Original publication: August 2017
Authors: European Policies Research Centre, University of Strathclyde: Fiona Wishlade, Rona Michie, Phil Vernon
Short link to this post: http://bit.ly/2jKDNJI
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Financial instruments for energy efficiency and renewable energy

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This study concerns EU energy and climate change policy and the role of Cohesion policy financial instruments (FIs) for energy efficiency (EE) and renewable energy sources (RES). EE and RES have become important aspects of EU Cohesion policy: the broad context is set by the Europe 2020 ‘headline’ targets, implemented through national action plans which help determine the nature of ESIF support for EE and RES. Moreover, cohesion policy contributes to the Europe 2020 flagship initiative a resource efficient Europe. Reflecting this, Thematic Objective 4 – supporting the shift towards a low carbon economy is one of 11 ‘thematic objectives’ under the European Structural and Investment Funds (ESIF) in 2014-20. At the same time, the Commission has expanded the role for FIs in Cohesion policy delivery. FIs mainly take the form of loans, guarantees and equity. For most ESIF Managing Authorities, FIs are relatively new tools for using within their programmes, and in 2014-20, the role of FIs is being reinforced both in breadth of policy areas and scale of funding.

The aim of this study is to analyse the use of ESIF FIs for the low carbon economy, especially energy efficiency and renewable energy sources. More specifically:

  • to give an overview of Cohesion policy support for EE and RES;
  • to analyse the implementation of FIs, and to identify specific challenges and lessons;
  • to analyse and assess the performance of FIs, including their contribution to broader Cohesion policy goals.

Energy efficiency is increasingly regarded as the ‘first fuel’. Buildings represent the greatest potential for energy efficiency. Energy efficiency obligations schemes are the most widely used measure used to achieve EE targets, followed by financial incentives.

Across the EU, some 16 percent of energy is derived from renewables. Feed-in tariffs and premia are the most widely used instruments to encourage RES use. These compensate for the extra costs of RES energy generation, however, private investment is sensitive to the design of these measures.

National contexts for energy policy vary. Factors include climate (heating is more important in northern than southern Europe), building quality (with poor quality housing in many central and eastern European countries), resources (geography, topography and network infrastructure affect the availability and accessibility of RES), policies (differences in regulation, budgetary and administrative capacity), and sectoral issues (buildings, transport, industry, agriculture) having diverse implications. The domestic policy landscape for supporting EE and RES investment is complex and fragmented, involving a patchwork of national and subnational measures. In some countries, especially in central and eastern Europe, there is significant ESIF cofinancing of incentives for EE and RES. However, quantitative data is not always available or comparable.

Meeting the Europe 2020 targets for EE and RES requires significant spending – around EUR 100 billion annually for EE and EUR 60-EUR 70 billion on RES installations. According to the Commission, this could be returned by 2050 through annual average fuel savings of EUR 175 billion to EUR 320 billion. Nevertheless, there are significant obstacles to financing investment in EE and RES in some contexts, concerning both the drivers of demand for investment and the supply of finance.

Cohesion policy is the largest EU source of funds for EE and RES, rising from EUR 10.8 billion in 2007-13 to EUR 29.2 billion in 2014-20. Most support for EE and RES is in the form of grants. In 2007-13, just EUR 467 million Structural Funds was paid to FIs set up specifically for EE and RES. However, additional Structural Funds were also invested through Urban Development Funds, some of which invested in EE and RES activities. The absorption of funds in FIs for EE and RES is poor – of the EUR 467 million paid to energy-specific FIs in 2007-13, only EUR 233 million had reached final recipients by end 2015. There was almost full absorption in Denmark and Estonia, but low levels or no absorption in Germany, Italy and France. Barriers to absorption included slow mobilisation of projects due to the resources needed to reach target groups; expertise required to understand the complexities of FIs and the technical aspects of EE and RES investment; and the reluctance of some target groups to engage with repayable support. For 2014-20, a substantial increase in the use of FIs for EE and RES is envisaged: over EUR 3 billion across 19 Member States are planned for FIs for the low carbon economy. However, by end 2015 only five FIs had had funds paid to them, totalling less than EUR 200 million.

ESIF cofinanced FIs for EE and RES are diverse in objectives, target recipients, scale and governance. Four broad groupings can be identified:

  • Energy efficiency in housing, which can be provided to individuals, housing associations or landlords, typically in the form of loans.
  • Energy efficiency and renewables in public places and buildings, normally undertaken in the wider urban development context, and usually through loans and guarantees to municipalities and other public authorities to invest in areas such as renovation or public buildings and street lighting or transport.
  • Investment in energy efficiency and renewables infrastructure; including support for projects such as solar installations, smart grids and energy management infrastructure, through ESCOs, PPPs and public or private entities.
  • Innovation and development of new EE and RES technologies, targeting new or spinout companies seeking to demonstrate, pilot or upscale projects for commercialisation.

The choice of financial product is closely tied to objectives: loans predominate for investment in buildings; and equity for investment in low carbon innovation by SMEs. FIs for EE and RES are affected by the same implementation challenges as other FIs. However, the new emphasis on low carbon in 2014-20 involves engaging with different stakeholders, addressing specific technical challenges associated with energy policy, and increasing the acceptability of FIs.

The key lessons from FIs for EE and RES do not substantially differ from those for FIs for general business support, in addition a number of specific needs were identified:

  • for specialist input;
  • an overarching vision to demonstrate how energy projects deliver sustainable development in order to improve ‘buy-in’;
  • for intensive awareness-raising and applicant support;
  • to tailor delivery mechanisms to target recipients;
  • for recognition of the role of wider regulatory issues, such as feed-in tariffs, and their impact on the attractiveness of FIs;
  • for ‘pilot projects’ in preparing future policy directions.

Variations in domestic contexts limit the scope for transferability of good practice between countries, but drawing lessons from one period to the next (within a programme) is important. ‘Off-the-shelf’ instruments which provide a template for dealing with the main compliance issues aimed to facilitate the use of FIs in 2014-20. However, no use has been made of off-the-shelf instruments for EE and RES, partly because they became available too late, but also because they did not meet identified needs. The legislative framework for FIs is generally regarded as complicated, though most issues are not specific to FIs for EE and RES. Technical assistance has been welcomed, but would have been more useful if available earlier.

The wider funding landscape for EE and RES is complex. As well as domestic policy measures under the national action plans (some of which are cofinanced by ESIF or funded through EIB-backed measures) there are EU-level FIs for EE and RES. Among some Managing Authorities, understanding of the roles of, and relationship between, domestic, shared management and EU instruments is limited.

Measuring the ‘success’ of cofinanced FIs of all types has been problematic for 2007-13. The challenge of measuring the performance of support for EE and RES is not limited to FIs: it is difficult to assess the impact of ESIF programmes on carbon emissions in a region or country, and more so the role played by FIs. This is partly due to the tension between standardised indicators that enable comparative assessment of operations and the need to capture the specificities of interventions. ‘Simple’ quantitative indicators may fail to capture wider qualitative and/or indirect benefits of EE and RES FIs.

Future policy should acknowledge the heterogeneity of EE and RES FIs. Their highly context-dependent implementation limits transferability of lessons and practice. However, in general, EE and RES FIs require specialist support and suffer from being constrained by ESIF OP lifecycles. The focus on thematic concentration in 2014-20 has potentially distortive effects, and more could be done to measure the impact of EE and RES FIs.

Link to the full study: http://bit.ly/601-992

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