9 May 2023
In recent months, the building sector has become the unexpected protagonist in the latest instalment of what is fast becoming an EU policy analyst’s favourite blockbuster: The Fit-for-55 Legislative Package. Announced in July 2021, Fit-for-55 is an EU legislative package aimed to reduce greenhouse gas emissions by 55% by 2030. Consisting of both new proposals and revisions to existing EU legislation, the package aims at providing a coherent framework that facilitates the EU’s ambitious climate targets. The Energy Performance of Buildings Directive (EPBD) is a key regulation that the package updates and has been a central focus EU environmental policy playbook of late.
Revising the Energy Performance of Buildings Directive
The building sector is an essential vehicle for delivering Europe’s emission reduction targets. Responsible for 36% of greenhouse gas emissions and over 40% of energy consumption across the bloc, an energy-efficient and climate-resilient building stock can provide large emission reductions in relatively short timelines. The sector is often called to act as the poster child for the just transition, as increasing renovation rates offer tangible benefits of the move towards a low-carbon society. Building refurbishment not only offers emission savings, but also provides job opportunities, reduces energy costs and creates cleaner, safer communities. By decarbonising where we live, work and play, individuals can come to understand the value of climate resilience and the benefits, beyond carbon emissions alone, that climate alignment can provide. The EPBD is therefore at the heart of the Commission’s push for a climate-neutral future.
The EPBD revision aims to accelerate the renovation rate of buildings by increasing the stringency of energy demand targets required by buildings (through the Energy Performance Certificate framework), ensuring all new buildings are nearly-zero emissions emitters from 2028, phasing out fossil fuel boilers and instead equipping both new and refurbished buildings with solar technologies.
Since the moment that the Directive’s revision was announced, however, Europe’s building stock has become a site for tension and conflict between European legislators and Member States alike. Just as buildings provide a visible emblem for a just, low-carbon transition they are equally a symbol of national identity. Some Member States opposed the stringent targets, arguing they were equivalent to an afront on sovereign identity. Instead, they pushed for more relaxed targets that facilitated a slower pace of national renovations.
The economics of renovation
A sentiment favoured among the revision’s opposers is that simple economic instruments are more efficient in facilitating economic activity as they grant greater protection for national-level structures. This is set in contrast to the proposal’s EU-wide ratcheting mechanism for energy efficiency vis-à-vis the existing Energy Performance Certificate framework (which, it should be noted, does operate on the basis of national-level stock thresholds and relative renovation rates). The proposed alternative? The EU Emission Trading Scheme and its forthcoming inclusion of the building sector. Let the market fix it, they argued! Set the price and the renovations will come!
There is a lot to be said for the value of dynamically efficient mechanisms for emissions reduction. It is right to argue that by establishing a sufficient price for carbon, renovations will be encouraged. But to achieve ambitious – and ever more immediate – renovation targets, a simple cap-and-trade (or even a very sophisticated and well-designed one) cannot go far enough nor fast enough. The ETS should be complementary. It can only partially address economic and financial barriers and lacks the ability to deal effectively with other well-known barriers to renovation that will not be addressed by increasing the energy bills of households. Furthermore, the EPBD is a necessary framework to ensure local and national circumstances are considered and to account for the diversity of building stock and infrastructure in a way that the ETS cannot.
The business case for a revised EPBD
A benefit of introducing a price mechanism linked to a building’s energy performance is that it encourages private actors to renovate their assets in order to reduce costs and protect value. The EPBD achieves this aim, however, through alternative means. The proposal is as much about asset protection as it is about climate resilience.
Buildings with low-rated energy performance certificates will become increasingly less valuable, regardless of the EPBD, and require mass renovations across national building stocks. While significant public monies are being set aside to assist in the mass renovations that Europe’s buildings require, alone it is not enough. The building renovation rate in Europe currently sits at 1% annually. With over 75% of the building stock noted as energy inefficient, and 95% of said stock projected to still be in operation in 2050, a rate of renovation of 3% or more is necessary to reach EU decarbonisation targets in the proposed timeline. In short: Europe needs money and Europe needs it now.
The revision of the EPBD will provide an injection of public funds into the industry, creating jobs and refurbishing buildings, but equally, it will create an environment that supports private investment. Regulation certainty is a key ingredient in incentivising financial flows. The EPBD – and its supporting sister strategy, the Renovation Wave – is a long-term commitment to private actors. It states regulators’ commitment to supporting renovation. Its binding and increasing targets demonstrate that renovation will be a continuous process for several years to come. Investing in renovation now is smart and it will assure the creation of future value. This works to stimulate flows and incentivise investment.
The EPDB will ensure that banks have appropriate access to data through the revision of the provision of data collection of buildings. By streamlining and harmonising data retrieval and reporting of energy consumption across the EU-built environment, banks have better data with which to assess risks and offer the most attractive products to consumers.
The certainty of pace and timeline of the renovations planned supports credit institutions and financial institutions in their decisions on portfolio allocations and medium-term financing allowing those who own and invest in buildings to further invest in their upkeep, sustainable design, and energy efficiency. And the legislative backing of EU-wide renovation guarantees allows credit institutions to reduce their risk exposure on green mortgages.
The essential piece of the puzzle
The revision of the EPBD marks a turning point for the future of the built environment. Finally, issues that the sector has earmarked for years are being addressed and focus is being redirected where it is needed. It is clear that stringent targets are needed to drive change and incentivize action and that providing legislative certainty can increase financial flows and stimulate investment.
Good buildings support good lives and build good societies. Renovation and refurbishment create environmental and social value, support the push towards a low-carbon economy, and increase the value and resilience of building assets. Thankfully, the legislators of Europe understand this and voted in favour of the proposed EPBD revision. Now, the proposal will move into inter-institutional negotiations for Member States to state their claim. The business case for the EPBD is clear, but its future now lies in the hands of the European Member States – we can only hope they see it too.
How can Longevity help?
At Longevity Partners, we believe that regulatory knowledge forms the foundation of any successful sustainability strategy. We use our specialist knowledge of the real estate sector to provide policy and regulatory analysis of regulations such as the EPBD, tailored to our clients need and geographical location. Our team provide a range of services including legislation reviews, trainings and workshops, and data management and reporting to ensure that clients can better apprehend the risks and opportunities related to regulatory requirements.