Europe

A Green Future Built on Solid Foundations

The EU’s REPowerEU plans need to push further on promoting energy efficiency in the built environment. 

The transition to a low-carbon economy isn’t just about switching from fossil fuels to renewable energy. Reducing overall energy consumption and waste is key to enabling a more sustainable future. 

To establish more energy independence and security following Russia’s invasion of Ukraine, EU lawmakers have introduced a strategy to speed up the implementation and adoption of clean energy and energy efficiency measures.  

“Reducing energy consumption through higher efficiency is a vital component of the clean energy transition which increases the resilience of the EU economy and shields its competitiveness against high fossil fuel prices,” the European Commission noted in a communication document. 

On 18 May, the Commission provided more details on its €300 billion REPowerEU plan, originally unveiled in March, which focuses on short-term recommendations between now and 2027, as well as medium-term targets which increase existing 2030 goals. It takes a three-pronged approach, with binding and non-binding measures focused on saving more energy, diversifying the EU’s energy supply, and producing more localised renewable energy. 

“[REPowerEU] shapes the transition trajectory and brings forward the urgency to act,” says Zsolt Toth, Senior Project Manager at the Buildings Performance Institute Europe (BPIE). “It confirms the material importance of divesting from fossil fuels and decarbonising real estate.” 

Responsible for 40% of the EU’s total greenhouse gas (GHG) emissions, the built environment should be top of the agenda for member states – especially as 75% of EU building stock is considered to be energy inefficient. 

“The EU recognises that there has to be a big sustainable renovation wave across built environments,” Robbie Epsom, Head of ESG EMEA at CBRE Investment Management, tells ESG Investor. 

The Commission has estimated that renovating existing buildings could reduce the EU’s total energy consumption by 5-6% and lower emissions by around 5%. However, less than 1% of EU buildings are currently renovated each year, with member states managing between 0.4-1.2%. 

Cementing change 

As part of REPowerEU’s energy saving strategy, the Commission intends to build on existing regulation. 

The Energy Efficiency Directive (EED) and Energy Performance of Buildings Directive (EPBD) are already set to be altered as part of the 2021 ‘Fit for 55’ (Ff55) package. By raising these 2030 targets alongside a host of other regulatory measures, Ff55 aims to achieve a 55% reduction in total emissions compared to 2020 levels over the next decade.  

The REPowerEU proposal plans to increase these targets even further to ensure a sharper increase in the EU built environment’s energy efficiency. 

Under the 2018 revision to the EED, the EU set a target for reducing energy consumption by at least 32.5% compared to 2007 levels by 2030. Ff55 targets for primary and final energy consumption aimed for a 9% overall reduction from 2020, nearly doubling member states’ existing annual energy savings obligations. The REPowerEU plan has proposed that the new reduction target should be 13%. 

The EPBD, introduced in 2010, requires energy performance certificates (EPCs) to be displayed in the advertising for buildings sold or rented across the EU. It was first revised in 2018, requiring all member states to develop long-term building renovation strategies mapping out interim targets towards an 80-95% reduction in emissions by 2050.  

As part of the Ff55, the Commission introduced a new definition of ‘zero-emission buildings’ and refined existing definitions, such as ‘nearly-zero energy building’.  

Under these planned revisions, all new buildings in the EU must be zero-emission buildings by 2030, and all new public buildings must be zero-emission as of 2027. Non-residential buildings with a class G EPC must be renovated and achieve a higher EPC of F by 2027 and E by 2030. The 15% worst-performing buildings in each member state will need to reach at least class F by 2030 and E by 2033. 

Through REPowerEU, the Commission has invited the EU Parliament and Council to “enable additional savings and energy efficiency gains in buildings through the EPBD”, the Commission’s ‘Save Energy’ communication noted.  

REPowerEU makes further suggestions to strengthen energy efficiency, such as phasing out member states’ subsidies for fossil fuel-based boilers in buildings from 2025. 

“Member states should consider fast-tracking existing, and implementing additional, energy efficiency measures,” according to the Commission.   

“Each member state will know best where to focus its efforts.”  

Hélène Sibileau, Senior Policy Advisor at BPIE, notes that REPowerEU’s broader recommendations “put an emphasis on the voluntary aspect of saving energy in the short-term” and are therefore much weaker compared to the tangible amendments proposed for the EED and EPBD. 

But there are other proposals put forward by REPowerEU that may also have a “big impact” on the EU’s built environment, such as the Solar Rooftop Initiative, Sibileau adds.  

The initiative proposes making installation of rooftop solar energy compulsory for large new public and commercial buildings by 2027 at the latest.  

Redrawing the blueprints 

When it comes to climate-related regulation, there are always calls for increased ambition.  

Although REPowerEU’s proposed amendment to the EED 2030 target is a step in the right direction, it “could probably go further”, says CBRE Investment Management’s Epsom.  

