How to make the Buildings Directive fit-for-finance...

First published in Euractiv by Frédéric Simon at 12pm on 8th December (here)

This week was a good one for energy efficiency and buildings.

It started with 118 countries pledging to double their rate of energy efficiency improvements by 2030. By mid-week, a 27-country COP28 “Buildings Breakthrough” coalition pledged to deliver near-zero emission and resilient buildings, and last night a political agreement was reached on the recast of the EU Buildings Directive.

With seven short years until 2030, it’s about time.

The IEA believes that energy efficiency measures can deliver half the pre-2030 CO2 reductions required under the Paris Agreement. They say that this would also drop household energy bills in advanced economies by a third, create an additional 4.5 million jobs globally and greatly enhance Europe’s economic resilience and energy security.

Yet on the ground, “lack of finance” remains among the most frequently reported reasons why building owners don’t upgrade their homes, and many banks offering green mortgages and loans for home renovations are underwhelmed by their customer demand. That’s why today we published an in-depth look at the state of readiness of retail lenders for the EU energy efficiency challenge in buildings, and what Member States can do to resolve this finance issue and thereby double their rates of buildings’ energy renovation.

As context, Euro 2 trillion needs to be invested in improving EU buildings in the next seven years, and over three-quarters of this must come from the private sector.

In principle, this should not be a problem as retail lenders have over one hundred thousand customer facing bank branches in the EU and process millions of customer requests online, every day. Most Europeans (70%) live in homes they own, and over a quarter of EU homes have a mortgage – and even more have no debt at all. Yet, retail banking channels, and mortgages, remain underused to promote energy savings.

In a world where consumers are smothered in financing options for cars (hire purchase), white goods (0% interest, buy now & pay later) and so many other competing purchases, it’s a shame that so few attractive “point of sale” renovation finance options exist, and how little admin and procurement support would-be home renovators have. This is notwithstanding Recovery Funds providing historically high amounts of public subsidy for building renovation.

To systematically address the yawning divergence between target setting and reality, Member States are presented with a historic opportunity to align with retail lenders to deliver resilience and savings to their customers. Here are five “hidden gems” in the recast Buildings Directive which can deliver this:

• Member States must quickly establish minimum energy performance standards (“MEPS”) with clear and measurable interim targets for each sub-sector of their building stock. The closer countries can get to identifying individual buildings requiring renovation, the better. MEPS must be established in line with the EU’s energy efficiency targets, and included in national energy and climate plans and buildings renovation strategies, with a focus on the worst-performing buildings. After all, these are the “low hanging fruit” of the energy transition.
• Governments need to increase fully grant funded renovations to the energy poor and make it easy for them to renovate. Often it’s not a lack of finance or subsidy per se which blocks renovation, but the intensity and opacity of the application process and procedures. To simplify this, increased levels of technical and project development assistance are required, and permanent local renovation offices need to be established in neighbourhoods with lots of renovation potential.
• A new EU-level renovation loan and/or guarantee facility is needed for retail lenders to engage with, and promote home renovations to, the elderly, and families with poor economics. Banks suggest that up to 20% of their existing homeowner customers are not eligible for new mortgages. By extension, this means there are some 40 million underserved homes, which need around Euro 1 trillion to upgrade. The launch of an EU Renovation Loan, or the offer of a new EU-level guarantee, would increase the ability of lenders to access this substantial renovation segment. An EU instrument levels the playing field among Member States by helping resolve issues of scale, cost of finance, fiscal headroom, access to and speed to market.

• Mortgage lenders need to play a more proactive role, and start by implementing a Mortgage Portfolio Standard. Over a third of the top 30 European banks already have some form of voluntary Mortgage Portfolio Standard, and nearly all of the remainder are in the process of concluding they will need one to deliver their net-zero commitments. A Commission-led Delegated Act process can convene Europe’s leading lenders, experts and Member States to build from the many existing best practices and help define technical standards and guidance to achieve these goals.

• AI, digital proxies and increased transparency are all required to open-up the black box of buildings energy performance data. All necessary policy levers have to ensure that more, and better quality, energy use and performance data is surfaced through the buildings renovation supply chain, and for homeowners. This will help residential and commercial buildings owners prioritise cost effective renovations, add value to their properties and reduce operating costs. The complexity of renovations can only be resolved if contractors, financiers and trusted project managers work from the same data set. Digital logbooks, building renovation passports, AI, proxies and improved and advanced EPCs all have a role to play, but fundamentally building owners need reliable energy records, support and simplicity.

Our study reveals that European banks with net-zero targets, clear transition plans, and especially science-based emissions reductions trajectories, have already identified their mortgage books as containing material climate risks, and opportunities. Most have also seen the evidence showing that mortgage arrears and defaults in Europe decrease as property energy performance improves.

As temperatures in Europe drop, and again countries look to provide hundreds of billions of euros to subsidise energy consumption – we cannot lose sight of why people can’t afford to heat their homes. Our buildings are inefficient. We know how to fix them and countries can provide better health, resilience and security for their occupants.

This political agreement on the recast of the EU’s Energy Performance of Buildings Directive is the green flag in the race between Member States to double building efficiency at twice the speed with half the hurdles.