Susanne Dyrbøl: Financing renovation of public buildings
Financing renovation of public buildings
The renovation challenge in Europe is massive. More than 75% of our buildings will still be standing and in use in 2050 . At the same time the energy standard of the existing buildings is far from today’s standard – in fact less than 3% of our existing buildings live up to the best energy class. It is well known that cold and leaky buildings have serious consequences for the climate, for people’s health, well-being and productivity. In 2019 more than 10% of the citizens are still not able to heat their homes in winter and 20% not able to cool their homes in summer with serious consequences for people’s health.
In EU the public sector owns and operates a large share of our buildings – e.g. 20% of residential housing in EU is publicly owned . Hospitals, schools and offices account for nearly half of the total floor area of non-residential buildings.
The large portfolio of public buildings provides many opportunities for economies of scale. Leadership by governments and cities renovating their own buildings would have a significant impact and lead the way for upscaling actions on energy renovation.
Even though energy renovation delivers multiple-benefits far outweighing the investment cost, the public sector is constantly challenged to find the upfront investments for renovation. One of the solutions is to create large-scale renovation projects and blend public funding with private funding in projects where private investors have a business case. In this way, a larger share of public funding can be allocated to renovation of publicly owned residential housing.
Using energy performance contracting (EPC) is one way of attracting private investments into renovation of public buildings. EPC is a mechanism for organising the financing linked to guaranteed energy savings in a project. The EPC often involves an Energy Service Company (ESCO). The ESCO will typically manage the total project including financing and the measurement and verification process for the energy savings in the repayment period. At present ESCO and EPC are predominantly and increasingly found in the public sector and to a lesser extent in the industrial and commercial building sectors.
The ESCO model is attractive for the public sector as it can help free public money to be spent on projects which have a higher economic return measured on social and environmental benefits. Several cities are already using EPC for renovation of municipal buildings and the number of innovative financing schemes to fund locally-owned projects is growing – the Covenant of Mayors has recently published a summary booklet with lessons learned by cities and regions across Europe .
Inspiration from Croatia – how to use ESCO contracts for renovation of public buildings
Croatia is one of the countries which has taken a strategic approach to work with ESCO contracts aimed at maximising the benefits for the public sector.
The government in Croatia has actively supported the use of ESCO contracts for renovation of public buildings by creating public-private partnerships for large renovation projects. Some of the large hospital renovations in Croatia were done with ESCO companies providing 60% of the funding from private investors while the remaining 40% came from the Croatian Energy Efficiency Fund .
Lessons learned & recommendations
- To reduce the perceived risk – it is important to have transparent rules and ensure a “fair” deal for the local or national authorities in the contract. The Croatian government has created a contract template which in a transparent way defines all obligations, risks and rights to prevent disagreements during the contract period, which is very important for the accounting of public debt.
- Public buildings like hospitals which are in use 24-7-365 have proven to be the most attractive investments for ESCO companies when there is a request for deep renovation .
- The business case for deep renovation is more challenging for ESCOs in buildings with a shorter “occupancy time” and/or mixed use such as schools and kindergartens as the guaranteed energy savings will be lower.
- ESCO contracts for public buildings in Croatia must guarantee at least 50% energy savings and have a contract period of maximum 14 years.
- To maximise the total savings delivered in projects, the government can co-fund projects.
- Renovation of public buildings should always be evaluated on the “triple bottom-line” – environment, social and economic benefits. NB! energy renovations will deliver a positive impact on all parameters. The economic benefit is the main parameter for ESCO companies; however, the public sector is expected also to deliver on the social and environmental agenda.
Croatia has demonstrated an interesting path for organising the energy efficiency funding for renovating of public buildings securing the public sector benefit from the contract. Using ESCO contracts on clearly defined conditions specifying high ambitions helps to free public money for other projects such as residential buildings or schools which have a higher return on social and environmental parameters.
Susanne Dyrbøl, Public Affairs Director at the ROCKWOOL Group:
Experienced public affairs professional within energy efficiency and climate policies. Susanne Dyrbøl is vice-chair in the Renovate Europe campaign and board member in Euroace and eceee.