Financing energy renovation: we need to re-think our approach

My initial research question, for the International Refurbishment Symposium, was about an ex-ante evaluation of the impacts on the renovation market of the European Commission's proposed Smart Finance for Smart Buildings (SFSB) initiative. To illustrate my theoretical evaluation; I decided to assess how the SFSB would impact the French energy renovation market.

France was selected as a case study for the availability of data and the ambition level of the French energy transition. In fact, France ticks almost all the boxes of known best practices to ensure the overall building stock will be renovated and decarbonised by 2050:

From a regulatory perspective, France has set a target of making its overall building stock low energy consuming by 2050. This is equivalent to 80 kWh/m²/yr for the regulated loads (heating, cooling, lighting, ventilation and hot water.) Furthermore, to meet this objective, France has set a renovation target of 500,000 homes, starting from 2017. And to ensure the French energy transition will be a "just" energy transition, half of the renovated homes must be occupied by low-income households. Moreover, the energy transition law requires building owners to conduct energy renovation each time a building is refurbished.

France is a champion combining EU and national funding
From financing perspective, France is a champion for using available EU funds for energy renovation and combining these funds with national funding allocated to energy renovation. Several French energy renovation projects have been approved by the European Fund for Strategic Investments (EFSI) and the European Structural and Investment Funds (ESIF). Households are offered the possibility to borrow, for 10 years, up to 30,000€ at zero interest rate if they implement three energy efficiency measures. This is in addition to a tax credit, VAT reductions and grant schemes. And to make access to public finance easier, households can combine all existing incentives (grants, tax credits, reduced VAT, loans at zero interest rate).

To overcome the information barrier and make sure that citizens are aware of the availability of public support for energy renovation, France has set up one of the most comprehensive Energy Renovation Advisor Services. This service is available at the local level for free, and energy advisors organise on regular basis initiatives to encourage citizens to take advantage of the existing financing schemes and renovate their homes.

Other support schemes include certification of workers/companies providing energy renovation services, trainings to upgrade skills and a comprehensive R&D programme.

While France's overall approach may be enviable of many throughout Europe, the figures below show that this is far from enough.

According to the most recently available data from 2015, France renovated 388,000 homes, out of which almost 100,000 occupied by low-income households. The same year, France used 100% of its Emission Trading Scheme (ETS) revenues for energy renovation. But this is equivalent to only 1.76% of total investment. Similarly, France used 67% of its Energy Efficiency Obligation Schemes (EEOSs) revenues for energy renovation. But this is equivalent to only 3.93% of its total investment. This means funding through ETS and EED directives contributed by 5.69% to the overall investment in energy renovation. Likewise, EU funding (ESIF and EFSI) contributed to 2.13% of the total energy renovation investments in France. This last point is the question I was originally asked to answer.

Still far from unlocking smart financing
At this point, you may be asking: how did France renovate 388,000 homes in 2015? Actually, it is through the use of the oldest financing mechanism: energy taxes and private financing. The same year, France used at least 20% of households' energy taxes for energy renovation. This was equivalent to 23% of the total renovation investments. Importantly, when leveraged with private finance, this represented 85% of the total investments. Question remains, of course, about the use of the remaining 80% of household's energy taxes.

In total, when leveraging each of the funding mechanisms with private finance, households would have contributed with 92% of the total investment in energy renovation. One may wonder what we mean by "unlocking private finance" as expressed through SFSB.

Too high renovation costs to reach the targets
This leads to the critical issue of energy renovation costs. If equally distributed, the €12.2 billion invested in energy renovation in France is equivalent to 31,400€ per home or an average of 314€ per sqm. This cost should be compared to the current cost of deep energy renovation which is more than 1,200€ per sqm or 120,000€ for an average home. Either France decides to lower its target or the industry must reduce the renovation cost by a factor of four. Given the ambition of the newly elected French President to make France a Climate change leader, I doubt France will lower its ambition level. However, the current level of investment per home will not allow France to reach its energy renovation ambition. The question then is about how ready is the industry to reduce energy renovation costs.

This leaves more questions than answers about our long-term renovation strategies. If these are the results for France – with its rather comprehensive approach – how are we going to move forward throughout Europe?

The Commission's clean energy package is not yet adopted. We have a lot to do!

This column was published for the first time on September 15th, 2017 on eceee