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Financing instruments target the barrier of insufficient availability of, or access to, capital for financing the incremental up-front costs of energy-efficient buildings or retrofits. Scaling up investment in energy efficiency is crucial to achieve a sustainable energy future. Among the vast variety of different financing schemes, preferential loans, revolving energy efficiency funds or government-facilitated third party financing schemes (e.g. on-the-bill or property tax financing) are exemplary and suitable public policy responses to address the existing financing gap and to foster private investment.
Difficulties of financing extensive energy efficiency measures (such as very energy-efficient new buildings and ‘deep’ renovation to very low remaining energy consumption) continue to be one of the main challenges with regard to tapping the full energy saving potential of energy efficiency in buildings (cf. IEA 2007, 2010). Reasons for the sluggish development of markets for energy efficiency investments are high up-front costs, perceptions of disproportional risk exposure, controversies surrounding calculation methods of energy savings to be expected, ongoing debates on appropriate discount factors and persistent practices within private financing institutions of assessing energy efficiency investments by means of traditional indicators (cf. IEA 2007, pp. 17-20).
In order to tackle the pre-eminent issue of high up-front costs in energy efficiency investments, financing instruments such as preferential (also called ‘soft’) loans, revolving energy efficiency funds or third party financing are suitable policy responses. Since the latter refers to practices more commonly provided by the private sector, it is only succinctly covered here with a narrow focus on forms specifically facilitated by government.
In general, the financing schemes mentioned offer building owners, or investors, opportunities to either get access to low interest loans and/or loans with reduced security/collateral requirements and/or to benefit from innovative loan repayment mechanisms. Moreover, by demonstrating the safety/security and financial attractiveness of investments into energy efficiency projects, the implementation and evaluation of such programmes play an important role with regard to fostering market development.
In preferential loan schemes, governments directly or via private financial institutions provide favourable loans (e.g. with low or even zero interest rates and/or prolonged payback periods) to increase the attractiveness of energy efficiency investments and to leverage an increase in lending for energy efficiency projects. In most cases such arrangements are implemented as public-private partnerships (PPPs), in which governments subsidise loans for reaching high levels of energy performance in new build or refurbishment (such as Low-Energy Buildings or Ultra-Low-Energy Buildings, see the bigEE Buildings Guide) or for a specified range of energy conservation measures (e.g. window replacement, roof or wall insulation, replacement of heat substations asf.). The loan is usually subsidised by providing fiscal incentives, low or no interest loans and/or partial/full loan default guarantees to private financial institutions that offer low-interest loans to building owners or investors (cf. IEA 2007, p. 34). The German KfW Energy Efficient Refurbishment and Construction programmes for example provide loans via a network of local commercial banks. These banks process applications, deal in credits and are liable for their repayment. In return they receive the credits from KfW at an even lower interest rate than the actual loan recipients. Loan conditions vary between the programmes. Whereas the Refurbishment programme offers loans of up to €75000 at 1% interest rate p.a. over a repayment period of 30 years, the Construction programme offers loans of up to €50000 at an interest rate of 1.4%, 1.8% or 1.9% depending on the stipulated repayment period (4 to 10, 11 to 20 or 21 to 30 years). As an additional incentive debtors will receive a grant if pre-specified building energy efficiency levels are achieved.
The Mexican Hipoteca Verde (Green Mortgage (GM)) programme, which is operated by the National Housing Trust Fund (INFONAVIT), provides loans to employees in the private sector that have previously contributed a small share of their monthly salary (5%). The GM loans, which are complementary to general mortgage loans provided, range from €1050 to €2100 and are bound to investments in energy efficient technologies. Interest rates range between 4% and 10% depending on the income level of the recipient in comparison to a reference value.
