Funding energy efficiency in the EU

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EURACTIV examines the different ways in which energy efficiency improvements are funded in Europe, whereby  EU funds are only a small part of a large equation that includes market-based instruments, bank financing and private sector initiatives. 

Background

Improving energy efficiency at all points on the "value chain" - from industrial electricity, fuel and heat production to end-use by consumers - is an essential requirement for reaching the 20% CO2 emission reduction targets set at the 8-9 March European Council.

But energy efficiency improvements can require large up-front investment that only pay off after several years, and the issue of who provides funding and how best to implement it remains the subject of a complex and far-reaching debate. 

Some argue that the EU and individual member states should provide more funds and/or tax breaks for efficiency upgrades; others argue that private or public-private financing should do more; and others point to the potential of changing energy-wasting habits among consumers. 

The best solution, most experts agree, is an "integrated approach" that combines policy and fiscal incentives with technological advances, more favourable financing conditions, and changes in consumer behaviour. 

Issues

There are no precise figures available for total EU spending in support of energy efficiency improvements as such. 

Energy efficiency is a "horizontal" issue that affects nearly all of the EU's most important policy areas, including transport, energy, product development, buildings, agriculture and information technologies. 

EU policy framework

Among the most important EU communications and policies are:

The Commission is also pushing for a Strategic Energy Technology (SET) Plan that would place more emphasis on research into energy-saving technologies such as fuel cells, hydrogen and sustainable coal and gas technologies (EURACTIV 07/03/07).

EU funding instruments

EU funds in support of these policies are spread across a variety of spending programmes and are allocated through grants, financed by the EU budget, in support of specific projects.

The Seventh framework programme (FP7) for research and technological development, for example, provides monies for select research projects during the period 2007-2013 according to different thematic areas, including: information and communication technologies (9.1 bn euros), transport (4.1 bn euros), energy (2.3 bn euros), food, agriculture and biotechnology (1.9 bn euros), and environment, including climate change (1.8 bn euros).

To what extent these funds support energy efficiency improvements depends largely on the nature of the project that is funded - certain grants are given only the condition that the funded project leads to technological advances in energy efficiency.

Complementary to FP7, and more targeted to funding energy efficiency, is the Competitiveness and Innovation Programme (CIP). The CIP, which also runs from 2007-2013, is endowed with a budget of 3.2 bn euros, and contains two important programmes: 

  • The Intelligent Energy Europe (IEE) programme, focused specifically on energy efficiency and renewable energy with a budget line of 730 million euros, and;
  • The Entrepreneurship and Innovation programme, with 430 million devoted to "eco-innovation".

The EU's budget is relatively small - it is less than the total budget of the UK, for example. But money from the EU budget is not the only source of funding for energy efficiency. 

Market-based instruments

The EU Emissions Trading Scheme (EU ETS) is perhaps the most frequently cited example of a market-based instrument (MBI) for improving energy efficiency, since paying for carbon emissions should, ideally, encourage investments in technological and other improvements to reduce energy waste.

Taxes are a central and controversial issue in the debate. While they can help stimulate energy efficiency improvements, many member states are reluctant to cede national sovereignty on taxation to the EU.  

Reducing value-added tax (VAT) rates for energy-efficient products and services, for example, is supported by France and, ironically, the UK. But it remains to be seen whether unanimous agreement can be reached on this issue among 27 EU member states (EURACTIV 23/07/07). 

State aids for environmental protection are not ususally mentioned in connection with MBIs, but they play an important role since current EU rules do allow member states to subsidise efficient production of electricity as long as costs for more efficient production exceed the market price of conventionally generated electricity. The rules are currently being revised for 2008, and may contain more allowances for energy efficiency subsidies.

On 28 March 2007, the Commission published a Green Paper on market-based instruments, opening a debate on how best to use taxation and other market-based measures to finance energy efficiency and the "greening" of the EU economy (EURACTIV 20/03/07 and 30/03/07).     

Structural funds: a wasted opportunity?

EU Structural Funds are designed to promote development and reduce inequalities between different regions of the EU. They represent over 40% of the EU budget, totaling 308 billion euros for the period 2007-2013.

But structural funds spending priorities were formulated before energy efficiency and related issues, such as climate change and energy security, moved to the top of the EU's political agenda.

