Unlocking the Renovation Wave

The EU’s aging and energy-wasting housing stock is a major source of greenhouse gas emissions and a significant contributor to rising energy costs, insecurity and poverty. The biggest barrier to home renovations to increase energy efficiency is a lack of access to affordable finance, yet banks are hesitant to lend because of the administrative costs attached to small loans.

This article from Positive Money Europe (p33-38 of Agir Pour le Climate’s Financing a Deep Renovation Wave document) examines these dynamics, and proposes that the European Central Bank (ECB) introduces a green discount rate to its refinancing operations, incentivising banks to lend for home renovation purposes and supporting EU efforts to unleash a “renovation wave“.

The European Commission estimates that additional investment of €275bn per year is needed to realise its ambition of doubling home renovation rates and most of this must come from private sources. Bank lending can play a particularly effective role in meeting this need due to its decentralised and elastic nature, the article explains, but there are significant barriers and disincentives to bank-based renovation financing for both the banks and their customers.

Following a review of these barriers, the authors propose introducing a green discount rate to the ECB’s refinancing operations. The proposal calls for a version of the ECB’s targeted longer-term refinancing operations (TLTRO) programme, tweaked to grant a green discount rate to banks on their portfolio of loans aimed at energy efficient housing renovations, providing an incentive to lend for these purposes.

Further incentives could come from extending loan durations towards the average maturity of the projects financed and by adding an additional discount for banks reaching a lending threshold for energy efficient renovation, in line with national objectives for housing renovations.

The article says that, in line with the European Commission’s transition objectives, these “renovation TLTROs” would not only help the ECB fulfill its secondary mandate of supporting general economic policy in the EU, tbut would directly contribute to its primary price stability mandate.

The authors outline the benefits of such an approach, not only to the ECB, the EU and financial institutions, but also to consumers through reduced energy bills and improved health and well-being. It ends by recommending the development of a robust framework and green loan standard for identifying which loans and renovation projects should be eligible for the discount.