Revolving energy efficiency funds are self-sustaining financial schemes which, when operated effectively, use a one-time initial investment to establish a permanent financing structure for energy efficiency projects. Such a fund may also serve as an organisational basis for the provision of preferential loans. If publicly operated, a recommendable way to streamline energy efficiency policy is to provide the initial funding by dedicating revenues generated by energy taxes. Similar to Energy Performance Contracting (EPC) arrangements, loan recipients may repay their loan to the fund with the extra cash available due to energy savings. The repayments then recapitalize the funding pool to enable additional lending. This is the way in which they differ from the policy instrument of Energy efficiency funds (shown in the above Figure), which organise and fund energy efficiency programmes with an annual budget but normally no repayments. Among such programmes, however, could also be a revolving energy efficiency funds lending to investors. Examples of such instruments are the Thai Energy Efficiency Revolving Fund (cf. Grüning et al. 2012), the Estonian energy efficiency fund KredEx (cf. Adler 2012) and, although not exclusively focusing on energy efficiency investments, the Slovenian Eco Fund (cf. Zajc 2011).
Other innovative loan repayment mechanisms can be realised through third party financing approaches facilitated by policy through adapting law or regulation, such as on-the-bill or property tax financing. With on-the-bill financing energy companies or other ‘third’ parties such as energy service companies pay up-front for energy efficiency measures and are then repaid through surcharges on monthly energy bills. Regulators or the law may need to allow this. With property tax financing, public entities provide the up-front payment and repayment is made via property taxes. This mechanism may require a change in property taxation laws. The advantage of both forms over conventional loans is that the payment can be linked by law to the property instead of its owner. The repayment is therefore not affected by changes in ownership, which may ease the initial decision by the current owner to invest in improving energy efficiency of the building. Within such schemes, it is however crucial that payments are being at least approximately offset by efficiency induced monetary savings in order to maintain their attractiveness for building owners.
Although preferential loans, revolving energy efficiency funds and government-facilitated third party financing are suitable policy instruments to address the initial cost barrier, they should be combined with additional financial, regulatory and informational tools such as tax credits or grants for implementing strong energy efficiency measures, introduction of Minimum Efficiency Performance Standards (MEPS), advice and assistance during design and construction and provision of education offers to financiers in order to achieve genuine and long-term market transformation.
Due to the vast variety of existing financing schemes and the diverse institutional and economic contexts in which they operate, there is no global impact assessment of respective policies available to date. However, good practice examples such as the German KfW Energy Efficient Refurbishment and Construction programmes or the Mexican Hipoteca Verde programmes show that considerable monetary and energy savings are possible. According to a series of evaluation reports, the energy-efficient refurbishment programme saved 2,679, 2,450 and 1,247 GWh/yr of final energy demand in 2009, 2010, and 2011 respectively (BEI & IWU 2010; IWU & BEI 2011; 2012). Moreover, between 2006 and 2010, the energy-efficient construction programme (and its predecessor “Building Environmentally-friendly ”) saved 1,341 GWh/yr as compared to the reference case. With regard to heating costs, IWU & BEI (2011; 2012) calculates savings of about €213 million/yr for the 2010 programme year and €125 million/yr for the 2011 programme year.
For the Hipoteca Verde Programme, it has been estimated to have induced energy savings of almost 400 GWh of electricity and almost 500 GWh of LPG between 2009 and 2011. The medium repayment period for measures financed under the programme in 2010 was calculated to be 4.1 years. With an assumed medium lifetime of 10 years for all measures (and no maintenance costs considered), the net benefit for the housing owner would be in the range of about €900.
Public and public-private financing approaches such as preferential loans, revolving funds and government-facilitated third-party financing aim at tackling the financial barrier to energy efficiency investments, specifically their high up-front costs. By providing opportunities for building owners to either get access to low interest loans and/or to benefit from innovative loan repayment mechanisms they increase the attractiveness of energy efficiency investments and thus promote the implementation of energy-efficient building concepts (such as Low-Energy Buildings and better Ultra-Low-Energy Buildings, cf. the bigEE Strategic Approach in our Buildings Guide) and technologies.
Worldwide implementation status
Energy efficiency financing schemes are being implemented all over the globe (see for instance Taylor et al. 2008; Maio et al. 2012; Kats et al. 2012 as well as the examples mentioned in the Summary here under Key information, and the bigEE Good practice examples).
Existing energy efficiency financing schemes can be found mostly on a national, regional or local level, but also on a trans-national level (e.g. the European Energy Efficiency Fund).
