Public plans for energy efficient refurbishment are put in place by states to encourage building owners to renovate their properties in a way that increases their energy performance. As financing represents the most important obstacle to this type of renovation, the plans favour financial incentives in the form of loans or grants. Various institutions can be involved in the process, such as ministries, banks, firms, or energy services companies (ESCOs).

A number of countries have implemented such plans: the United States, France, Belgium, Germany, the United Kingdom, Australia, Estonia, and others.

United States: PACE

The concept of PACE (Property-Assessed Clean Energy) was inspired by "solar bonds" program implemented in San Francisco in 2001. It was meant to overcome the major barrier to the installation of solar and energy efficiency retrofits in commercial or residential properties: high up-front costs. The principle consisted in "on-tax bill solar and efficiency financing," whereby repayment of the investment in measures is made through a property tax assessment.

PACE originated in 2008 with pilot programs in California, Colorado, and New York, that focused primarily on energy efficiency upgrades to single family homes. The first actual PACE program was carried out in Berkeley, California, and the state passed the first PACE-enabling legislation in 2008.

In the midst of the 2008 financial crisis, on July 30, 2008, the Federal Housing Finance Agency (FHFA) was created to supervise enterprises and banks (the "regulated entities"), after Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Association)'s bankruptcy."Housing and Economic Recovery Act," PUBLIC LAW 110–289, 110th Congress, July 30, 2008. At the time, most homes had a market value below the volume of contracted loans, following the burst of the housing bubble. In July 2010, the FHFA issued the first of many directives that effectively ban Fannie Mae and Freddie Mac from buying or holding mortgages with PACE assessments. PACE therefore shifted its focus over the next year toward commercial, industrial, multi-family and agricultural buildings and properties.

PACENow, is a national advocate for PACE, defines its mission as "to promote and assist the development of PACE programs by state and local governments and provide leadership and support for a growing universe of energy efficiency and PACE stakeholders."

PACE funding is provided (using various sources) or arranged by local governments for 100% of a project's cost, and is repaid with an assessment over a term of up to 20 years.PACENow, "Annual Report," June 2013.

Germany - KfW Bankengruppe

Context and creation

KfW (Kreditanstalt für Wiederaufbau, meaning Reconstruction Credit Institute) is a German government-owned development bank, based in Frankfurt. The bank was created in 1948 after the Second World War as part of the Marshall Plan for the reconstruction of Europe.

The KfW Förderbank (KfW promotional bank) is today its largest business unit, committed to housing and environmental protection. KfW introduced the Efficiency House Standard in 2009, to identify levels of energy efficiency in houses and provide loans or grants accordingly. Its activities devoted to bringing down CO2 emissions align with a strategy designed by the Federal Ministry of Economics and Technology (BMWi) in 2010, following the decision to speed up the pace of nuclear energy phase-out. This strategy outlined the directions to be privileged in the following years to achieve the desired level of energy efficiency. Among others, it asked to significantly raise the efficiency standards for buildings, to increase funds available for building improvement, and to implement tools to help ensure that new buildings gradually comply with the futureEuropean standards for nearly zero energy buildings. The KfW created promotional programmes targeting private buyers and homeowners, landlords and housing companies, to support refurbishment of older residential buildings with grants or loans.

Goals and missions

The German government announced in its "Energy Concept" strategy that it aims at reducing CO2 emissions by 80% in 2050 (the base year is 1990). Between 1990 and 2010, annual CO2 emissions have fallen at an average annual growth rate of -1.1%. This rate is not large enough to reach the 80% reduction goal; emissions should decrease at a rate of 3.4% per year from now on.

The most important sector contributing to CO2 emissions is the production and distribution of energy and water (42% of total emissions), and the second-most important one is that of private households (22%). The government has thus decided that efforts must be focused on two pillars: increased energy efficiency in existing buildings, and a larger share of renewable electricity. In order to ensure a reduction of energy consumption in existing buildings, it has decided to promote their rehabilitation, and has committed to carrying out thermal retrofits on 2% of the building stock each year. The realization of these goals is precisely what KfW's promotional programs are targeting.Kronenberg, Tobias, Wilhelm Kuckshinrichs, and Patrick Hansen. 2012. "Macroeconomic Effects of the German Government's Building Rehabilitation Program," Munich Personal RePEc Archive (MPRA) Paper No. 38815.

Intervention methods

The bank has set six levels of promotional incentives for energy efficiency refurbishment activities, expressed as Efficiency House Standards 55, 70, 85, 100, 115, and "Monument". These numbers represent the energy consumption of the housing unit as a percentage of the maximum primary energy requirement specified by the Energy Conservation Ordinance (EnEV). The lower the rating, the greater the energy efficiency. For example, a "KfW Efficiency House 70" consumes 70% of this requirement. As such, the best standard (55) receives the greatest support. To meet the energy standard for an efficient home, heating systems, thermal wall insulation, roof and floor insulation and windows are required.Power, Anne and Monika Zulauf. 2011. "Cutting Carbon Costs: Learning from Germany's Energy Saving Program," WhatWorks Collaborative Promotional funds are available either through a loan, or through a grant.

