Financial Incentives for ULEB and deep retrofits

Financial incentive programmes can serve a variety of aims simultaneously:

• Raise awareness for and stimulate investment in BAT (ULEB) rather than least up-front cost options, which is of very high importance in the building sector because of long life-times of investments.
• Trigger learning curve effects in ULEBs by increasing the number of buildings meeting this standard. 
• Thereby, accelerating the market penetration of (U)LEBs and certain energy efficiency technologies or services. As a result, help prepare markets for the next steps in strengthening MEPS towards higher energy efficiency levels to finally make ULEB the standard in new build.
• Render almost cost-effective measures to cost-effective from the user/investor’s point of view.
• If information/uncertainty cost exists, financial support can trigger investments that are actually cost-effective but would otherwise still not be made due to the information/uncertainty cost.
• Overcome barriers to investment in ULEB such as financial endowment of owners, time-limited ownership or leased buildings, which are taking away the occupant’s incentive to invest in long-term lower energy bills (Baden et al. 2006).

Worldwide implementation status
Many states in each of the USA and the EU-27, but also many other countries, such as Mexico or Thailand provide financial incentives for energy-efficient new buildings or retrofit.
Although Maio et al. (2012) found, that in Europe, most financial instruments tackling the new building sector do not (yet) target ULEBs, and the same is likely in other world regions, there is much to learn from other past experiences also for financial support towards approaching ULEBs. Information on relevant programmes, their effectiveness and comparability is often not available. The following list thus gives some hints on programmes in different areas.

Direct grant schemes
Grants and subsidy schemes are by far the most wide-spread instrument. Almost 2/3 of financial incentives in the EU are of this type (Atanasiu et al. 2012, p. 12).
The programme Esta Es Tu Casa (This is Your Home, TIYH) in Mexico supports households with low (although permanent) income levels in building/buying/renovating a house or apartment through a direct grant, thus helping those families in getting a decent own property. TIYH grants for new housing are fixed at € 3,450 and contribute about 20-25% to the cost for a low-income home with a maximum value of € 13,400 (single-family house) or € 16,500 (apartment in multi-family house).
The German KfW programme (see the bigEE good practice example), combining a direct grant with a preferential loan, is another example that provides financial incentives for ULEBs in new build and for energy-efficient refurbishment, including to LEBs and ULEBs.
In Belgium, the Brussels capital region has promoted low-energy and passive housing standards by providing up to €120/m² to investors. The maximum amount is given to low-income households.

Tax-related instruments
There are different options of using taxes as an instrument: by reduction or crediting of certain taxes or reducing VAT. All instruments are in place. In the EU for example; there are 25 tax-related instruments: 13 tax reductions, 4 tax credits, 8 reduced VAT schemes (Atanasiu et al. 2012, p. 12).
The US Energy Policy Act of 2005 gives a $2000 tax credit for homebuilders if energy performance can be verified to consume 50% less heating and cooling than required by the 2004 Supplement to the International Energy Conservation Code. For existing buildings, this credit is max. $1500 (USDOE 2012a). The legislation also makes available tax deductions of up to $1.80 per square foot for improving the energy performance of commercial building over the provisions of ASHRAE Standard 90.1-2001 (USDOE 2012b).
Another example is the French “Plan Climat 2004” which gives “tax credits” investments for energy efficiency in buildings. The credit amounts to 25% of the investment costs for boilers, insulation and energy meters and 40% for heat pumps and renewable energy production (Baden et al. 2006, p8-9). The credit scheme established in 2005 (FRA23) generally lies between 15-40% of investment costs. Its impact is estimated to be “high” (ECF 2009).
In the Netherlands, the Energy Investment Allowance (EIA) offers tax deduction for investing energy efficiency and renewable energy technologies in different sectors. The deduction covers 41.5% of the investment costs. In the building sector, the investment of both single measures and comprehensive measures for retrofitting are covered (Neuhoff et al. 2012).