Behaviour and Management
The main target group of financing instruments are investors on the demand side such as landlords, housing companies and investor-occupiers. Through the provision of financial incentives inherent in different financing schemes these actors shall be motivated to mobilise private capital and to make investment decisions into energy efficiency projects.
Investors on the demand side such as landlords, housing companies and investor-occupiers benefit directly due to facilitated and advantageous ways of funding energy efficiency investments. Preferential loans or government-facilitated third party funding either reduce their own equity contribution or associated risk or both.
Due to the availability of advantageous financing opportunities, implementation of energy efficiency measures is likely to increase, which translates into increased demand for related services from actors on the supply side able to offer energy-efficient solutions, including architects, construction companies, installation contractors, manufacturers of components and prefabricated houses, system suppliers as well as energy consultants and energy service companies. Moreover, also tenants and users of buildings and equipment indirectly benefit in terms of reduced energy bills, improved living comfort or working conditions.
Although lack of or access to financing is a major barrier to improving energy efficiency in buildings (particularly for SMEs and private owners of residential buildings), providing advantageous financing opportunities alone will not be sufficient to achieve this goal. A survey commissioned by the Global Buildings Performance Network (GBPN) on the building sector’s view on energy efficiency showed that the lack of enforcement of regulations as well as skewed perceptions of the cost of building energy efficiency are major obstacles to that end (cf. Economist Intelligence Unit 2012). Thus, in order to achieve a genuine and long-term market transformation, financing opportunities should be combined with additional financial, regulatory and informational tools, such as financial incentives like tax credits or grants for implementing strong energy efficiency measures; the introduction of Minimum Efficiency Performance Standards (MEPS) and Energy Performance Certificates; advice and assistance during design and construction, training for construction workers and other supply-side actors, and the provision of education offers to financiers. This will raise awareness of the benefits of energy efficiency and further strengthen incentives for private investment.
We advise the reading of the bigEE file on the recommended policy packages for the mainstreaming of Ultra-Low-Energy New Buildings in new build and for the achievment of high energy savings in building renovation.
The following pre-conditions are necessary to implement Financing:
Agencies or other actors responsible for implementation
The implementation of financing instruments requires the nomination of an institution that is responsible for the coordination, oversight and (external) evaluation of the financing schemes. This could for instance either be an energy agency, an (revolving) energy efficiency fund, a public development bank such as the German KfW, or energy companies. In addition, there may be the need to involve retail banks, energy companies, or energy service companies to handle the loan or finance applications as well as the payments to and repayments from investors.
Substantial funding for financing schemes is needed in order to promote the development of a genuine market for energy efficiency. The initial funding for the revolving loans as well as funding for continuous programme administration and the cost of making loans preferential could stem from different sources, such as the revenues from an energy tax or an emission trading scheme or earmarked government budget allocations. Most of the investment in energy efficiency will, however, be made by building owners or energy service companies and will be repaid to the organisations offering the energy efficiency financing schemes.
|Source of capital||Financing Mechanism||Collection Mechanism||Enhancements||Eligible Measures||Underwriting Criteria||Security Interests|
|Banks||Personal loan (secured or unsecured)||Amortized payment bill||Reduced interest rates||Energy efficiency||Debt to income ratio||Unsecured|
|Public benefit charge or added to rate base||Mortgage / home equity (secured to real estate)||Lease payment||Stretched underwriting criteria||Renewables||FICO score||UCC fixture filing|
|Utility general funds||Line of credit (secured or unsecured)||On utility bill||Guarantees||Other home improvements||Utility bill payment history||Mechanics lien|
|Federal, state or local govt funds||Lease||On property bill||Loan loss or late payment reserves||Tax payment history||Other lien on real estate|
|Municipal bonds||Retail installment contract||Performance contract bills||Rebates||Other||Lien on other property (car, boat, etc.)|
|Manufacturers||Special tax or assessment levied||Buy kWh or terms||Tax credits||Disconnection for non-payment|
|Pension funds||Tariffed installation program||Subsidized transaction costs|
|Housing or economic dev finance agency||Performance contract||Aggregation|
|Qualified energy conservation bonds||Power purchase agreement||Environmental or carbon credits|
|Other 3rd party|
Source: Fuller et al. 2009
Each of the aforementioned energy efficiency financing schemes can have quantified targets relating to different success/performance indicators. These may be the budget which is to be provided for direct lending or indirect lending support, ex-ante specified numbers of motivated credit users or specific energy efficiency actions implemented or a combination thereof. Thinking further, these immediate indicators may then also be translated into an estimate of achievable energy savings. There may be a trade-off between high participation rates and high energy efficiency levels aimed for. Initially, a good compromise may need to be found between those two objectives. Over time, energy efficiency levels should be strengthened while maintaining high participation rates.
