Financial instruments for energy efficiency in housing

Innovative financing for energy efficiency
in housing under the 2014-2020 EU
Cohesion Policy
Prepared by Peter Sweatman, Chief Executive of Climate Strategy
and Axel Volkery, Senior Fellow at IEEP
Policy Clinic, IEEP Offices 9.30am to 1.30pm
Thursday, 26th September, Brussels

Objectives for this meeting
• Exchange views and lessons learnt with regard to financing energy-efficiency
in buildings under Cohesion Policy
• Highlight and discuss issues which arise when public-private finance is
required to deliver on policy objectives
• Develop perspectives to frequently asked questions about financial
instruments
• Establish a common understanding of the functioning, success conditions
and do‟s and don‟ts when discussing innovative financing models with
Member States

Climate Strategy & Partners
Executive Management
Peter Sweatman - Chief Executive Officer and Founder
Climate Strategy specializes in the
 strategies
 markets
 and opportunities
created by the need to combat climate change.
We provide strategic advice and first class project execution
to our clients in areas of:
Climate Strategy understands the interdependent relationships
between:
 Environment
 Society
 and Government
and their roles in guiding the global transition to a low carbon
economy.
Founded in 2009, Climate Strategy is a Madrid – Spain based
consulting firm specialized
in the transition to a low carbon economy
 Engineer from Cambridge
University
 9 years at JPMorgan
 5 years as Social
Entrepreneur
 5 years as MD for Iberia for
Climate Change Capital
Clients include:
 Clean Energy
 Clean Technology
 Energy Efficiency
 Policy
 Environment
 Sustainability

Institute for European Environmental Policy (IEEP)
IEEP is an independent, not for profit institute dedicated to
advancing an environmentally sustainable Europe through
policy analysis, development and dissemination
Axel Volkery, Senior Fellow and Head of Environmental Governance Programme
 15 years of work experience,
including the European
Environment Agency and the
Advisory Council on the
Environment of the Federal
Government of Germany
 Key subject areas: climate
and environmental policy, EU
budget
 Diploma in Ph.D. from Free
University of Berlin
IEEP is specialised in policy analysis and
strategic advice in a number of core policy
areas.
Work Areas:
 Agriculture & Land Management
 Climate Change & Energy
 Environmental Economics
 Industrial Pollution
 Ware, Marine & Fisheries
 Resource Use, Waste &
Chemicals
 Biodiversity
 Global Issues & External Action
 Governance
Our clients include:
 European Commission, mainly DG
AGRI, CLIMA, ENER, ENTR,
ENV, MOVE, REGIO, RTD.
 European Parliament
 Public authorities in Member
States
 Foundations (e.g. European
Climate Foundation)
 NGOs (e.g. WWF, Greenpeace)
 Business (e.g. Novozymes)

Part 1: The context for Public
Intervention in Energy
Efficiency: Rationale, objectives
and barriers

Energy efficiency: increasing relevance on the EU‟s policy agenda
5
 Europe 2020 Strategy and the 2050 Low Carbon economy Roadmap set
out objectives for the transition to a low carbon, climate resilient and
resource efficiency economy.
 European Council has endorsed a cut in GHG emissions by 80-95%
compared to 1990 levels we have to push for more public and private
investment in energy infrastructure by 2050
 EU is deliberating the 2030 framework for climate and energy, and energy
efficiency will have a key role to play
 Energy efficiency is a key objective for the 2014-2020 MFF
 Underpinned by the EU acquis: Energy-Efficiency Directive, Energy
Performance of Buildings Directive etc.
“It is in our cities
that the greatest
potential for energy
saving lies… I
believe that
Cohesion policy
and its solid
financial
instruments will
have to play an
important role in
that sense.”
(J Hahn, 2013)
“We have to push for
more public and
private investment in
energy
infrastructure…
Member States can
also devote a bigger
share of their
structural funds to
investing in energy
and energy
efficiency”.
J.M. Barroso, 2013