Governance level
Usually, financial incentives are offered by national governments. However, depending on the specific measure and legislative framework, they can be implemented at the international, national, regional and local level and also be offered by energy companies as part of their measures to fulfil an energy efficiency obligation. It is essential to avoid competing schemes.

Related sectors

• services
• residential
• industrial

Concepts

• Low-Energy Buildings
• Ultra-Low-Energy Buildings
• nearly-Zero-Energy / Plus-Energy Buildings

OptionsPassive options

• Thermal comfort
• Site
• Microclimate
• Building Form
• Building orientation
• Building envelope
• Shading
• Colour
• Passive cooling techniques
• Passive solar heating

Active options

• Mechanical ventilation
• Cooling
• Heating
• Domestic Hot Water
• Lighting
• Building transportation
• Building integrated renewable energy systems

Behaviour and Management

• User Behaviour
• Building Energy Management
• Design Optimisation

Others

• Natural ventilation

Related target groups

• Architect
• Manufacturer of prefabricated houses
• Investor
• Property development company
• Investor-occupier

Direct beneficiaries
All investors of energy-efficient buildings and the related equipment will directly benefit from financial incentive programmes.
Investor-occupiers, Investors (landlords/landladies, developers, leasing companies, housing corporations) will receive financial incentives and benefit through the less costly implementation of BAT for a long lifetime, and investor-occupiers will benefit from high future energy and consequent monetary savings. Investor-landlords will realise a higher value of their buildings and a higher rent, if building energy efficiency and the full rent including energy costs is made transparent, e.g. through an energy performance certificate.

Indirect beneficiaries
On the supply side, property development companies, system suppliers, architects, engineering consultants, energy consultants, installation contractors, facility management companies, manufacturers and retailers offering energy-efficient building concepts, technologies, and solutions will see an increase in their business and also benefit from the usually higher investment cost of ULEBs.
For example, manufacturers of prefabricated houses/buildings specialising in prefabricated ULEBs benefit from increasing sales opportunities.
On the demand side, tenants and users will benefit from energy cost savings, after the building owner invested in energy efficiency taking the financial incentive.

Direct beneficiaries

• Retail company

• Investor-occupier

• Investor

  E.g. landlords/ landladies, developers, leasing companies, housing corporations

Indirect beneficiaries

• Installation contractor

• Tenant

• User

• Energy consultant

• Engineering consultant

Relevant barriers

• Knowledge and information barriers: Uncertainties (e.g. about future energy prices, market development, etc.): without a financial incentive, uncertainty may be too high for investors to decide to invest in BAT. Non-availability of information: The knowledge of financial incentives motivates potential investors to inform themselves on the opportunities and benefits of energy efficiency.
• Economic and financial barriers: High expectations regarding return on investment: the financial incentive improves the benefit-cost ratio of energy efficiency investments. Access to financing/lack of capital: Insufficient capital endowment leads to energy-inefficient new build or renovation, which are socially sub-optimal investments. Especially in renovation of existing buildings, there is the additional barrier of the basic renovation investment, even without an improvement to energy efficiency.
• The investor-user barrier: With regard to the investor-user or landlord-tenant barrier (misplaced or split incentives between developer and final investor or misplaced or split incentives between landlord and tenant) financial incentives will cover at least part of the incremental cost of the more energy-efficient buildings and thus may make it attractive for building developers and landlords to build and retrofit energy-efficiently.
• Lack of interest and motivation in energy efficiency-improvement: The following aspects are of particular concern: transaction costs or hassle/inconvenience (in combination with) time constraints, focus on core activities and small size, low priority. Not only the financial incentives but also the information will motivate investors and suppliers to consider the energy-efficient technologies and solutions supported by the programmes. The programmes should make it easy to actually implement energy efficiency.

Relevant incentives

• Saved energy costs: With the acquisition of BAT, future energy costs over the entire building life span will be significantly lower.
• Increased (re-sale) value of the property: The building value will be relatively higher to that of less efficient buildings, however to what extent costs may be recovered may remain uncertain. Energy performance certificates will increase transparency and thus market demand for and value of energy-efficient buildings.
• Directly increasing earnings or profits for actors on the supply side: Financial incentive programmes will also increase profits for suppliers of energy-efficient technologies and solutions to investors or final consumers.

