The ambition of the European Green Deal is reflected not only in the scale of its targets but in the aim to be achieve them while balancing social, economic and environmental challenges. The commitment to ensure ‘no one is left behind’ is a monumental shift. Among other aims, these targets are designed to stimulate implementation of national renovation strategies.
Boosting the energy renovation rate by 3% annually could, by 2050, lead to an 80% reduction in energy demand from EU buildings. Photo: Ronstik
Past experience shows that Member States (MS) are unlikely to launch aggressive building renovation strategies in the absence of innovative financing models. To correct this shortcoming, the Just Transition Mechanism aims to combine subsidies, grants, guarantees and loans within effective policy and regulation frameworks. It also seeks to address two overarching shortcomings of past plans:
Electoral barriers: The Mechanism acknowledges the disconnect that the European Green Deal is setting out 30-year strategies against electoral cycles that are typically 4-5 years, which make it very difficult for any government or party to ‘sell’ a renovation platform that will incur large public debt through to 2050.
Projects are not always financially feasible: The Mechanism takes into consideration that energy renovations are often feasible for businesses, but not for individual homeowners, in which case the need to have work done and to access financing is extremely granular. It also accounts for the reality that wide-scale renovations may not be feasible for Member States (MS).
The Mechanism is built upon financial engineering principles that aim to mobilise – from public and private sources – up to €100 bn over the period 2021-27. At their core, these principles aim to reduce risks. This is because involving private sector money, which can more easily participate in the ‘risk-reward’ world, is critical. The reality is that MS governments facing the biggest challenges in the Transition are also the most likely to be constrained from taking on more public debt. They may simply have different priorities for debt, be overburdened by existing debt or want to avoid surpassing acceptable levels. Additionally, they may want to stay away from the pressure of financial markets.
In relation to energy efficiency and buildings renovation, the Mechanism moves beyond ‘loans for buildings’ in that it aims to capitalise on the ways that building renovations can renovate economic activity more broadly.
Pillars of the Just Transition Mechanism
In name, the Just Transition Mechanism defines a key aspect of its scope: while all MS are eligible to access the Fund, it targets those MS and regions most affected by the transition, including facing higher costs. It will prioritise funding to MS that have the highest carbon-intensity economies and the most people working in fossil fuel sectors. Importantly, the Mechanism is not designed to save ‘dying’ industries (such as fossil fuels) but to stimulate new ones across diverse sectors such infrastructure, technology, energy, buildings, etc.
The Mechanism is strategic on the lending side in that it comprises three pillars designed to tackle different financing challenges and stimulate different types of co-investment by public or private partners. In turn, it is strategic on the receiving side in that eligible MS must submit Transitional Plans that carefully itemise all measures they intend to take. The Commission and the MS will assess these plans and allocate funding accordingly. The three pillars are as follows:
Just Transition Fund: With a base of €7.5 bn from the Commission, this fund aims to generate €30-50 bn in investment. Its purpose is to ‘alleviate the cost of the transition’, along two main policy streams: the economic stream focuses on diversification while the social stream targets re-skilling of workers. This combination seeks to ensure that sectors affected, as well as jobs lost, in the transition will be recreated in other/new sectors to maintain overall economic activity – and that MS have enough skilled workers to fill such jobs. To tap into the Fund, MS will have to commit to match each euro from the Just Transition Fund with money from the European Regional Development Fund and the European Social Fund Plus, as well as provide additional national resources as required under the Cohesion policy.
While all types of projects are eligible, the case for energy renovations would be strengthened by linking them to alleviating the cost of the transition. A MS or region that depends heavily on coal for heating, for example, might present that, in parallel with phasing out coal mining and coal-fired power generation, financing buildings renovation alleviates the cost of transitioning to new energy sources or lowers overall energy demand (ergo, also lowering overall costs).
Invest EU: Targeting €45 bn of investment mobilised, this funding is available across four areas: sustainable infrastructure; research, innovation and digitalisation; small and medium-sized business; and social investment and skills. Energy efficiency projects would most likely fit within the first area, but there may be scope to secure support for research, innovation and digitalisation. All projects must be shown to be ‘bankable’, having some sort of revenue to deliver a return on investment.
Public sector loan facility: With a contribution from the EU Budget of €1.5 bn, this new instrument is intended to leverage €10 bn of loans from the European Investment Bank (EIB) such that they mobilise €25-30 bn in total. The combination of a either a grant or an interest rate subsidy plus an EIB loan will make it easier to engage national authorities.
In November 2019, the EIB announced that its new lending policy would, in essence, transform it into a climate bank and establish a green projects fund. This loan facility thus fits well with the EIB’s new mandate. It is anticipated that projects such as energy efficiency, district heating and renewable energy infrastructure are likely to be eligible. The Commission will table the full proposal for this instrument by the end of March 2020.
High carbon-intensive economies present a challenge, but the ‘Just Transition Mechanism’ will help to ensure the involvement of all Member States. Photo: acilo
Again, while all MS are eligible to the Just Transition Mechanism, there is one element of conditionality: to access funding under Pillars 2 and 3, a MS (or region) would also have to apply for funding under Pillar 1. One way in which MS less affected by the transition might qualify is to participate in a regional activity in which multiple MS collaborate to alleviate the cost for some partners.
Some may be quick to point out that, in relation to the scale of funding needed, the Just Transition Mechanism falls short. But readers should not underestimate the substantial investment it represents.
Renovate Europe calls upon EU institutions to ensure that the EGD creates the ecosystem for deep energy renovation, including establishing stability that will eliminate the current ‘stop-go’ dynamic that erodes investor confidence. This includes making energy efficiency a top priority and planning beyond short-term measures.
For the full set of articles co-produced by EnAct and Renovate Europe, follow the links below:
Part 1 of 5 / Building renovations and the EU Green Deal
Part 2 of 5 / Proof of how buildings renovation can help meet the EU Green Deal
Part 3 of 5 / Tapping into the Just Transition Mechanism
Part 4 of 5 / Leveraging carbon revenues for EU buildings renovation
Part 5 of 5 / Financing residential deep energy renovation