Multiple benefits from energy efficiency investment
6
Reducing
GHG
emission
The most cost-effective way of reducing GHG emissions
Additional co-benefits from reduced air pollution
Reducing
energy
demand
Reduced global energy demand of 28,000 Mtoe -> 8% lower electricity demand between 2012-2035
(IEA 12)
Required investments in generation capacity and transmission/distribution infrastructure would be
16% lower
Cost
savings
For every EUR 1 of direct energy cost savings, an additional EUR 1 could be saved due to lower
energy prices (Ecofys 2013)
Net direct savings of €107 billion annually by 2020 for European businesses and consumers while net
additional annual cost savings are estimated in the order of €100 billion (Ecofys 2013)
GDP
growth/jobs
If EU reduces its energy demand by 13% in 2035 as compared to 2010, a 1.1% increase in GDP can
be expected in OECD Europe (IEA 2012)
The implementation of the EED is expected to lead to an increased in EU GDP of € 34 billion and
increased net employment of 400 000 jobs (EC, 2011)

Multiple benefits from energy efficiency Investment
in buildings
7
Creating jobs
and additional
social benefits
Relatively labour intensive; jobs are local and cannot be easily exported
12-17 jobs are created per million euro invested (Ürge-Vorsatz et al. 2010, Meijer et al
2012)
Swiss energy efficiency programme „EnergieSchweiz‟ in 2006 a net employment benefit of
2,600 person years was achieved as a result of the implementation of energy efficiency
measures with a total investment volume of CHF 315 million of which around CHF 32
million were public subsidies (INFRAS, 2007)
Reducing
energy
poverty
„Energy poverty‟ includes appr. 52 million people in Europe (CECODHAS 2012)
Households supported by the Irish „Home Energy Saving Scheme‟ between 2009-2011
are expected to save €450 per year on their energy bills (Scheer and Motherway, 2011)
Between 2006 and 2010, under the KfW energy efficiency programme on average
280,000 flats were renovated leading to annual energy savings of 2.1 TWh and total
investments of €14 billion based on an average public budget contribution of €1.4 billion
(Prognos 2013)
Fostering
innovation
and export
markets
€6.5 billion of venture capital and private equity has been invested into energy efficiency
markets since 2007 worldwide (Bloomberg) and future market prospects are positive
Global market for green building and construction materials to grow from $116 billion in
2013 to $254 billion in annual market value in 2020 (NAVIGANT 2013)
Markets for insulation, lighting and building controls to grow at a range of between 3-6% on
average up to 2030 (Mulki and Hinge 2010)
Buildings are responsible for around 40 per cent of energy consumption and GHG emissions in the EU.
Residential and tertiary buildings have particularly high energy requirements for heating, hot water, and cooling needs.

Challenges
8
 Investment needs are considerable: an increase by up to €200 billion by 2020 is
forecasted by the Commission (EC 2011)
 Credit crunch: New financial regulations (ie Basel III) and related needs to
deleverage balance sheets reduce bank‟s interest in lending to SMEs. Note: Banks
provide for roughly 80% of corporate finance in the Eurozone.
 Oftentimes, information and knowledge gaps persist, and other barriers such as
split incentives (landlord-tenant dilemma) distort interest.
 Setting the right regulatory framework remains the main lever for the EU to
mobilise private investment into energy-efficiency.
 But the EU budget can play an important support function and boost certainty among
investors. A greater focus on financial instruments is needed, and there is broad
agreement to simplify and expand the use of financial instruments in 2014-2020.

9
“Union measures of financial support provided on a complementary basis from the budget in order to address one
or more specific policy objectives of the Union. Such instruments may take the form of:
• equity or quasi equity investment,
• loans or guarantees,
• or other risk sharing instruments,
and may, where appropriate, be combined with grants.”
Regulation 966/2012, Title I of Part One. Art. 2 (p) (own accentuation)
What are EU financial instruments?
Essential requirements:
• Should focus on situations of market failure and imperfect market conditions (ie where projects that are
principally bankable receive no funding because they are perceived to be too risky)
• Should not crowd out private finance
Regulation 966/2012, Title I of Part One. Art. 140 (2)