In comparison, the EU environmental taxonomy’s technical screening criteria for building renovations under the climate delegated act is far more ambitious. It pushes for a minimum 30% reduction in primary energy demand – more than double the EED’s 13% reduction target.  

“Whilst this is not directly analogous – as REPowerEU’s efficiency target is cross-economy and the EU Taxonomy serves a different purpose to REPowerEU – it’s a useful check on the potential efficiency gain for buildings,” Epsom notes.  

Further, to qualify as an asset investable by an Article 8 fund under the EU’s Sustainable Finance Disclosure Regulation, it is necessary to complete a building Life Cycle Assessment (LCA) to ensure all factors are considered, from the extraction of raw materials to the construction phase, use, and finally demolition and disposal. This ensures that asset managers are considering the carbon intensity of their real estate investments and looking to reduce them.  

German think tank Agora Energiewende has also published recommendations designed to reduce the EU built environment’s existing fossil gas usage by 480 terrawatts an hour (TWh) by 2027 compared to 2020 levels of 1,400 TWh. Its recommendations include promoting the installation of new gas boilers and scaling up heat pump installation.  

But questions arise over the chances of REPowerEU meeting its more limited objectives, due to the lack of guidance for the member states expected to meet these new targets.  

The Commission has made non-binding suggestions – for example, recommending that member states reduce VAT rates for high-efficiency heating systems to incentivise developers and building owners to transition away from carbon-intensive fossil fuel-boilers.  

Perhaps more worryingly, there is a lack of consequences for member states failing to comply with climate regulations, experts tell ESG Investor. 

BPIE previously conducted research on member states’ long-term renovation strategies under the EPBD. Six months after the 2020 deadline, over half of the strategies hadn’t been submitted, while those that had lacked the necessary ambition to meet climate goals, the report noted. 

That’s not to say all member states are failing to make positive progress.  

The Netherlands and France are experimenting with industrial renovation programmes which target multi-family homes with low energy performance, such as large apartment blocks, and can therefore achieve high energy savings, according to a BPIE report 

But energy efficiency projects for existing properties will fail to get off the ground without accurate data on current and future energy efficiency performance, not to mention the cost of getting from one to the other. Problems around data also make it more challenging to assess the extent to which EU real estate investments are aligned with the EED or EPBD.  

“There is a place for policy to facilitate frictionless ESG data sharing across the value chain of the built environment – in particular between occupiers and landlords,” says Epsom.  

CBRE Investment Management has produced a tool to measure the performance of real estate assets on an individual basis.  

“We work out the lowest performing assets across themes like energy usage, waste, GHG emissions and water management that help us develop a comprehensive picture. We then generate tailored recommendations to help asset managers think through the changes they need to implement at an asset level,” Epsom notes.  

There are other tools emerging to support investors in their quest for reliable ESG-related data for their real estate assets.  

The Global Real Estate Sustainability Benchmark (GRESB) recently launched the GRESB Transition Risk Report, which aims to help investors identify which of their assets are most exposed to climate-related transition risk, thus highlighting where additional engagement is necessary.  

An undervalued asset class 

European investors are increasingly recognising the value of investing in green real estate. 

Earlier this year, real estate data provider Deepki surveyed 250 pension fund managers (combined AUM of €402 billion) across the UK, France, Germany, Spain and Italy, noting that 78% expect commercial real estate with strong ESG credentials to deliver better returns over the next five years. 

But they’re not yet voting with their feet.  

“The scale of the investment opportunity is enormous,” says BPIE’s Toth. “However, energy efficiency unfortunately remains an undervalued asset class. Beyond small scale individual renovation projects, investors should also consider opportunities of large scale and serial renovation projects which are executed on neighbourhood and city scale, and which can create wider societal and environmental benefits.” 

A huge amount of investment in the built environment’s energy efficiency will be needed if the goals outlined by REPowerEU are to be met.  

In fact, an additional €275 billion a year of investment in EU energy efficiency building renovations will be required by 2030 – a sharp increase from the current annual spend of €85 million-€90 million, according to a report by research and data provider Moody’s.   

Part of this investment will be met by the EU’s €672.5 billion Recovery and Resilience Facility (RRF), which has dedicated 37% of its funds to climate-related expenditure between 2021-27, but the rest must come from investors, Moody’s said.   

Substantial levels of due diligence are likely to be required to identify the opportunities, costs and solutions across real estate portfolios.  

For example, it’s arguably much easier to improve the energy efficiency of a large office building by installing rooftop solar panels. In comparison, residential houses and listed buildings are potentially more restricted, he says. 

“Ultimately, the lowest carbon energy is that energy not used in the first place,” Epsom says. “Energy efficiency is therefore the most important first step in any low-carbon transition planning.” 

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