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Refurbishing Buildings for Energy Efficiency: Could an Energy Efficiency Fund Serve as a Supplementary Financing Model?

Press Release of May 6, 2015

To increase the rate at which residential building undergo refurbishments for energy efficiency, innovative financial solutions also need to be considered. For example, some property owners who are currently hesitant to implement thermal retrofit might be encouraged if the investment is funded by a third party (fund) and refinanced based on the energy costs saved with the efficiency measure. Such financing options need to be examined and tested, suggests a new study conducted by the German Institute for Economic Research (DIW Berlin). "It is important to look for innovative solutions, because we are currently squandering many economic benefits through the slow progress of the implementation of energy efficiency measures," said DIW expert Karsten Neuhoff. Even though other countries’ experience with such models is still limited, "the possibility of their implementation in Germany should be thoroughly examined in light of the challenges of energy transition," said Neuhoff. But it seems clear that an energy efficiency fund can only serve as a complement to existing financing instruments, and not as a replacement. The DIW experts believe it is especially necessary to further develop the existing information and advice programs, to strengthen financial support from Kreditanstalt für Wiederaufbau (KfW), and to continue improving qualification and certification in the construction industry in order to sustainably increase the rate of refurbishment.

German Institute for Economic Research (DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

In order to reach the Federal Government’s environmental protection goals by 2020, an annual refurbishment rate of 2% of the existing German housing stock is needed. But despite government funding and an increasing volume of construction, the refurbishment rate has stagnated at around one percent. Apparently, the existing support programs are not being used by many property owners - perhaps because the owners do not have the necessary long-term investment horizon for such investments, or because the risks are being given too much weight in the assessment of the investment project. The decision to make a comprehensive energy efficiency refurbishment is complex and - alongside the sheer finance risk - involves multiple uncertainties: Will the refurbishment work properly, in technical terms? How much energy can really be saved? How will the energy prices and property value develop in the future?

Alternatives to bank loans: Financing refurbishment with energy savings

These risks could be underwritten in part by third parties, whereby the refund or, more specifically, the payment is funded through the energy savings. Unlike traditional bank loans, the lending would be bound to neither the creditworthiness of the borrower nor the value of the property, but rather to the income from the investment. The necessary capital could come from large institutional investors, such as pension funds or life insurance companies, which are seeking new investment opportunities within the current climate of low interest rates and have the requisite long-term horizon. Similar to what was proposed by the Expert Commission on the "Strengthening of Investment in Germany,“ a fund could collect private capital and make it available as equity for investment in the creation of energy-efficient buildings. Neuhoff and his co-authors, Claus Michelsen and Anne Schopp, have researched where such a fund would make sense, how it would have to be organized, and what kind of experiences other countries have had with it. "Such an energy efficiency fund would make particular sense for municipal or commercial projects," said Michelsen. "But if you group the individual projects accordingly - for example, by larger service areas - this model could also become useful for the refurbishment of residential buildings." Government participation would be beneficial. In the medium term, the costs can be reduced as technical expertise increases and standardization continues.