Background and issues

1.       Prioritising the energy efficiency of public buildings as a quality investment

Since buildings represent 40% of energy consumption in Europe, they are a major segment of the energy transition, calling for hundreds of billions of euros of investment. Public buildings in particular (excluding social housing) are estimated to represent around 10% of the total surface area of the building stock. The SFTE project builds on the duty of European, national and local authorities to set an example and stimulate quality investment. In Europe, public buildings (schools, offices, hospitals and so on) are considered a largely untapped source of potential for financially sustainable renovation (entirely funded by energy savings as opposed to subsidies) of at least €120bn over the next three years, that is to say €100bn more than the current investment trend (BAU of €20bn or even less over the next three years). This untapped potential, which urgently needs to be more accurately assessed in the EU, is reason enough for action by public authorities, since:

• public finances are heavily constrained, and the situation is liable to deteriorate in most European countries, hindering public building retrofit projects and lowering the BAU trend;
• public accounting standards in the EU and member states (MSs) are a burden on these projects and their “conventional” financing mechanisms;
• existing project finance mechanisms remain ill-suited to these medium-sized operations;
• stimulating demand for renovation projects (currently in low demand and politically undervalued) calls for a clearly articulated long-term real estate strategy by MSs, and the key projects to realise that strategy;
• current financing capacities and regulations would be inadequate in the context of the proactive policy being proposed.

The SFTE’s €120bn investment programme is based on financially long- or very long-term financially viable projects, with a 3% IRR objective.

2.       Support for EU objectives

Energy renovations in public buildings would help to attain several EU goals:

• exemplary reduction of CO2 emissions in the context of COP21, in accordance with European targets[1];
• improvement of the EU’s highly skewed energy trade balance;
• energy independence[2]: the EU28 imports more than 50% of the energy it consumes, and the Ukraine crisis is currently underlining Europe’s vulnerability;
• investment which spurs the EU’s competitiveness: fossil-fuel imports represent more than €1bn per day but energy savings would enable the EU to use these resources to generate more added value;

According to AFTER’s economic estimates, investing €120bn over three years in public buildings would reduce their energy consumption by 10-15% and their CO2 emissions by the same percentage. AFTER’s proposals respond to the need for the long-term financing of the European economy[3] and focus on the “real economy” without increasing the public debt, thus addressing today’s market failures. They will improve the traceability of such financing to facilitate the safe and transparent monitoring of the scheme by public authorities.

3.       Unrivalled socio-economic benefits

Energy renovations bring key non-financial socio-economic benefits in addition to those previously mentioned:

• local job creation, in part through SMEs: with about 15 jobs per year per million euros invested (a €120bn programme of investment in public buildings would result in more than 600,000 additional jobs/1year over three years);
• the development of an industrial cluster of excellence which would boost EU exports to globally expanding energy efficiency markets, and which would also benefit strategic energy efficiency programmes geared towards residential buildings.

4.       Three-year time frame

It is estimated that €120bn of energy renovation work could potentially already be undertaken in a financially viable way in the EU[4]. While the level of readiness of member states may vary, operations could be launched in most EU MSs within a year. A dedicated task force will provide technical, legal and financial advice to some countries, so that operations could begin the following year.

5.    Leverage potential

The financial mechanisms proposed by AFTER are designed to maximise leverage potential, with private financial entities benefiting from the EU guarantee (see details below): (i) banks first; (ii) then institutional investors, following securitisation.

6.    Scalability

Between years 4 and 10, there will still be potential for around €60bn worth of additional BAU and financially viable projects. Moreover, according to the SFTE study, there should be an additional potential of €240bn of non-financially sustainable projects which could help to attain more ambitious energy consumption and CO2 emission reduction targets. Overall, for a €420bn investment over 10 years (i.e. €120bn over three years, and a further €60bn and €240bn in years 4 to 10), the energy consumption and CO2 emissions of public buildings would be reduced by 40%. In this case the minimum IRR would be slightly negative at -3%.