Financial incentives (“the carrots”) aim to accelerate the market penetration of (U)LEBs and certain energy efficiency technologies or services with higher energy efficiency than MEPS. In renovation of existing buildings, however, their aim is often to overcome the high cost barrier and thereby to trigger investment projects in energy efficiency that would not have happened without the incentive. As a result, they will help prepare markets for the next steps in strengthening MEPS (“the sticks”) towards higher energy efficiency levels for both new buildings and for retrofitting existing buildings. However, to achieve this as quickly as possible, they will also need mutual support with and from the following types of policies and measures:

• Information and motivation programmes for investors on both the cost and benefits of (U)LEB and available financial incentives for investing in ULEB new builds and retrofitting (“the tambourines”).
• Personalised advice for investors on what the economic benefits and costs of (U)LEB design and energy-efficient technologies for their building or renovation project are, and also how to ensure the high energy performance in practice. Such advice may be made a requirement for obtaining the financial incentive for the energy efficiency investment, and it is recommended to offer an additional financial incentive for the advice.
• Issuing energy performance certificates after construction or retrofit and requiring their disclosure to inform potential buyers or tenants about the high performance of the (U)LEB and the low energy costs.
• Training and certification of supply-side actors, such as architects, energy consultants, contractors.
• Demonstration buildings for (U)LEB (both new build and renovation of existing buildings) to convince potential investors of the feasibility and cost-effectiveness.
• Providing information to local governments about the cost and benefits of financing ULEB and deep retrofitting to the local economy and to their budget. 
• Particularly for renovation, stimulating the market for energy efficiency services such as energy performance contracting, and allowing ESCOs and other providers of such services to benefit from financial incentives for energy efficiency on behalf of the building owner.

The following pre-conditions are necessary to implement Financial incentives for approaching ultra-low-energy buildings (ULEBs) or exceeding MEPS requirements and for triggering very energy-efficient (‘deep’) retrofits:
Agencies or other actors responsible for implementation
For grants and tax-related measures, funding from government budgets and implementation through a government organisation (e.g. ministries, energy agencies etc.) or implementation and funding by energy companies that are subject to an Energy saving obligation is needed.
Loan schemes, with a grant component, are operated by banks which may be publicly or privately owned, and involve funding by government budgets (e.g. ministries or energy agencies). Depending on legal possibilities, energy companies may also provide combined loans and grants.

Funding
Funding can be provided via the energy prices and tariffs, since it will also be the energy consumers benefiting from the energy savings. This will be the usual source in case of energy companies implementing the programme under Energy Savings Obligation schemes and possibly with associated trading of energy savings certificates. Creating a special levy on energy prices to provide the funding is another possibility.
Cross-financing from government budgets (taxes) is possible, e.g. for energy efficiency funds. Market-based financing includes funds from auctioning of Emission Certificates or, an alternative source for developing countries and emerging economies, climate finance, such as Programmes of Activities (PoA) under the Clean Development Mechanism (CDM) or Nationally Appropriate Mitigation Actions (NAMAs). Funding for NAMAs can also come from bilateral or multilateral government co-operation.

Test procedures
Financial incentives need to be connected to reaching requirements for whole building energy performance or equipment energy efficiency. These need to be calculated or measured according to transparent calculation standards or test procedures. It will be best to use standards and tests defined for MEPS, building energy performance certificates, or equipment energy labels, as market actors should already be familiar with these. An incentive will be the easiest to communicate, if the requirement can be stated as “label class A” or similar. If, however, no calculation standards or test procedures exist yet for the technologies or solutions to be promoted, they will need to be developed especially for the financial incentive programme.

Other pre-conditions
In order to prove that the programmes are effective in saving energy and reaching defined efficiency standards, agreed, reliable, and standardised methods for calculating saving, economic benefits, and costs need to be developed and used.