Co-operation between countries can include an exchange of information relating to experience on principles as well as practical details, problems, and solutions of implementing such financing schemes. Providing climate finance — such as the programmatic Clean Development Mechanism, New Market Mechanisms, Nationally Appropriate Mitigation Actions (NAMAs) — to developing and emerging countries for funding financing schemes is another potential way of co-operation. For example, the expansion of the Mexican Green Mortgage programme (cf. the bigEE good practice policy example) is now being co-funded through the NAMA facility of the UK and German governments with up to €14 million ( ).
Monitoring the performance of energy efficiency financing schemes is essential in order to generate data on the measurable benefits of energy efficiency investments. A monitoring information system (MIS) should be an integral part of a financing scheme design and needs to establish clear specifications regarding data requirements for evaluation purposes (such as the types of energy efficiency actions financed and their energy efficiency specifications, like U-values of walls, roofs, or windows, cm of insulation material added and its thermal resistance, efficiency of heating or cooling systems, or specific energy performance of equipment or whole buildings) and provide guidelines to implementing actors on how to record the data and to assure loan recipients’ compliance with the scheme’s terms and conditions.
The data required to evaluate achieved energy savings resulting from the operation of financing schemes are more difficult to obtain. In order to assess whether a scheme for energy efficiency measures delivers significant additional energy savings, elaborate measurement and verification (M&V) is needed.
This is particularly relevant for government-facilitated third party financing schemes since repayments of investment cost for the implementation of energy efficiency measures to the financing entity have to be covered by resulting end user savings. In this instance, monitoring of household energy consumption prior to and after the implementation of financed measures, according to a metered baseline approach (cf. Bertoldi/Rezessy 2009, p.30), is indispensable. However, although providing more precise results, this proceeding entails considerable administrative effort and monetary expense, which may impede a broader roll-out of such schemes. In schemes with different refinancing mechanisms, other approaches with lower transaction costs to monitor energy savings for evaluation purposes, such as the deemed savings or the engineering approach, may thus be employed. These use ex-ante specified estimates of achievable/projected energy savings for measures that are financially promoted within a scheme. Thus, a second best solution to evaluate the impact of a financing scheme is to monitor numbers and types of energy efficiency measures that have been financed through the scheme as well as a set of building properties and then use these data to calculate overall energy savings.
With regard to the evaluation of the economic benefits and costs, information requirements for the latter include data on expenditure relating to the operation (i.e. administrative cost) of a scheme as well as data on loan performance (i.e. share of loan defaults). Equally important are the investments made by those who received the preferential loans or other financing support. It may be necessary to analyse a sample of investments to identify the full cost of new build and renovation as well as the incremental investment in energy efficiency improvement. With regard to the economic benefits of financing schemes, monitoring mainly needs to capture data on changes in end users’ energy expenditures associated with the implementation of financed energy efficiency measures.