10
Lessons learnt in 2007-2013
Positive
+ Leverage of private finance, positive effects on
access to finance during financial crisis
+ Additional levers for EU policy objectives
+ Provision of experts skills – capacity building
across governance scales
+ Revolving funds improve the quality of projects
and fiscal discipline
Negative
- Inconsistencies and overlaps
- Concerns about the ‟additionality‟ of actions
(deadweight situations)
- Lack of capacity and resistance due to perceived
complexity and difficulty
- Lack of information, visibility and acceptance – need
for cultural change underestimated
Need for:
1. Clear, coherent regulatory framework
2. Fewer instruments with streamlined and simplified implementation modalities
3. Greater visibility and transparency
4. New risk-sharing agreements to leverage higher finance volumes
 Financial instruments are no “silver-bullet”

11
Grants and financial instruments in context

12
Common rules for all funds under shared management in 2014-2020:
• Expand scope of FI to all types of projects, sectors and beneficiaries
• Allow combination (blending) of grants and FIs from EU sources
• Three implementation options
• FI at EU level (ring-fencing)
• FI at national/regional level (2 sub-options: „off-the-shelf and „tailored‟ instruments)
1. Loan for SMEs based on a portfolio risk sharing loan model (“RS Loan”)
2. Guarantee for SMEs (a “partial first loss portfolio” or “Capped guarantee”)
3. Equity Investment fund for SMEs and start-up companies based on a co-investment model (“Co-
investment Facility”)
4. Loan for energy efficiency and renewable energies in the residential building sector (“Renovation
Loan”)
5. Loan for sustainable Urban Development (“UD Fund”).
• FI consisting solely of loans and guarantees.
• New annual reporting requirements
Ex/ante demand assessment required
Need for limited, clear set of relevant, measurable indicators
Links to COSME/Horizons 2020?
Financial instruments in funds under shared management

Why Cohesion Policy should support energy
efficiency through financial instruments
13
 Smart and cost-effective investment in energy efficiency in buildings contribute to multiple objectives of 2014-2020
Cohesion Policy – growth, jobs, cohesion, sustainable regional and urban development
 New regulatory framework, revolving nature, possibility of upfront receipts of EU co-financing, higher EU co-
financing rate, external financial expertise and management
 EIB‟s 2013 survey showed that 79% of respondent (managing authorities) are interested in setting up financial
instruments
 Already existing experience and capacities with such investment across regions through grants and more recently
financial instruments
 Limits of capacity, ie JESSICA funds for energy efficiency slow in uptake
 Perception of complexity/ low added value: Opinion that Fis are too complex, expensive (fees), not suitable for
types of projects, little interest in the past etc.
 Lack of pipeline: is there interest from the financial sector?
Underlines the need for sufficient understanding and guidance, but also capacity-building

Part 2: Financing Energy
Efficiency – The Challenge and
its Characteristics

Energy Efficiency is a “Big Deal” for Europe: Why?
15
• Imports of 1,4 billion barrels of oil result in € 107
billion being „exported‟
• Construction of 550 coal power plants and
accompanying infrastructure
• EU GDP will lose the net positive impact of energy
efficiency of at least € 34 billion
…AND IF NOT

Europe needs to invest Euro 60-100 billion per annum
in Buildings Energy Refurbishment from 2012-2020
16
 Solving Regulatory and Market Failures: Methodology
 An accurate view of the size of the financing needs for European buildings
 A clear pathway towards securing them in the timeframe required
 An adequate mix of public and private finance
 “Three Methodologies” + Their Investment Figures
 Bottom-up Approach (EuroACE): fn (# Retrofits x Value)
▪ Annual European investment capital budget range of Euro 50 billion to
Euro 180 billion
 Top-down Using the IEA‟s 2050 GHG targets
• Annual investment figure for buildings in the EU27 countries of Euro 110
billion each year until 2050
 Procurement and Development Cost Approach (Barclays/ Accenture)
• Total cost of Low Carbon Technologies by 2020 of Euro 2.9 trillion, from
which Buildings require a total 2011-2020 procurement and development
cost of Euro 600 billion (approximately Euro 67 per annum).
“While there are many
regulatory proposals
aimed at filling the policy
gap identified by the
Energy Efficiency Plan
2011, there have been
fewer attempts made to
quantify and resolve the
commensurate and
considerable financing
gap.”

