This article is part of a special series discussing the economic dimensions of environmental issues ahead of the - COP 21 Climate change Conference held in Paris on 30 November-11 December 2015. Read more about it here.

 

The SFTE[1] project aims to establish a broad partnership between public and private entities to stimulate the economy and deliver hundreds of billions of euros across Europe for the benefit of medium-sized projects (in the order of €1m) which are necessary for the energy transition. It will enable EU banks to finance the energy renovation of public buildings under excellent – cheap and long-term – conditions.
 
The SFTE project corresponds with the 2015 European 10-point agenda proposed by the Juncker Commission (12/11/14):

 
The SFTE project should serve to restore the confidence of European citizens in national and European institutions, all of them being users of public buildings. Regular dialogue between the European Parliament and the Commission about the SFTE project will be a catalyst for local decision-making by elected representatives.
 
The SFTE project is a strategic opportunity under the €300bn three-year investment programme announced by President Juncker. AFTER[2] has recently published proposals which have been adapted to the above investment programme, its constraints, and a direct economic stimulus by the EU[3].


Background and issues

 
Prioritising the energy efficiency of public buildings as a quality investment  
 
Since buildings represent 40% of energy consumption in Europe, they are a major segment of the energy transition, calling for hundreds of billions of euros of investment. Public buildings in particular (excluding social housing) are estimated to represent around 10% of the total surface area of the building stock. The SFTE project builds on the duty of European, national and local authorities to set an example and stimulate quality investment. In Europe, public buildings (schools, offices, hospitals and so on) are considered a largely untapped source of potential for financially sustainable renovation (entirely funded by energy savings as opposed to subsidies) of at least €120bn over the next three years, that is to say €100bn more than the current investment trend (BAU of €20bn or even less over the next three years). This untapped potential, which urgently needs to be more accurately assessed in the EU, is reason enough for action by public authorities, since:

 
The SFTE’s €120bn investment programme is based on financially long- or very long-term financially viable projects, with a 3% IRR objective.
 
Support for EU objectives

 
According to AFTER’s economic estimates, investing €120bn over three years in public buildings would reduce their energy consumption by 10-15% and their CO2 emissions by the same percentage. AFTER’s proposals respond to the need for the long-term financing of the European economy[6] and focus on the “real economy” without increasing the public debt, thus addressing today’s market failures. They will improve the traceability of such financing to facilitate the safe and transparent monitoring of the scheme by public authorities.
 
Unrivalled socio-economic benefits
 
Energy renovations bring key non-financial socio-economic benefits in addition to those previously mentioned:

 
Three-year time frame
 
It is estimated that €120bn of energy renovation work could potentially already be undertaken in a financially viable way in the EU[7]. While the level of readiness of member states may vary, operations could be launched in most EU MSs within a year. A dedicated task force will provide technical, legal and financial advice to some countries, so that operations could begin the following year.
 
Leverage potential
 
The financial mechanisms proposed by AFTER are designed to maximise leverage potential, with private financial entities benefiting from the EU guarantee (see details below): (i) banks first; (ii) then institutional investors, following securitisation.
 
Scalability

Between years 4 and 10, there will still be potential for around €60bn worth of additional BAU and financially viable projects. Moreover, according to the SFTE study, there should be an additional potential of €240bn of non-financially sustainable projects which could help to attain more ambitious energy consumption and CO2 emission reduction targets. Overall, for a €420bn investment over 10 years (i.e. €120bn over three years, and a further €60bn and €240bn in years 4 to 10), the energy consumption and CO2 emissions of public buildings would be reduced by 40%. In this case the minimum IRR would be slightly negative at -3%.

 
SFTE’s technical proposal for an EU economic recovery plan
 
Financial, industrial and political tools
 
At the core of the scheme, the SFTE will provide a high-quality guarantee (counter-guaranteed by the European Union)[8] for dedicated loans by commercial banks. Given the intrinsic low-level risk of the SFTE project, the EU’s guarantee will be a risk-sharing participation mechanism (“first-loss tranche” where the EU would bear 10% of the downside risks). The implementation of the scheme will be entrusted to the EIB by means of indirect management. The EU’s guarantee (with the payment of a commission fee by banks) is necessary to improve the investment climate and enable the creation of a new market of green securitised assets. The level of the guarantee should decrease in the medium term, with the appraisal of the low-level intrinsic risk of operations by financial markets and rating agencies improving over time. Simple, transparent and safe securitisation will enable the refinancing of these very long-term loans – high-quality “green bond” infrastructure assets –, by the EIB and institutional investors. 
 
Energy Performance Contracting (EPC) as a key public policy tool
 
EPC is perfectly adapted to investment in the energy renovation of public buildings. It is based on a contractual commitment to achieve a given energy-efficiency target, subject to actual and systematic ex post monitoring. AFTER proposes several adaptations to EPC that will increase its integrity and serve to justify European and national investment through demanding impact assessments. Moreover, EPC benefits from strong European support ("EPC Campaign" of DG Energy, Energy Efficiency Directive, IEE, JRC work on the ESCOs market, EESI 2020, etc.). In a nutshell, AFTER’s proposal represents a shift from tailor-made to standardised, ready-made EPC projects, for wide-scale use with the help of the EU guarantee.
 
A massive impact without increasing the public debt
 
The programme will benefit from: (1) an off-balance sheet EU guarantee and (2) the funding of projects under EPC partnerships (PPP-EPCs) that transfer a significant level of risk to private operators or semi-public companies. Like other institutions in Europe with which it is in contact, AFTER is calling for technically limited changes to the European accounting framework so as to better adapt it to energy-efficiency improvement projects: the accounting treatment of PPP-EPCs outside the scope of public debt is paramount to bringing about a change of scale in Europe. On the basis of a 10% “first-loss” guarantee, the capped guarantee for +€100bn projects would amount to €10bn. Given that the intrinsically low-level risk being guaranteed primarily consists of the default risk of governments and local authorities, risk weighted asset (RWA) calculations should imply a very low level of equity for the SFTE.[9]
 

The SFTE’s proposed quality investment programme for an EU economic recovery plan
 
We have seen broad interest in our innovative proposals through our European contacts: the EIB, the European Commission (DGs ENER, CLIMA, MARKT, ECFIN and others), KfW, NGOs and so on.
 
The SFTE project calls for the rallying of public authorities in the EU and Member States. Their commitment is essential to improve public project management capacity, pool operations, promote economies of scale, standardise projects, and ultimately to significantly increase the volume of operations. According to the G20, “Governments should build public sector institutional capability in project development and implementation, and foster greater knowledge sharing and transparency across levels of government, jurisdictions, the private sector and other stakeholders.”[10] In addition, energy saving performance commitments will provide for reliable and demanding public policy assessments. The programme should be widely publicised to make it easier for local elected representatives to politically promote their energy efficiency projects.
 

EU NEXT STEPS
 
The SFTE project now calls for the rallying of all stakeholders, especially from European and MS public authorities.
 
European Union

 
National public authorities

 
Industry players, SMEs, banks and institutional investors

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