic of energy efficiency financing at all levels, including (I) Innovative financing solutions, (II) Financing climate adaptation, (III) Financing urban mobility, (IV) Financing Energy Efficiency in the public sector, (V) Financing Home renovation, and (VI) Innovative sustainable energy planning.


As underlined during the last event held in Brussels, a significant part of the effort in this area over the next few years should focus on simplifying procedures and incentivizing the ignition of private equity in the energy efficiency market. The call topics aforementioned, as well as building capacity in the financial community through public events and initiatives help to achieve this objective.


The challenge lays in matching current cities needs with investors’ desires, so the core question is gradually shifting from a purely technical dilemma to a matter of mutual trust between the financial community and society as a whole.


In conclusion, decarbonisation of the EU building stock through a massive investment in energy efficiency can strongly contribute to energy transition.


While economists agree on the potential for growth and jobs from such a clean energy transition, the EU is well aware that it will be particularly difficult for some regions or society sections, especially in the short-term, and it is supporting these with the launch of specific calls to address the problem.


The transition must be assured to be fair and socially acceptable to all [5]. That shall be the driver of even broader investments and financial interest in supporting energy efficiency initiatives that should also come from private financing institutions already participating in some projects to update their financing products.




[1] Topic “Energy Performance of Buildings” in


[2]  “Supporting accelerated and cost-effective deep renovation of buildings through Public Private Partnership (EeB PPP)” in


[3] Securitisation refers to the conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising capital by selling them to other investors.


[4] PACE can be used to pay for energy efficiency, renewable energy, and water conservation upgrades to homes and buildings. PACE financing covers up to 100% of a project’s costs and is repaid as a special assessment added to a property tax bill over a term of up to 20 years. EuroPACE adopts best practices from the US PACE market and intends to further enhance its reach, scope, and overall impact well beyond the American experience.


[5] ‘Clean energy for all Europeans’ in