At a country level, the EU Investment Target is
consistent with 0.5-0.8% GDP Investment Annually
17
“Our methodologies allow
us to determine an order of
magnitude investment
capital figure for European
buildings which, through the
use of existing successful
national financing models,
allows us to develop a
European financing
framework which can scale
to deliver levels of national
retrofit activity required to
meet Europe’s 2020 energy
efficiency targets.”
 Appropriate “Order of Magnitude”
 Investment required in European buildings between now and 2020 is Euro
100 billion per annum.
 In the context of the EU 27 2010 gross GDP, the figure is 12 trillion
• This implies an approximate annual investment into energy efficiency
in buildings on average per country of just over 0.8% of gross GDP to
deliver Euro 100-150 billion in annual savings by 2020.
 Cross-Check of Comparable Research
 The figures above are consistent with Mckinsey‟s work on the capture of
NPV - positive savings in the USA:
• At a minimum, the US should be investing approximately $67-79 billion (c. 0.5% of
US GDP) per annum in building energy efficiency measures
 And coincides with UNEP‟s 2010 research which calls for annual
investment of $308 billion in green buildings globally (0.5% of 2010‟s global
GDP) until 2050

The Problem is not only the Aggregate Amount of
Finance: It is the AGGREGATION itself…
18
Customers Energy Efficiency
+ $ ee 1
+ $ ee 2
+ $ ee 3
+ $ ee 4
+ $ ee 5
+ $ ee 6
+ $ ee 7
Re Financing
Capital Markets

Energy vs. Energy Efficiency:
“from a Finance Perspective”
19
 Few concentrated assets
 Few large sophisticated owners
 „Known‟ commoditized finance approach
 Well organized, funded and credit worthy
counterparties
 Deal track records
 Mature consolidated industry
Energy Energy Efficiency
 Many distributed assets
 Many unsophisticated small owners
 “Innovative finance”
 Varied counterparties, limited credit
history
 Limited track records
 Immature fragmented sector

Buildings Investment Capital comes from Six
Sources and in Eight Instrument Categories
20
 Sources of Capital
 Government, Building Owner, Building Occupier, Bank, Renovation
Contractor and Energy Supplier
 Availability of Capital depends on:
• The source‟s access to and cost of funds
• Perception of the risk / return characteristics of the renovation
investment
• Other competing investment priorities
 Instrument Categories
 Preferential Loans, Subsidies, Grants, Third Party financing, Trading
(White/Energy Certificates), Tax Rebates, Tax Deductions and VAT
Reductions
“In 2010, EuroACE identified
in excess of 100 financial or
fiscal instruments which were
in place across Europe which
represented a total
investment in the order of
tens of billions of Euros
One of the most important
roles of Government Policy is
to lever private capital to
invest alongside its own
orders of magnitude which
reach 0.5-0.8% GDP every
year from now until 2020”

All Potential Sources of Value MUST be
contemplated in the Financing and Policy Solutions
21
Energy and CO2
Savings
Green Premium
Other material
Improvements
Sometimes referred
to as “co-benefits”
Image source: guardian.co.uk
 Value Framework and Economic Incentive
 In the context of a building retrofit, there are three key sources of value:
“Refurbishment activity can be
driven by any one, or a
combination, of these three
value sources: Energy savings
(classic ESCO activity), implied
emissions reductions (white
certificate programs like the
UK’s CRC Energy Efficiency
Scheme) or the other material
improvements (eg. Commercial
property refurbishments which
include improved energy
performance alongside a more
sizeable general renovation).”

Policies and Finance go “hand in hand” and 10x
leverage can only be achieved with Strong Alignment
22
“From a structuring
perspective, we believe
that, independently of
originating channel (Bank,
ESCO, Energy supplier),
the broad primary source
of capital (debt capital
markets) required for such
significant sums are those
which can guarantee the
most permanent access to
such low cost funding”
 Successful Polices
 If successful policies and programmes are implemented, the total
amount of energy efficiency activity funded in Europe by 2020-25 could
reach Euro 1 trillion.
 If levered 1:10, this implies Euro 100 billion of public funding together
with Euro 900 billion of private sector co-funding.
Equivalent to 15% of the total EU27 residential mortgage market in 2008.
• Of similar magnitude to the expected energy infrastructure
investments required of European Utilities.
 The role of Government “policy bank” balance sheets is key (eg. KfW,
CDC, ICO, CDP) together with local retail banks working alongside the
policy banks making low cost customer retrofit loans a priority and
sharing the risk.
1x 5-9x 2x 2-3x ?