As a first step, existing grant schemes and tax incentive programmes, as well as the existing institutional landscape should be analysed to find potential starting/connection points for further financial incentive programmes.
Next should be an analysis and possible demonstration of energy-efficient building designs and technologies, their potential energy savings and cost-effectiveness, and of the skills of architects and construction and installation workforce to implement the designs in practice. For energy-efficient retrofits, their potential energy savings and cost-effectiveness should be analysed based on refurbished demonstration buildings. The findings on cost-effectiveness will indicate the need for, and the necessary level of, financial support needed for market breakthrough of the energy-efficient building designs or retrofit options.
Then, the programme can be designed. This includes implementation procedures, routines of application for the financial incentive, checking applications, approval, payment, control of compliance and penalties for non-compliance.
Ex-ante impact and cost assessments can then help identifying the most cost-efficient and highest-savings design and refurbishment options. Experiences from existing schemes may serve as indications, but detailed case-assessment is necessary.
Implementing the programme is the next step.
A thorough monitoring and evaluation system should be set up in order to identify real effects and the most effective and efficient measures.

Quantified target
After these first steps, legislators and governments may well set quantitative targets in terms of energy savings and number of participants.

International co-operations
Countries can co-operate by exchange of information and experience on principles as well as practical details, problems, and solution of implementing such incentive programmes. Providing climate finance to developing and emerging countries for funding financial incentive programmes is another potential way of co-operation.

Monitoring
The implementing institutions needs to set up a monitoring system covering data on individual cases: the measures taken, the amount of energy saved (kWh/a per measure), the total cost of the measure, the amount of grants/tax credits. In order to verify office book-keeping, sample checks in the field are useful.

Evaluation
In order to be credible, evaluation should be done by independent institutes or consultants and not by the government agencies or energy companies implementing the programmes themselves, but costs for energy companies can be included in the energy prices.
The possibilities and formulas for evaluating energy savings will depend on the type of energy efficiency action supported as well as the type of energy efficiency programme (e.g. information only programmes are more difficult to evaluate than financial incentive programmes, see our detailed files on information instruments). The same holds for economic benefits and costs from either the customer/participant perspective or the one of the national economy/society. The USA in particular have a long-standing experience in evaluation methods.
In addition to the data directly monitored for the energy efficiency programmes, evaluation of net energy savings compared to baseline trends should address side-effects such as rebound, multiplier, and free-rider effects, and the ‘lifetime’ and potential deterioration of energy savings.
For the economic benefits from the perspective of the national economy/society, standard values for the incremental energy supply costs that will be avoided in the long run for a kWh of energy or a kW of load should be developed by the regulatory authority.

Relevant individual dynamics and side-effects

• Minimising snap-back effects: In principle, financial incentive programmes can be discontinued if the energy-efficient technologies and solutions have become the mainstream. However, care needs to be taken that the markets don’t “snap back” to inefficient practices and technologies.
• Creating Spill-over effects: In order to maximise spill-over effects, the programmes can be discontinued if the energy-efficient technologies and solutions have become the mainstream. However, care needs to be taken the markets don’t “snap back” to inefficient practices and technologies.
• Dynamic market transformation and/or innovation: Financial incentives for ULEBs and deep retrofits target the highest-possible energy savings in buildings and aim to contribute to gradually making ULEBs the standard in new build and at least LEBs, if possible also ULEBs in retrofitting existing buildings. They are therefore an essential policy to making energy efficiency standards for buildings dynamic.
• Avoiding lost opportunities: Financial incentives for ULEBs, deep retrofits, and BAT technologies are targeting the highest-possible energy savings in buildings and thus also avoiding lost opportunities. However, when designing incentive schemes, it is important to incentivise BAT instead of any efficiency-promoting measure. If this principle is disrespected, investments in long-living lower-efficiency buildings or technologies may lead to sunk costs and buildings with remaining savings potentials that are not realised (lost opportunities).
• Minimising rebound effects: Rebound effects are likely to occur in very energy-efficient buildings with their high technical savings potentials, but are also difficult to evaluate. Financial incentive programmes may be designed for example; to incorporate absolute energy consumption limits (of components or systems) as well as training/educating consumers for avoiding usage/operation changes that lead to energy consumption rising again, such as more frequent use of air conditioning in warm climates or seasons, or higher indoor temperatures in winter. Rebound effects which are due to relative price changes (as a consequence to the measure) are minimised if relative prices remain stable. Therefore, a respective adaptation of energy taxation may be useful (BTI 2011, p. 52-53): if for example; heating energy prices are lowered by decreased demand due to the policy, energy tax increases may reduce substitution/rebound effects. We recommend to use the tax revenue to fund further energy efficiency incentives and or programmes for education and training of energy users and professionals regarding good use of energy-efficient buildings and equipment.
• Minimising free-rider effects: The programmes should also be designed to minimise free-rider effects e.g. by promoting only technologies and solutions with high energy efficiency levels while maximising uptake of these at the expense of low-efficiency solutions. Tax incentives are likely to be associated with higher free-rider effects than direct grants (Neuhoff et al. 2012)

