German KfW, a successful funding tool for renovation and energy efficiency projects

Germany, energy efficiency, funding

KfW (Kreditanstalt für Wiederaufbau, i.e. Reconstruction Credit Institute) was originally created to finance Germany’s post-war reconstruction, including the coordination of Marshall Aid from 1948 on            wards; today it is the cornerstone of energy efficiency upgrading policies. Its sizable financial endowment makes it a meaningful contributor to Germany’s transition towards energy efficiency.

KfW is a key player in the funding of investment projects in Germany. Financially backed by the federal government and having the best possible rating on the capital markets (AAA), its annual refinancing capacity amounts to 80 billion € worth of bonds (250 securities in 11 different currencies for the year 2011). Such funds derived from capital markets are complemented by the federal and regional governments (Länder) as well as an annual 1.5 billion € generated by the sale of carbon credits under the EU ETS (European CO2 emissions trading scheme). Financing capabilities of this scale enable KfW to support numerous projects at very low rates (never exceeding 1%).

Loan conditions

KfW grants loans to various entities (households, local governments, businesses) with a view to financing energy efficiency projects in buildings. However, it does not directly offer banking services: rather, it relies on an indirect financing scheme, granting loans via the existing network of public and private banks. The latter are responsible for assessing investment projects and deciding whether or not to submit co-financing requests to KfW. Any renovation project must be subject to an ex-ante evaluation of its expected results: in practical terms, to be eligible any project must “upgrade a building’s energy efficiency to a level equal to 115% of the energy needs of a new building (KfW 115)”.

A successful financing tool for energy-positive buildings

In 2011 KfW granted a total of 70.4 € in loans, 22.4 of which went to medium-sized businesses. About a third of these loans were used to bring buildings up to environmental standards or to carry out ecological transition projects. Every year, between 60,000 and 150,000 energy efficiency projects are funded by KfW. Not only do such undertakings help reduce energy consumption and protect the environment, but they also generate significant tax revenues. KfW financing schemes create sizable financial leverage for the government: for each euro invested in public aid, two to four euros in taxes levied on the ensuing economic activity go back to the public treasury.

A model worth emulating

KfW is a successful tool for environment protection and reduction in energy use. Besides, it financially benefits all stakeholders, including the government, which ensures its medium and long-term viability. Other countries in Europe and worldwide should indeed take inspiration from KfW in their efforts to finance energy retrofit programmes.

KfW provides a compelling demonstration of the opportunities offered by the funding of energy efficiency projects, thus bringing convincing evidence that the energy transition not only benefits the environment but also fosters growth and jobs.

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