Part 3: Energy Efficiency Case
Studies and Barriers

24
Challenge: How to Use the Commission‟s Financial
Instruments to Deliver more Energy Efficiency
Sources: EIB Energy Efficiency in Buildings (2012)
SEB loan agreement in fourth JESSICA fund
loan in Lithuania (2012)
QUESTIONS:
WHAT MIGHT STRUCTURAL
FUNDS ACHIEVE IN
DIFFERENT
CONFIGURATIONS
WORKING ALONGSIDE
PRIVATE SOURCES OF
FINANCE ?
HOW TO STRIKE THE
BALANCE BETWEEN TA AND
OTHER INSTRUMENTS ?

German Case Study: KFW established a sizeable,
low cost, retail EE renovation programme
25
■ Size: KfW – with Euro 6 billion of federal funds was able to deploy Euro 27 billion
efficiency investment through program activity stimulating a total and private
investment flow totalling Euro 54 billion thus creating a “waterfall effect”.
■ Leverage: Germany has achieved impressive co-financing ratios of public to total
funding for energy efficiency retrofits which started at 1:4 until 2006 which increased
to 1:9 through the introduction of new programs coordinated by state bank KFW to
2009.
■ Parallel Grants: Grant subsidy of eligible measures and to encourage deep
renovations are also available at a single KfW window.
■ Scale: Germany has refurbished around 200,000 buildings a year (equating to c.
400,000 homes). Estimates Germany has retrofitted 9 million units to high energy
for heating efficiency standards.
■ Distribution/ Reach: Deployment through most German retail banks at very low
interest rates (1-2.75%).
■ Branding: Creation of the KfW55/ 100 Home Standards helped to deepen
customer awareness of energy efficiency standards.
Image source: 123rf.com
“This “waterfall effect” was created through
several positive design features of KfW’s
programmes including their deployment through
the networks of private banks ensuring broad
reach, levering banks’ retail transaction
processing capacities and their subsidized
2.75% interest rates.”
RESULT: LOW COST RETAIL BANK DEBT FUNDING
WITH BANK BRANCH DISTRIBUTION AND GRANTS

UK Case Study: Green Deal Standardized Process,
Government Soft Guarantee and On-Bill Repayment
26
 Ambition: Starting in 2013, UK anticipates the continued retrofit of over a million homes per annum, building on CERT‟s success.
► The Green Deal looks to provide some £10,000 investment capital per intervention.
 Leverage: UK‟s Green Investment Bank targets 1:5 ratio from its initial £3 billion of capital and green infrastructure investment. GIB
contributed £125 million to Green Deal Finance Company which will also be levered again.
 Quality Assurance: UK provides “Golden Rule” cover with high quality design, oversight and procedures.
 Use of On-Bill Channel: Green Deal repayments are included into Utility Bills.
 Harnessing the Power of Energy Companies: Energy companies are obliged to provide the funding and distribution to support
CERT (previously the retrofit of social housing) and now ECO programmes.
RESULT: MEDIUM COST
RETAIL FUNDING WITH
ENERGY CO. AND
INSTALLER DISTRIBUTION

French Case Study: Low Rates, Tax Rebates and
Nation Wide Distribution Domofinance/ “Bleu Ciel”
27
 Ambition: 500,000 home retrofits targeted per year by 2017 (of which 120,000 in social housing)
supported by Grenelle Law framework and White Certificates (phase 3).
 Tax Credits: The French “crédit d’impôt développement durable” has been a key driver for primary
home renovation demand for eligible measures.
 White Certificate Pressure to Engage: The drive for EDF and GDF to source white certificates
has driven their engagement in establishing certified installer networks (eg. Bleu Ciel‟s 5,000
partners) and specialist low interest rate debt provider banks (eg. Domofinance and Solfea).
 Low Cost, Long-term Loans: Either through specialist private sector lenders (Domofinance, Solfea
etc) with interest rates “bought down” (0.75% in some cases) by Energy company acquiring related
white certificates, or “l’éco-prêt à taux zéro” a Ministry of Environment 0% 10-15 year loan for
eligible projects.
RESULT: LOW COST RETAIL DEBT FUNDING WITH
ENERGY COMPANY AND GOVERNMENT
DISTRIBUTION WITH TAX SUBSIDIES