The involvement of an energy consultant is mandatory in the application process, and must be contracted by the applicant himself.

Supplementary Credit

The "KfW Energy Efficient Renovation - Supplementary Credit" programme offers low interest loans specifically for the replacement of the heating and domestic hot water systems that were installed before 2009. The loans can be up to €50,000, and have a 10-year maturity at a fixed interest rate."KfW Energieeffizient Sanieren - Ergänzungskredit (Energy Efficient Renovation - Supplementary Credit) - Germany." BuildUp. Retrieved July 25, 2010.

BAFA Energiesparberatung (Energy saving advice)

The Federal Office of Economics and Export Control (BAFA) offers grants in certain situations to cover expenses in on-site energy consultancy in residential buildings (on-site consulting). The maximum grant cannot exceed 50% of the total gross cost of the consultation."BAFA Energiesparberatung (Energy saving advice) - Germany." BuildUp. Retrieved July 25, 2014.

Financial arrangements

KfW obtains its funding on the capital markets, where it benefits from an AAA credit rating and a 100% guarantee from the German government. It obtains around €80 billion annually on the international capital markets. KfW thus provides refinancing loans to commercial banks at advantageous rates. KfW does not lend directly to individuals; loans have to go through commercial banks. The interest rate for the promotional loans distributed by the commercial banks is further subsidized by funds provided by the Federal Ministry of Building, Transport and Urban Development. KfW also receives additional funding from the "Energy and Climate fund", used to finance the preferential loans and the grants. Grants are distributed directly by KfW to individuals.

Business plan and results

In 2012, KfW Group had dedicated €29.2 billion to its "Climate change and environment" department, making it its largest activity and its core priority. The latest data on the KfW programs' achievements shows positive results: between 2006 and 2012, the programs led to an average reduction of 5.9 Mt CO2 equivalents per year."Sustainability Report - Facts and Figures Update 2013." KfW. 2013

More specifically on KfW's refurbishment programmes, the commitment volume in 2012 was €10.1 billion, and financed investments amounted to €27.3 billion. Still in 2012, 240,000 housing units were refurbished to higher energy efficiency levels, and 116,000 new energy efficient housing units were built.

In terms of energy conservation, the energy use in newly retrofitted buildings has decreased from approximately 120 kWh per square meter per annum to 80 kWh/sm/p.a.

International opening

In 2010, the KfW entered into a partnership with the Small Industries Development Bank of India (SIDBI), whereby the KfW provided a dedicated credit line of €50 Million to finance energy efficiency projects in micro, small and medium enterprises in India. The aim is to encourage MSMEs (Micro Small and Medium Enterprises) to undertake energy-saving investments in plant and machinery, and in production processes. KfW has also provided technical assistance to help SIDBI identify key MSME clusters, set up the financing streams, and conduct awareness campaigns.

Macroeconomic effects

A study on the macroeconomic effects of the German government's building rehabilitation programs has been conducted to assess the impact from the investment projects on the public revenue, the housing industry and the climate policy. The analysis focused on short-term effects (the effects taking place in the corresponding year). For the years 2008, 2009 and 2010, the analysis took into account the program cost (the opportunity cost of providing funds for the KfW promotional programs instead of using them elsewhere), and calculated the revenues from the value added tax paid by investors, net taxes on products, net taxes on production, payroll tax and SSC (Social Security Contributions) including solidarity surcharge, corporate income tax, and other income taxes including solidarity surcharge. Because it is not clear whether the additional demand for labour is met through overtime work or through additional jobs, the analysis provides two scenarios; one named "overtime", where the demand impulse does not create additional jobs, and the second named "jobs", where the opposite is true. In the latter, the avoided cost of unemployment is added as a revenue.

In any scenario, results clearly show that the public revenue has been positively impacted by the investment projects.

In 2008, the program cost amounted to €1,293 million. In the scenario "overtime", the net effect on the public budget (public revenue minus program cost) was €1,478 million. In the scenario "jobs", the avoided cost of unemployment equals €857 million, and the net effect is thus €2,335 million. In 2009, which was the year of the "Great Recession", when the KfW programs were used as a means to increase aggregate demand, the program cost amounted to €2,035 million. In the scenario "overtime", the net effect was €3,326 million, and in the scenario "jobs", it was €5,937 million. In 2010, the program cost was much lower than in 2009, amounting to €1,366 million. In the scenario "overtime", the net effect was €3,987 million, and in the scenario "jobs", it was €5,810 million, quite similar to the year 2009.