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Buildings as catalysts for energy security: the role of cities

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Back view of professional construction team using infrared camera on tablet checking heating system
View of professional construction team using thermal camera on tablet checking heating system in renovated apartment. Photo by TommyStockProject on Adobe Stock.

In Europe, worries are rising together with energy prices. While all eyes are set on national governments’ and EU policymakers’ response, many know that their ways of life will be inevitably disrupted in the short-term. Amid taking immediate measures, we must consider how we can enhance our resilience to energy shocks and preserve citizens’ quality of life in the mid-to-long term. Action at the local level holds a key to unlock implementation of critical interventions, including those aimed at improving the energy efficiency of buildings.

Buildings are the largest energy consumers: meeting heating needs in residential buildings guzzles gas like no other sector. Reducing buildings’ energy consumption has therefore long been a subject of discussion. A recent study showed that improved insulation could help cut 44% of Russian gas imports. Faced with a heating crisis, households are concerned about their energy bills. While some are opting for energy efficiency retrofits — e.g. by installing a clean heating system or replacing an existing fabric such as single glazing — many will have no choice but to cut back on heating. A massive discrepancy between awareness and implementation remains, and retrofitting at scale is part of what’s been dubbed the EU’s ‘favourite fail’

Why has it been challenging to drive energy efficiency in buildings, and what role can cities play?  

To begin with, who will pay for the upgrades? Landlords won’t directly benefit from their investments, and tenants aren’t keen to splurge on a property they don’t own. In other instances, a consensus is necessary for collective decision-making while benefits and costs are unequal. There are many types of this split incentive problem which affects a large share of Europe’s buildings. 

Another barrier is the information gap that persists at all levels despite growing awareness. This affects not only consumers but also local retail banks who could offer guidance on the best financing solutions. An educational effort geared towards all stakeholders could facilitate buy-in and stimulate demand. This is precisely one of the roles of “one-stop shops”. To be effective, awareness-raising must be combined with a narrative shift: the enhanced quality of life and energy affordability gained from retrofits should be emphasised. Otherwise, energy savings could be perceived as a prescriptive restriction (“you need to turn the temperature down”).  

Municipalities are well positioned to address this conundrum either directly by implementing projects on their building stock, or indirectly through citizen engagement and stakeholder coordination. Most importantly, surveys show that municipalities are the level of governance most trusted by citizens. Two other main advantages place them at the forefront of delivery: good knowledge of the local building stock, and responsibility for the local application and enforcement of building regulations.  

So how can municipalities drive progress on buildings’ energy efficiency? 

Firstly, they must address one of the main bottlenecks in the renovation market: labour and skills shortage. Municipalities themselves need significant capacity building. They need staff, technical expertise and, crucially, financial competence. Indeed, public funding alone won’t cover the €282b required each year for buildings’ renovation. Municipalities can create the market conditions for private finance to close the investment gap. The right advisory push would enable them to bundle investable deals and secure retrofits at scale.   

Secondly, they can learn from and promote innovative financing mechanisms already deployed. In Lithuania, municipalities play an important role in the success of a blended finance product that is expected to yield almost €1b of upgrades across the country. It leverages grants to attract private capital, using public funds as first-loss guarantee to de-risk the investment. The EuroPACE project went even further by tackling the main barriers to retrofits through on-tax financing. These are examples that can be adapted to local market realities. 

Finally, they must foster the right partnerships. Because there isn’t a “one-size-fits-all” solution, municipalities should lead the way by bringing together multiple stakeholders — residents, financial institutions and the construction sector. Institutional investors are increasingly attracted to the long-term returns and positive impacts of energy efficiency financing. Better showcasing ongoing efforts to overcome the structural barriers to scale energy efficiency is a first step to engaging private finance. 

Municipalities can do much to increase such investments. Their actions will bring significant benefits to citizens beyond merely reducing their energy bills. Now is the time to be persistent and creative at local levels to leverage all the potential energy efficient buildings have to offer – and ensure there is financing at scale to make this happen.   

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