Case Study: EBRD Engaging Banks through Sustainable
Energy Finance Facilities in Central Europe
28
 Scale/ Reach: € 1.5 billion signed (through more than 100 loan operations) in 15 countries
via 70 local financial institutions with over € 900 million on-lent to approximately 1,000
businesses, 500 housing associations and 30,000 households. Sub-loans range from €
2,500 to € 5 million.
 Distribution: Local financial institution credit lines – mixture of institutional and retail
channels with fees paid on eligible investments.
 Technical Assistance Grants: Specialist consultants provide support to banks and sub-
borrowers.
 Example: Slovakia SLOVSEF through 9 credit lines to 6 local banks for a total of EUR 150
million complemented by 30 million EUR grant funding from the Bohunice International
Decommissioning Support Fund (BIDSF) with results:
 560 projects financed
 >2.4 million m2 of floor area refurbished
 >82,000 people benefiting from lower energy bills and improved thermal comfort
 Average energy savings ~35% and 100 kt CO2 -eq. per year
Sources: Financing Opportunities with EBRD (2013)
Introduction to EBRD‟s Sustainable Energy Initiative (2013)
slovseff.eu (2013)
RESULT: DEBT FUNDING WITH TA GRANTS
DISTRIBUTED BY LOCAL BANKS TENDING
TOWARD MID-SIZED PROJECTS

29
Discussion Structure for a National Energy Efficiency
Fund for Buildings Renovation
Alternative Finance Structure Example

What are the Key Characteristics expected in the
Framework for Financial Instruments ?
30
 Benefits = Applicability and Flexibility: The advantages of FI in the context of Structural Funds are specifically:
 Use across all 11 thematic objectives;
 “User-friendly” legal framework with interpretation guidelines (TBA);
 Easier/ possible to combine grants and FI within the same operation;
 Possible to consider an asymmetric remuneration of the private contribution to financial instruments (eg. Public
“first loss” tranche etc.);
 EC co-financing rate is increased by 10% if an entire priority axis is implemented through FI;
 Alternatives = Four New Options to Implement FI:
 Shared managed FI: Responsibility is the MA and FI is tailor made for the special conditions of the region;
 Off-the-shelf FI: Offering a standard set of conditions to save time and difficulties in setting-up;
 Make use of the existing FI: Directly or indirectly, such as the risk sharing facility, H2020 or COSME;
 Direct: Provide funds directly by the MA in loans and guarantees, but not in equity.
 Requirements = Additional Reporting and Monitoring:
 Ex-Ante Assessment: EIB detailed methodology expected in October 2013;
 “No Free Parking”: Provisions to require transferal of up to 25% of the total resources needed upfront;
 Yearly Updates: Detailed rules to be published about monitoring on a yearly basis.
Draft Characteristics of Financial Instruments (from June 2013 Stakeholder Discussions)

What are the Advantages of “Off-the-Shelf” and what is
a “Renovation Loan” OTSFI ?
31
 Easier to Execute FI = “Off-the-Shelf”:
 The “off-the-shelf” instruments are designed using the limits imposed by the different regulations, in particular state aid;
 If the MA wants to set-up an instrument with different conditions, it has to be tailor made and the MA has to check if it is
done accordingly with different regulations;
 Considered as a good starting point to develop other financial instruments and approaches.
 Five initial “off-the-shelf” Financial Instruments:
1. Loan for SMEs based on a portfolio risk sharing loan model (“RS Loan”)
2. Guarantee for SMEs (a “partial first loss portfolio” or “Capped guarantee”)
3. Equity Investment fund for SMEs and start-up companies based on a co-investment model (“Co-investment Facility”)
4. Loan for energy efficiency and renewable energies in the residential building sector (“Renovation Loan”)
5. Loan for sustainable Urban Development (“UD Fund”).
 Renovation Loan: An FI made available by the MA in the framework of the operation which is part of the priority axis defined
in the programme funded by the ESIF and defined in the context of an ex-ante assessment:
 Primarily aimed at multi-apartment buildings where the energy saving potential of renovation is significant but where
apartment owners still need appropriate incentives eg.:
 Complementary grant assistance;
 Long term subsidised loan conditions; and/or
 Upfront advisory support and funding to prepare and implement “full envelope” building renovations.
 Assumes two key conditions in Member State:
 A financing market in which banks are essentially the only source of funding, but where this funding is either too
little (due to the risk appetite of the bank), too short term, too costly or otherwise inappropriate for the long term
payback nature of the projects being financed;
 An inefficient system of identifying and procuring the works on behalf of multiple apartment owners;
Draft Outline of “Off-the-Shelf” FIs and the Renovation Loan (from July 2013 Draft Standard T&Cs)