Independent evaluations of publicly operated energy efficiency financing schemes are an important means of demonstrating their economic viability (also compared to alternative energy efficiency policies) and thereby not only justify the dedication of public funds but also contribute to making a case for an increased involvement of private financial institutions. Moreover, they can provide evidence regarding what measures financing schemes should best target in order to achieve the highest impact. Financing schemes tend to focus on the promotion of multiple inter-related energy efficiency improvements leaving property owners the freedom to choose from a set of improvements, which complicates the evaluation. Moreover, a general problem with the evaluation of voluntary programmes is separating the effect of programme participation (i.e. borrowing money to invest in energy efficiency improvements) from the effects of other factors that might make people more likely to participate in the first place. A recommendable way forward to avoid selection bias when evaluating the impact of a financing scheme on energy use is thus to conduct randomized controlled trials (Palmer et al. 2012). A complete analysis of energy efficiency financing schemes would include evaluation of participation rates, loan performance (i.e. delinquency and default rates), and the types of measures that are financed with the loans and, most importantly, estimation of energy savings (ibid.). As regards the evaluation of economic costs and benefits of financing schemes, information requirements beyond the data monitored within the scheme as well as the chosen proceeding depend on the scope of the evaluation, e.g. overall additional investment or employment induced by the financing scheme.
Design for sustainability aspects
In order to promote sustainability aspects, eligibility criteria for energy efficiency financing offers can be designed to require the use of technologies or material within the implementation of supported measures that fulfil specific sustainability standards with regard to eco friendliness and health compatibility (e.g. the use of recyclable/biodegradable insulation material).
The availability of advantageous financing opportunities provides energy users with incentives to invest in energy efficiency action, which leads to an increased demand for technologies and services of those working in the building as well as in the financial sector. Accordingly, positive labour market effects can be expected from establishing energy efficiency financing schemes (see the bigEE good practice policy example on the German KfW programmes ).
The following barriers are possible during the implementation of the policy
As with all policies there is a variety of possible implementation barriers. One of the most common barriers that may arise throughout the implementation of energy efficiency financing schemes relates to limited participation through the target group(s). This may be due to a lack of awareness of the scheme’s existence, lack of knowledge on and perceived uncertainty regarding energy efficiency benefits, low attractiveness of financing conditions or cumbersome application procedures.
The following measures can be undertaken to overcome the barriers
In order to address the issue of limited participation the execution of a process evaluation can provide important insights regarding whether and how processes have an impeding effect on uptake within target groups. Based on the results, adjustments to the programme operation can then be made to improve the overall scheme performance. Information campaigns on the existence of financing opportunities as well as the economic benefits of energy efficiency improvements (presenting good practice examples) can help to close the knowledge gap and reduce risk perception among target groups.
The impact of financing schemes may differ widely depending on design options and circumstantial factors. Nonetheless, evaluations of good practice cases show that considerable reductions in energy use are achievable. One example is the extensive financing programme run by the publicly owned bank German Kreditanstalt für Wiederaufbau (KfW), which targets both refurbishment of building stock and new Ultra-Low Energy Buildings. According to a series of evaluation reports, the energy-efficient refurbishment programme saved 2,679, 2,450 and 1,247 GWh/yr of final energy demand in 2009, 2010, and 2011 respectively (BEI & IWU 2010; IWU & BEI 2011; 2012). Moreover, between 2006 and 2010, the energy-efficient construction programme (and its predecessor “Building Environmentally-friendly ”) saved 1,341 GWh/yr as compared to the reference case. In Germany, about half of new dwellings achieve Low-Energy or Ultra-Low-Energy standards due to the KfW programmes (cf. the bigEE good practice policy example), whereas in some Austrian provinces up to 60% of new buildings are Ultra-Low-Energy buildings today (Lebensministerium 2013).
Another example is the mexican Hipoteca Verde (Green Mortgage, GM) scheme, in which almost 500,000 tons of annual CO2 emissions (0.79 tons per home), almost 400 GWh of electric energy, and almost 500 GWh of LPG have been saved by 630,000 GM homes supported between 2009 and May 2011 (INFONAVIT 2012). In Mexico, practically all social housing is now Low-Energy housing due to the Green Mortgage and This-is-Your-Home programmes (cf. the bigEE good practice policy example).
The costs of implementing financing schemes may differ depending on the type of scheme, its financial endowment and the efficiency of the implementing authority to deliver the funds to the target group(s). In our good practice example of the KfW programmes for energy efficient refurbishment and construction for instance, allocated government funds to provide low-interest loans and (to a smaller part) grants amounted to €4.3 billion between 2009 and 2011 (€2.0 billion in 2009, €1.4 billion in 2010 and €0.9 billion in 2011). Moreover, the provided funds facilitated investments of €16.9 billion to participants of the energy-efficient refurbishment programme over the evaluated period (2009: €8.9 billion, 2010: €5.1 billion, 2011: €2.9 billion) and €7.3 billion to participants of the energy-efficient construction programme over the years 2010 and 2011 (2010: €3.7 billion, 2011: €3.6 billion).
