New funding methods for energy efficiency

energy efficiency, energy transitionIn France, buildings account for 44% of final energy consumption and 21% of greenhouse gas emissions. Upgrading their energy efficiency is thus an environmental, social[1] and economic imperative. Although the current government acknowledges this[2], the cost of such renovation remains a major obstacle to large-scale implementation. It is against that background that the “Plan bâtiment Grenelle” (Grenelle Building Scheme) set up a task force on “innovative financing tools for energy efficiency” in June 2012. Its final report by Inès Reinman and Olivier Ortega revolves around five main topics and puts forward ten proposals. Here is an overview of the main courses of action considered which will overcome obstacles and encourage energy efficiency investments.

Encouraging the emergence of “green value”

”Green value” or “responsible building value” can be understood as “the value given for an estate’s high energy and environmental performance”. Taking green value into account when assessing a property would therefore mean that its energy performance, just as its comfort or appearance, would impact its price. According to an ADEME study[3], green value could account for 5 to 30% of a renovated building’s price, which would create an incentive for owners. Other incentive schemes are considered, such as a tax on non-responsible building transactions or changes in local taxes depending on a building’s energy performance. However, the report does not provide an explicit definition of responsible buildings. It will be up to government to choose the best method (energy assessment, actual energy consumption, certification…) and to lay down criteria to define “responsible” buildings.

Fostering third-party financing

Since funding is one of the main obstacles to renovation works, the task force suggests that the third-party financing method should be generalized. Third parties finance renovation works and get a return on their investment thanks to the ensuing energy savings. Third parties could be anything from semi-public companies competing on the market to a public energy efficiency service.

energy efficiency, energy transition

Operating and payment principle currently set up by the SEM Energies POSIT’IF (source: FIEE report)

Creating a refinancing vehicle

Since building energy efficiency projects require large amounts of capital, it is vital to ensure low interest rates to encourage renovation. To that end, the task force proposes to emulate the German bank KFW and to create a public-private refinancing vehicle whose task would be to raise funds and generate a long-term return on the capital invested.

energy efficiency, energy transition

Energy efficiency refinancing vehicle structure (source: FFIE report)

According to its mission statement, this financing vehicle should be international in scope and “should not involve additional public funds”; it should be “visible enough […] so as to attract long term institutional investors whose investment criteria are compatible with the needs of high-quality energy efficiency upgrading”.

The financing vehicle could thus refinance energy efficiency structures (third-party financing) as well as regional funds, or directly finance or refinance retail or commercial banks when it comes to large-scale projects.

energy efficiency, energy transition

Energy efficiency refinancing vehicle operating principle (source: FFIE report)

Generating new revenues

The task force also proposes to facilitate the densification of existing buildings, that is creating additional surface area which would generate cash flows to finance renovation works. Two kinds of densification are considered: vertical densification consists in raising a building, while horizontal densification aims at dividing land into parcels. The income derived from the sale of these new parcels would then be used to renovate the initial building. Such densification is already provided for in article L.128-1 of the French town planning code, which allows the floor area ratio to be exceeded by 30% for high energy efficiency buildings. However, accessibility and fire safety standards as well as the right of co-owners to object to such changes represent an obstacle to densification; the report therefore recommends that such rules should be loosened.

Besides, existing schemes should be improved: for instance, the French Environmental, Economic and Social Council (CESE)[4] recommends that VAT on energy efficiency upgrading works should be lowered from 10 to 5%, a measure deemed “crucial to boost building renovation” [5].

Fostering the energy effiency sector

The report explores several ways of fostering the energy efficiency sector. First of all, a common portal should be created to better assess the needs of energy efficiency companies and the forms of assistance they are eligible to. Second, vocational training could be facilitated by a repayable advance (within 1 to 3 years) granted to SMEs, which would give them a better financial visibility. Third, following the example of “universal service employment cheques”, energy efficiency employment cheques could be created, which would provide households with a tax credit, thus creating an additional incentive to undertake energy efficiency upgrading works.

As the report emphasizes, these are not “miracle solutions” but are necessary steps for France to deliver on its environmental commitments[6] and to reach the target set by the minister of housing Cécile Duflot, i.e. “100% of French people living in low-consumption buildings by 2050[7].

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[1] According to GDF-Suez, there are more than 8 million of people in energy instability in France

[2] “The renovation of the building stock is an absolute priority”, PM Jean-March Ayrault during the Environmental Conference, September 2012

[3] Preliminary analysis of the green value for housing, ADEME, 2011

[4] Notice by the CESE on energy efficiency: A savings potential; a priority goal, 01/09/2013

[5] FIEE P100 report

[6] Especially the 38 percent decrease of the primary energy consumption of the building stock by 2010, as intended in the Grenelle 1 law

[7] Address to the media, 21st January 2013

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