As a result, structural funds are spent to support the Lisbon Agenda for "growth and jobs", which can lead to the construction of energy intensive industries and road transport networks, particularly in the 10 new EU member states. Some observers fear this will lead to an increase rather than a reduction of the EU's CO2 emissions by 2020. (Please see EURACTIV's related coverage  of this issue for more information.)

Banking on efficiency

During a 05 June 2007 Board of Governors meeting, the European Investment Bank (EIB) committed to a "reinforced" contribution to "clean energy", which includes raising the share of EIB co-financing to 75% of total costs for renewables projects and for "investments contributing significantly to energy efficiency". 

The EIB has also introduced a "systematic review of energy efficiency issues when assessing projects to be supported by the Bank." 

Private and state banks are also increasingly interested in financing energy efficient projects. The KfW, Europe's largest "promotional" bank, for example, actively backs the construction of energy efficient private housing in Central and Eastern Europe. KfW and partner banks are currently lobbying the Commission to secure financial backing from EU Structural Funds to finance energy efficient construction.  

Efficiency pays for itself?

Energy service companies (ESCOs) such as Honeywell and Siemens argue that there is no reason to wait for legislation or an increase in public funds to realise major energy efficiency improvements, particularly in large buildings that consume a great deal of energy.

So-called performance contracting is an arrangement whereby the ESCO's expenses for upgrading the energy performance of a large building are covered entirely by the returns from energy efficiency gains.

The Commission has taken note of the potential offered by performance contracting, and has promised to remove any remaining administrative barriers to companies offering such services.

Positions

In its 2005 Green Paper on Energy Efficiency, the Commission cites "a lack of access to adequate financial instruments supporting measures which bolster energy efficiency". 

The Green Paper suggests several options: "One avenue to explore is the idea of ‘global’ loans, where the funds are subsequently redistributed via an intermediary or a ‘clearing house’ with more technical and economic expertise in the field of energy efficiency. Another opportunity is the financing models based on shared savings currently used in some Member States, such as third-party financing and performance contracting."

The Commission also supports an increase in the amount of EU funds spent on research into energy-saving technologies and laments that all "member states have their own research programmes on energy, mostly with similar objectives and targeting the same technologies". This leads to "scattered, fragmented and sub-critical capacities", according to the Commission, which points out that the US annual energy research budget far exceeds the EU's budget.

In its response to the consultation on the 2005 Green Paper on Energy Efficiency, EuroACE, the European Alliance of Companies for Energy Efficiency in Buildings, gives strong support to performance contracting since it "provides a financing mechanism for upgrading and retrofitting energy equipment and services in public facilities without using budgeted funds and without requiring any capital investment by public authorities".

EuroACE also sees "an active role for the Structural and Regional Funds and for the European Investment Bank in particular in helping to improve the building stock in new Member States". 

Jan te Bos, Director General of Eurima, the European Insulation Manufacturers Association, has expressed the organisation's backing for a reduced VAT rate for energy efficient services and products. Te Bos also supports the introduction of EU budget guarantees for bank loans to finance energy efficiency projects.

In its response to the consultation on the Green Paper on market-based instruments, Eurima argues that preferential loans are best used upgrading the energy efficiency in private-occupied residential buildings, "whereas in commercial buildings tax credits for installing energy-saving products will be more effective". 

Concerning state-aid, "loan schemes, which provide a building owner with the means to invest in building improvement without having to use cash resources, are more effective and efficient than most subsidy plans", according to Eurima.

UEAPME, the European Association of Craft, Small and Medium-sized Enterprises, argues that the revised state aid rules "should create incentives and design specific financial instruments capable of increasing energy efficiency and environmental protection standards while at the same time avoiding a 'crowding out' effect that reduces or endangers the capacity for other investments".

RICS, the Royal Institution of Chartered Surveyors, supports the introduction of EU-wide energy saving trusts, whereby a fixed percentage of consumer spending on electricity is used to fund awareness campaigns and energy efficiency improvements in existing buildings. RICS also favours local property tax reductions for energy efficient buildings and more forward funding by national investment banks for energy efficient projects, based on CO2 reduction assessments.

Timeline

  • Dec 2007: Commission to propose a Strategic Energy Technology (SET) Plan
  • Jan 2008: Commission to publish revised state aid rules for the environment

Further Reading

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