In the example of the Mexican Green Mortgage Programme, the costs corresponded to 900,000 loans extended by October 2012, but no financial figure was disclosed by the implementing agency INFONAVIT. If approximately 50% of the total available Green Mortgage had been spent (value for 2009), total investment for eco-technologies would have been in the range of € 450 million (own estimate).
As with potentially achievable energy savings and expected costs, cost savings and net benefits may differ depending on the properties and implementation effectiveness of financing schemes. Also other factors such as e.g. building costs, expertise of staff in the building sector or user behaviour have an effect on actual outcomes. As an example, evaluations of our good practice example of the KfW programmes for energy efficient refurbishment and construction showed significant cost savings for investors and the government and also labour market related net benefits:
With regard to heating costs, IWU & BEI (2011; 2012) calculates savings of about €213 million/yr for the 2010 programme year and €125 million/yr for the 2011 programme year. Thus, each of the 181,000 building units refurbished in 2011 saved €690 per year or €60 per month. For an operating life of 30 years of funded energy-efficient measures, heating cost savings from 2011 alone reached €3.3 billion (present value) or €4.2 billion (nominal value) (IWU & BEI 2012, p. 40 et seg.). Energy cost savings (present value) therefore seem lower than the overall investments of €3.85 billion. However, this includes at least 30 to 80 % of costs (depending on energy efficiency action) that investors would have incurred anyway by scheduled refurbishment of walls, windows, roofs, or heating systems without improving energy efficiency. Comparing the energy costs savings only with the incremental investment for energy efficiency improvements will therefore demonstrate a net benefit.
Employment effects from the 2011 programme year add up to about 52,000 person years (92,500 from 2010) of which 38,000 are direct effects (IWU & BEI 2012, p. 42). The loan-option is responsible for 41,000 person years. Overall investments are €3.85 billion, of which €0.6 are VAT or government revenues. A multiplying effect of 1.69 results from additional input processes worth €2.25 billion outside of the construction industry increasing government revenues by about €0.7 billion (IWU & BEI 2012, p. 48).
The energy-efficient refurbishment programme thus results in round about €1.3 billion in additional taxes.
Energy Efficient Construction:
The KfW programme for new buildings is estimated to have saved €35,566,000 of heating costs for 2011, which is €440 for each building unit and €35 each month. For 30 years of operating life IWU calculates total cost savings of €864 million (present value) or €1.1 billion (nominal value).
Employment effects amount to 199,000 person years of which 146,000 person years are direct effects. Overall investments account for €14.5 billion of which €2.3 billion are state revenues (VAT). Thus, the net turnover effect is €12.3 billion. Including input processes, net turnover is €21.5 billion which result in salaries and, again, in government revenues worth €2.7 billion (IWU & BEI 2012, pp. 70-72). The energy-efficient construction programme thus results in total government tax revenues of €5 billion.
However, all of these investment, employment and tax numbers relate to the full cost of construction. The incremental costs of building much more energy-efficiently than required by law are only a few per cent of these, and therefore most likely lower than the energy cost savings.
Both programmes are cost-effective to consumers and even for the government budget. According to IWU & BEI (2012) estimations the new build and refurbishment programmes together result in about €6.3 billion of tax revenues, as compared to €0.9 billion of budget allocation to the programmes. However, this is based on the full cost of construction, not just the incremental costs of energy efficiency improvements.
For the Mexican Green Mortgage Programme, the medium repayment period for homeowners on measures financed under the programme in 2010 was calculated to be 4.1 years. With an assumed medium lifetime of 10 years for all measures (and no maintenance costs considered), the net benefit for the housing owner would be in the range of about €900.
KfW Energy Efficient Refurbishment and KfW EnergyEfficient Construction
Programme for the promotion of solar water heaters in Tunisia
Green Mortgages and This is your house