There is no one single answer to this complex question and yet, an EU-funded project may provide some direction. FALCO (Financing Ambitious Local Climate Objectives), a project funded by the Horizon 2020 programme, developed three financing solutions to tackle certain aspects of ambitious local climate action plans in Flanders, Belgium. The project gathered partners ranging from consultancies specialised in energy efficiency, to Flemish authorities and a European network of cities.
With a budget of €1.7 million, the project managed to mobilise a total investment portfolio of ca. €18 million by piloting its solutions in Flemish cities and municipalities. The solutions focused on three sectors: renovation of public buildings, renovation of private buildings and energy-efficiency investments for Small and Medium enterprises (SMEs). In terms of housing segments, it also looked into social housing and private homes. Let us look into the three solutions developed by the project: a specific long-term loan, an approach to energy savings in private companies and a strategic way to make public buildings climate neutral.
ER 2.0 solution: a loan for the future
The challenge to accelerate the energy renovation of private homes is directly related to the ability of homeowners to finance the works. The solution FALCO proposes is for local, regional or national authorities to create access to a personal loan for energy renovation of individual private homes and ancillary investments, titled the ER 2.0 loan. The high loan amount (up to €50,000) would allow deep renovation investments and also provide the benefits of a longer loan period of (up to 20 years). The ER2.0 loan is targeted at average income households, but it would allow households that do not meet loan approval criteria to benefit. At the heart of the ER2.0 solution is the ER2.0 Fund, which offers the loan together with technical assistance services through the cities or region’s Energy Houses (services to citizens that are equivalent to One-stop shops for renovation).
The development of the ER2.0 offered the following key lesson: financing solutions should extend their focus in order to cover both renovation investments and technical assistance costs. As a result of this exercise, the Flemish Region recently announced a loan offering with key characteristics inspired by the ER2.0 loan, in addition to offering a 0% interest rate. The Flemish Region’s loan will at first be funded entirely by the Flemish budget.
Small enterprises…small energy-savings?
SMEs are a difficult target group for energy-efficiency investments, as the energy-savings are relatively small, and transaction costs are high. This translates into a focus on the low-hanging fruit investments, leaving more in-depth renovation opportunities untapped. Furthermore, financiers look for sizeable investment projects, and most energy-saving projects for individual SMEs are rather limited in scope.
To address the above challenges, FALCO project combined the pooling of buildings by focusing on network companies to reduce the transaction cost and integrating renewables and energy-saving measures into one project. This was done to combine low-hanging fruit with measures having a longer payback time, which increases overall energy-savings.
The proposed solutions were tested in three pilot projects: two projects covered a combination of both energy-savings and renewable-energy investments for a portfolio of residential care homes, resulting in energy-savings of around 30%. In a third project, an energy performance contract with a school combined different energy-saving measures with renewable energy (boiler renovation, relighting, monitoring of the devices, insulation and PV) for a total amount of €900,000 and with energy-savings of 40%. Given the relatively small investment amount, a financing solution was designed based on the sale of receivables.
From these pilots, the project showed that these solutions are appropriate to financing efficiency measures achieving 30-40% energy-savings, but they are ill-adapted for investments beyond that range. Indeed, higher energy-saving levels require higher investment volumes with long payback periods. From an ESCO perspective, this requires longer contract periods or co-financing from the customer.
Energy performance contracting is not equally easy to implement for all types of companies. Having large (groups of) companies pooling their buildings into a large portfolio reduces the relative transaction cost as well as the performance risk, which in turn benefits the bankability of the investment project. Conversely, small investments by individual SMEs often translate into high acquisition costs and performance risk for ESCOs. This explains why the latter frequently focus on measures with a shorter payback time, even though they offer smaller energy-savings. A stricter normative framework from local governments could possibly offer some relief here.
Public buildings: a strategic exercise
Aspiring to the principle of “lead by example”, public sector actors have frequently announced climate ambitions that reach well beyond the common private sector ambitions, in terms of both timing and depth of renovation. However, public authorities need to “show what they preach” with their own public building assets.
The third FALCO solution focuses on strategic real estate planning of cities based on the following key principles and guidance to local authorities:
- Start with an analysis of actual housing needs, followed by the sale of real estate assets that are not in line with these needs, and then use the proceeds to support the negative business case of deep energy renovations in the core portfolio.
- When investing in the core portfolio, it is important to make the most of 'natural renovation moments' (natural trigger points) – e.g., end-of-life of technical installations, asbestos removal, fire safety upgrades – and synchronize renovations by forming building clusters that will be tackled jointly to increase tendering efficiency. Investments in buildings earmarked for sale are limited to ‘no regret measures’.
- Buildings with heritage value require an alternative strategy, which may consist in seeking a different balance between reducing energy demand and using renewable energy.
When reflecting upon how to finance ambitious energy retrofits in the built environment, it was concluded that targeting a climate-neutral building stock by 2050 is a vastly different endeavour compared to gradually improving the energy efficiency of individual buildings. Whereas investing in energy efficiency measures in the past was often approached in terms of identifying a sensible mix of measures per building, resulting in a business case with an affordable payback time, obtaining a carbon-neutral portfolio by 2050 is a truly strategic exercise, going beyond the competence of the technical departments that are in charge of facility management.
The strategic analysis of public buildings by local authorities should dare to question the functional needs of a local authority. This is likely to entail a political discussion about the choice of amenities to be delivered to the citizens, and about the corresponding infrastructure needed to provide these amenities. Many local authorities indicate that available human resources are not aligned towards conducting this strategic real estate planning approach. Hence, initiatives that help unburden local authorities are most welcome: e.g., centralized tenders for supporting advisory services, one-stop-shops providing access to contractors (e.g., EPC contracts), and improved EPC contracts that enable them to implement deeper energy retrofits than the current EPC contracts
The strategic real estate planning approach was applied in the provinces of West Vlaanderen (€2,900,000) and Vlaams Brabant (€4,500,000) and the city of Sint-Niklaas (€7,700,000).
Overarching lessons learned
The many barriers encountered during the FALCO project point to the urgent need for a full-fledged financing vision and strategy on how the Flemish Region as a whole will finance the transition to a climate-neutral society. This will notably require building a shared vision on the role of local and regional authorities with regard to financing and the translation of that vision into a financing strategy and solutions that are able to achieve their ambitious climate objectives. The many lessons learned in this project may also be applied to other EU cities and municipalities that are faced with the common EU wide challenge of making its cities climate neutral.
For more information, please contact project lead Annick Gommers (annick(at)kenteradvies.be) or Communication lead Masha Tarle (m.tarle(at) climatealliance.org)