Design for sustainability aspects
Sustainability aspects can be included in the definition of measures incentivised. By this means, energy-saving, but otherwise problematic (health/ environmental impacts), measures can be excluded and measures with positive co-benefits supported.

Co-benefits
Several energy efficiency market segments can be stimulated with labour market effects in these sectors. Stimulated sectors may include the ULEB building sector, energy efficiency services (ESCOs), energy efficient equipment manufacturing. Additionally, comfort levels of building occupants or users can be raised (co-benefit, may be associated with rebound)

The following barriers are possible during the implementation of the policy
A typical implementation barrier for financial incentive programmes is lack of funds. These programmes require significant financial resources, which may not always be available to governments.
Another typical barrier is low response and participation from the target groups. This may be due either to low awareness of the programme, uncertainty of the benefits of energy efficiency, financial incentives being too low, application procedures too cumbersome, or supply-side market actors not sufficiently skilled or unmotivated to market energy efficiency and the programme.

The following measures can be undertaken to overcome the barriers
Funding for financial incentive programmes can be stabilised by delegating implementation to energy companies, e.g. as part of an energy saving obligation. Another option is a dedicated energy efficiency levy and funds, or using revenues from auctioning emission rights. For developing and emerging countries, climate finance is another potential way of funding financial incentive programmes.
If participation is low, a process evaluation should be carried out to find the reasons and then improve the programme accordingly. Experience shows that a programme takes several months or years before taking full effect. This is why continuity and stability of a programme is important.

Financial incentive programmes can be very powerful tools to promote ULEBs and deep retrofits. As some Austrian provinces have demonstrated, they can achieve more than 50 % of market share of ULEBs as part of a package. This means energy savings of up to 90 % compared to conventional new buildings.

Mexican scheme Esta es tu casa (This is your home)
According to INFONAVIT (2012),
• almost 500,000 tons of annual CO₂ emissions (0.79 tons per home),
• almost 400 GWh of electric energy, and
• almost 500 GWh of LPG
have been saved by 630,000 homes supported by this grant programme and the preferential loan scheme Green Mortgages together between 2009 and May 2011. No separate evaluation of the two programmes is available.
For more in-depth information on the Green Mortgages and This is your home programme, please refer to the bigEE good practice example on this programme.

