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<EU Energy Efficiency Regulation and Funding for Buildings
29-08-2013

EU Energy Efficiency Regulation and Funding for Buildings – Step change to a new real estate economy

'Green' or 'sustainable' buildings are still mostly an elite thing, prestige projects for corporate headquarters or the products of enlightened corporate governance as when the leading funds instruct their real estate managers to take on only cutting edge green buildings. But this is hardly a game changer given that the vast majority of the building stock doesn't belong to either funds or the big commercial property companies; it's made up of owner-occupied and private and social rental housing, and the vast 'lower' commercial building stock. To some extent, there is ecological trickle down from the top level, but it's a slow process.

The only game changer is mandatory regulation of the entire building stock of a large population, hence the EU.

The clincher is hard law …

The EU has been targeting energy efficiency in buildings for a decade, longer if you include a first completely failed attempt in the nineties. But motivated by the fact that buildings account for 36% of total EU carbon footprint, the EU, in its fumbling, bumbling, soundbite-free way, increasingly led by the European Parliament and working closely from the outset with the property industry (see box), has clocked up a series of Directives and Regulations setting mandatory requirements which, combined, could mean critical mass and step change:

  • All new build, residential and commercial, to be near-zero energyby 2018 (public) or 2020 (private)
  • Public bodies must purchase only energy-efficient buildings.Parliament would have liked "purchase and rent", but if all government purchase has to be energy efficient, won't that impact energy efficiency levels of buildings rented to the public sector and by knock-on to private tenants?

  • Energy efficiency renovation obligation now extended to the entire building stock(until recently, only buildings over 1000 m²). But this is only triggered when the owner freely decides to do a major renovation, 'major' meaning that the renovation covers 25% of the building shell or costs at least 25% of the value of the building.
  • Obligation on member states to energy efficiency renovate 3% of the central government building stock every year.No trigger needed. Must be done whether governments were planning to or not.
  • Obligation on big companies to do energy audits
  • Generalised smart metering and billing
  • Energy supply companies to provide energy services that reduce clients' energy consumption by a sum equivalent to 1.5% of the energy companies' annual energy sales
  • Energy Performance Certificates for all buildings put up for rent or sale with the indicator (Grade A, B, etc.) appearing in all advertising
  • Heating, cooling and ventilation checks
  • Obligation on member states to address the owner/tenant and multi-owner 'split incentive' issue by which each party hesitates to make an energy efficient move for fear that the other will be the main beneficiary
  • Member States have to set energy saving targets for 2020 that they have to present to the Commission in April 2013
  • Member states must also come up with a long-term strategy for mobilising investment intherenovationof the national stock of residential and commercial buildings, public and private, including identification of cost-effective approaches to renovations by building type and climate zone and policies and measures to stimulate deep renovations of buildings, including staged deep renovations;
  • Minimum levels of energy from renewable sources in new or refurbished buildings

  • Energy efficient construction worksand raw and secondary materials
  • And soon high performance boilers and water heaters

All this being mandatory for a population of over 500 million people plus all EU candidate member states.

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… backed by funding

Fortunately, the European authorities also recognised that the regulation requires funding, and despite the crunch, they're delivering:

1. Funding directly from the Commission for multi-country projects, the main instrument being the Intelligent Energy Europe programme with, for the 2014-2020 funding period, a big increase on the previous €730 million for projects that contribute to the practical implementation of the EU regulation, for instance the obligation on member states to address the owner/tenant or multi-owner split incentive issue.

2. Financing from the European Investment Bank recently doubled to €1.5 billion and is sure to increase. The EIB Vice Chairman has said "We've already done everything necessary for social housing; now we need to tap the private sector". He and his colleagues said they had previously been discouraged by the complexities of landlord/tenant issues and mortgage questions but that private buildings are such a big part of unexploited energy efficiency potential that they now merit the effort. They also said that the private real estate sector and banks should approach the EIB for common projects.

3. EU Structural and Cohesion Funds: In the 2014-2020 budget negotiations the Commission proposed ringfencing €17 billion for energy efficiency and renewables for which one of the investment priorities will be "public infrastructures and the housing sector" and the latest news is that the European Parliament, which now shares power with Council on the budget, wants 20% of the entire € 500 billion Structural and Cohesion Funds to be spent on the energy transition. This is not all for buildings - it covers research, energy networks, etc. - but it's still a lot. Note that, while EU regulation and IEE and EIB fundingimpact all asset classes, the Structural and Cohesion Funding will be for housing, seen as both the largest potential source of energy saving and the toughest nut to crack.

This sounds like big money, but is it enough for step-change? The Lithuanian government calculates it needs €13 billion to renovate the country's housing stock. At the moment, it gets € 227 million from the EU. The Head of the Commission's Energy Efficiency Unit says € 100 billion needs to be spent each year on energy efficiency of which € 60-70 billion for all types of buildings and most of that for existing buildings. It looks like, even underthe best budgetary scenario, funding bodies, banks, building owners and investors, developers and valuers need to all come together with a plan. A representative of the Région Rhône-Alpes has said "Regions and municipalities will get EU funding more easily for action plans if they can demonstrate building owner involvement" and Ralf Goldmann, Head of the EIB's Energy Efficiency and Renewables Division, said "Cities won't deliver without the private sector. This requires a change of paradigm in city / private real estate relations".

We should indeed all try to reach an agreement on a united approach that could filter down to regional level: guidelines on city/private real estate energy efficiency cooperation, housing and commercial, and a template for the allocation of regional authorities' EU Structural Funding to the implementation of the housing aspect of this cooperation. We're working on it. Once that's in place, we could have lift-off.

Abridged version of article published in 'European Pensions'