What are the Advantages of “Off-the-Shelf” and what is
a “Renovation Loan” OTSFI ?
32
Draft Outline of “Off-the-Shelf” FIs and the Renovation Loan (from July 2013 Draft Standard T&Cs)
 Long term, low interest funding provided
using European Structural and Investment
Funds (ESIF), with an appropriate level of risk
sharing by the financial intermediary determined
through a competitive process and provided in
the form of a shared loss component;
 “Hands-off” Management: MA represented in
supervisory committee of the Renovation Loan
but not participating directly in individual
decisions.
 Transparency and Market Practice:
Renovation Loan shall have a governance
structure that allows for decisions concerning
credit and risk diversification to be made
transparently and in line with relevant market
practice.
 Can be used together with grants assuming
final beneficiary benefits.

Financing
“a saving” /reduced
cash out flows
Energy efficiency measures result in a reduction of the cash outflow related to energy in a household or building. This has a financial return but it is
derived from the underlying ability of the household to pay or company to continue operating. The challenge is to structure a business case in
energy efficiency in such a way that the potential increase in free cash flow is secured and therefore used for interest and repayment requirements
instead of discretionary spending by households or businesses.
Split
incentives
The entity investing in energy efficiency is often not the same one that is benefiting from the investment. Without aligned or common interests, this
makes it hard to develop a business case for renovation. This is apparent when the occupant of a building is different from its owner and also
impacts the way the construction sector sees innovation to improve energy efficiency of its end-product: Unless homeowners and purchasers are
more aware of the running costs of efficient versus inefficient buildings the “free market” mechanisms will require regulatory support.
Aggregation
Challenge
Saving energy in buildings requires the upgrade of a series of complimentary measures (such as better insulation, energy measurement systems,
changing behaviour, LED-lighting, replacing old appliances, etc) which can deliver impressive savings. This can then be repeated in many similar
buildings and produce an interesting scale project for wholesale finance. Keeping the costs of aggregation down is critical.
Perceived
Higher Risk
Due to the lack of an investment track record and many investors‟ unfamiliarity with energy efficiency project structures and economics there is a
perception among many funders with low levels of specialist technical capacity that the risk of energy efficiency projects is high.
Multiple Sources of
Finance
The multiple benefits of energy efficiency upgrades accrue to different stakeholders and hence a mixed multi-stream package of public and private
source financing is appropriate, yet more complex to arrange and coordinate.
Concentration of
Banking Risk
In Real Estate
The built environment provides one of the most attractive and cost effective opportunities in Spain to save energy. But Spanish banks have large
exposures to domestic real estate and the mortgage market. As commercial and residential property values continue to decline the built
environment poses an increasing risk to banks balance sheets. Banks are reluctant to increase their exposure to real estate finance in a weak
price environment even though there is strong international evidence that property values of energy efficient buildings hold up relatively well in
comparison to less energy efficient buildings. Banks may prefer exposure to “on-bill” repayment channels than additional mortgage debt.
Lack of
Knowledge and
capacity
Energy efficiency requires specialised knowledge which is not widespread across the finance market. While many banks have this knowledge in
specialist teams, like structured finance, this potentially restricts the deal size and appetite for energy efficiency through the retail channels and
among generalist client managers to offer their institutional clients.
Source: Adapted from ING (2013)
supplemented with GTR interviews in Spain
“Top Barriers” to Energy Efficiency Finance
List of Financial Barriers to Energy Efficiency Deployment

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