The building sector is one of the most significant contributors to global energy consumption and greenhouse gas (GHG) emissions. In the (EU), the sector accounts for approximately 40% of total energy use and 36% of carbon emissions.
To reach these targets, we need a consistent construction of new buildings and renovation of existing ones and, therefore, the building sector requires substantial financial investment. Various financing schemes have been developed to support green projects, improve energy efficiency, and reduce the environmental impact of buildings. Examples are Sustainable Loans and Mortgages, Green Bonds, Energy Performance Contracts, and Public-Private Partnerships (PPPs) as explained in the next paragraphs.
Sustainable loans/mortgages
Sustainable loans/mortgages are financial products that offer incentives, such as lower interest rates, for building or purchasing properties that meet certain sustainability criteria. For instance, a green mortgage may be available to buyers of homes with high energy performance ratings.
Bonds and Green Bonds
Bonds are debt securities issued by banks to investors to guarantee to investors from whom the bank is lending money that the debt will be repay by periodic payments and/or at the expiring date of the bond.
Compared to general bonds, green bonds are designed to raise funds for projects that have positive environmental benefits. These projects can include renewable energy, energy efficiency, clean transportation, sustainable water management, and other initiatives.
Green bonds are preferred by investors for various reasons:
- environmental impact
- reputation and Corporate Social Responsibility (CSR)
- regulatory and policy support
For some types of green bonds, the proceeds are used to finance or refinance mortgages on energy-efficient or environmentally sustainable properties. These properties should meet specific criteria such as those defined by EU Taxonomy.
The EU Taxonomy (REG UE 2020/852) is a classification system that defines which economic activities are considered environmentally sustainable.
It provides clear criteria for activities that contribute to environmental objectives such as climate change mitigation and adaptation. This system helps:
- Standardize definitions for what constitutes a “green” activity
- Guide investments and make it easier for investors to identify and support sustainable projects.
- Prevent greenwashing
Energy performance contracts (EPCs)
An Energy Performance Contract is a contractual agreement between a building owner (or operator) and an Energy Service Company (ESCO). Under this agreement, the ESCO implements energy efficiency projects in a building or facility and guarantees a certain level of energy savings over a specified period. The cost savings generated from reduced energy consumption are used to pay for the improvements, making the project financially viable without the need for upfront capital from the building owner.
EPCs can be structured in several ways, depending on the financial arrangements and risk allocation between the ESCO and the building owner. The most common models include:
- Guaranteed Savings Model: The ESCO guarantees a specific amount of energy savings. The building owner secures financing, either through internal funds or external loans, to cover the project costs. If the guaranteed savings are not achieved, the ESCO compensates for the shortfall.
- Shared Savings Model: The ESCO provides the financing for the project, bearing the financial risk. The energy cost savings are shared between the building owner and the ESCO, typically on a pre-agreed percentage basis. This model is beneficial for building owners who lack access to capital but want to improve energy efficiency.
- Chauffage Contract: The ESCO takes full responsibility for the energy management of a building, including fuel supply, maintenance, and energy efficiency improvements. The building owner pays a fixed fee based on actual energy consumption. The ESCO benefits from any additional energy savings achieved beyond the agreed-upon targets.
Public-Private Partnerships (PPPs)
Public-Private Partnerships are collaborative agreements between government entities and private sector companies to finance, design, implement, and operate projects that serve the public interest. These partnerships combine public oversight with private sector efficiency, often resulting in higher-quality infrastructure and services.
EU Structural Funds and Grants
Apart from the green financial schemes offered by private institutions as banks and investors, to support the green transition in public buildings, the EU offers various funds, such as the European Regional Development Fund (ERDF) and the Cohesion Fund, which are managed and assigned by Member States and regional authorities. These funds aim to reduce regional disparities and promote energy efficiency at a systemic level.