German Energy Efficient Construction and Renovation programme
New Buildings:
Between 2006 and 2010, the programme (and its predecessor “Building Environmentally-friendly ”) operated by the KfW saved 1,341 GWh/yr compared to the reference case. This means that new buildings only fulfilling the minimum criteria for new construction instead of favouring more ambitious action (EH 40, 55, 70) would have used 3,310 GWh per year.
According to calculations in a monitoring study, final energy savings and primary energy savings for the year 2011 alone are at around 292 GWh/yr and 370 GWh/yr, respectively.
(IWU/BEI 2012, p.2; p. 5)
Renovation:
It was estimated that, in 2011, final energy saving due to the grant only part of the KfW programme amounted to 282 GWh/yr. This in turn resulted in a CO₂ (equivalent) emission reduction of 100,138 tonne (IWU/BEI 2012). The larger part of the programme, however, operates with soft loans that may include a grant component, so total savings were 1,247 GWh/yr, which is only half those of 2010.
For more in-depth information on the KfW programme, please refer to the bigEE good practice example on this programme.

Financial incentive schemes are among the higher-cost policies and measures, but can be very effective (see achievable energy savings above) and cost-effective (see below).

Mexican scheme Esta es tu casa
Within the TIYH programme, about 870,000 subsidies with a total budget of €1.3 billion were handed out between 2007 and 2011.

German Energy-Efficient Construction programme
New buildings: Amount of preferential loans (including grant component) facilitated to programme participants:
• 2010: €3.7 billion
• 2011: €3.6 billion
• in both years, the grant component was less than €50 million (offered at 5% of the loan for Low Energy Buildings and 10 % for Ultra Low Energy Buildings; both together were around one third of the total amount)
Programme administration costs of KfW and the local banks are unknown.
Retrofitting:
In 2011, 51 million Euros of grants were offered by KfW (IWU/BEI 2012) . In addition, the amount of Soft loans in 2011 was €2.8 billion (including single measures). Both numbers were about twice as high in 2010.
For more in-depth information on the Mexican and German programmes, please refer to the bigEE good practice examples on these programmes.

Financial incentive programmes will improve the cost-effectiveness of energy efficiency for investors. They can also be very cost-effective for society and can even bring a net surplus to the public budget.

Mexican scheme Esta es tu casa
For 2012, the total cost saving - from both this grant programme for low-income households and its sister programme Green Mortgages (GM with preferential loans - through reduced electricity consumption alone and avoided subsidies could amount to about €100 million for the state budget (own estimate of the author of the bigEE good practice example).
Regarding the housing owner, data are only known for the GM programme. The medium repayment period for measures financed under GM in 2010 was calculated to be 4.1 years. With an assumed medium lifetime of 10 years for all measures (and no maintenance costs considered), the net benefit for the housing owner would be in the range of about € 900.

German Energy Efficient Construction programme
New buildings:
The KfW programme for new buildings is estimated to save €35,566,000 of annual heating costs for 2011, which is €440 for each building unit and €35 for each month. For 30 years of operating life IWU (BEI (2012) calculates total cost savings of €864 million (present value) or €1.1 billion (nominal value).
Employment effects amount to 199,000 person years of which 146,000 person years are direct effects. Overall investments account for €14.5 billion of which €2.3 billion are state revenues (VAT). Thus, the net turnover effect is €12.3 billion. Including input processes, net turnover is €21.5 billion which result in salaries and, again, in government revenues worth €2.7 billion (IWU/BEI 2012, p. 70ff.).
The energy-efficient construction programme thus results in total government tax revenues of €5 billion. This compares very favourably to €0.9 billion of government grant to KfW for the new construction and retrofit programmes combined.
However, all of these investment, employment and tax numbers relate to the full cost of construction. The incremental costs of building much more energy-efficiently than required by law are only a few per cent of these, and therefore most likely lower than the energy cost savings, making the scheme cost-effective for participants.
Retrofitting:
IWU/BEI (2012) estimated an annual heating cost savings of about 125 million Euros and a lifetime-long (about 30 years) saving of 3.3 billion Euros (present value; grant and loan parts combined). The grant was expected to create 11,000 person years for employment, the loan component another 41,000 person years. Investments leveraged by the retrofit programme (including preferential loan) was 3.85 billion Euros, of which 0.6 billion of direct plus 0.7 billion of indirect revenues flew back to governmental budget.

For more in-depth information on the Mexican and German programmes, please refer to the bigEE good practice examples on these programmes.