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Private finance for energy efficiency: New solutions for funding Europe’s energy transition

Making European societies and economies more energy-efficient will play a key role in allowing the EU to meet its climate ambitions, create growth and improve well-being, particularly to meet the goal of making the EU carbon-neutral by 2050. Whilst energy efficiency has not always been considered as an attractive investment by the financial sector in the past, this updated Pack features 13 EU-funded projects that have set a new dynamic for accelerating and upscaling private financing of energy efficiency investments across the EU, as well as making such investments much more attractive to investors.

Climate Change and Environment

Whilst the EU has increased the amount of public funds available for energy efficiency, there is a need to further unlock private financing. In order to meet the EU’s 2030 climate and energy targets, such as cutting carbon emissions by 40 % from 1990 levels and achieving an energy efficiency target of 32.5 %, all as a part of the ambitious European Green Deal, an additional EUR 260 billion per year will be necessary over the period 2021-2030. Much of that finance will need to come from the private sector.

Overcoming the financial impediments for energy efficiency investment

Energy efficiency investments often come with high transaction costs because projects are small and not sufficiently aggregated to appeal to investors. Energy efficiency investments such as deep retrofits of buildings tend to have relatively long paybacks, and investors are wary that the savings achieved will not justify the cost of the energy retrofit. However, there is growing evidence that the risks associated with energy efficiency investments are lower than the level perceived by markets. The challenge is to reassure investors that energy efficiency projects are overall a safe and sound business case, and help banks and other financial organisations understand and easily assess any and all risks and opportunities associated with a particular project. There is an acute need for technical and legal standardisation at all steps of the investment value chain to simplify transactions and increase the confidence of financial institutions. The lack of standardisation of projects prevents securitisation of energy efficiency assets (loans or equity) so that financial institutions are not able to refinance their debt on the capital markets. Typically, the cost of energy efficiency investments is expected to be recouped exclusively through the reduction in energy bills, but there is growing evidence that non-energy benefits play a key role in the decision to invest in energy efficiency. These include better comfort and indoor health parameters, increased building value, lower probability of mortgage default, and lower tenant turnover or vacancy rates. Thus there are tangible financial and economic carrots to entice financial institutions to invest more in energy efficiency. Moreover, there is a 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. EU- or nationally-funded technical assistance programmes such as EIB-ELENA and H2020/LIFE CET PDA support the creation of these, aiming to progressively maximise the leverage ratio of public funds to private finance. Finally, finance providers, consumers, and public and private bodies must talk to each other to find workable solutions to scale up energy efficiency finance. The EU facilitates such dialogue through Sustainable Energy Investment Forums and the Energy Efficiency Financial Institutions Group (EEFIG).

Showcasing 13 projects leading the way

This updated Results Pack specifically introduces you to 13 EU-funded projects that have been developing tools and solutions that will accelerate the financing of energy efficiency investments, as well as offering concrete evidence that these extensively tested solutions are ready to be further scaled up. They include the Accelerate SUNShINE project which continues the efforts made by its predecessor to prolong the lifetime of Soviet-era residential buildings and to extend its solutions to public buildings in Latvia through the use of energy performance contracting, where efficiency savings are guaranteed by the energy service company. EuroPACE 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. To inject liquidity into the market, the LAUNCH project has pioneered the use of industry-tested tools such as standardised risk assessment protocols to allow for the aggregation and securitisation of energy efficiency investments. And the Ren-on-Bill project explores a financial mechanism whereby homeowners renovate their homes with the help of their utility company, repaying the costs through their monthly energy bill.