While the U.S. is one of the largest consumers of fossil fuels per capita in the world, it is also leading the charge in the green retrofit of buildings, with key lessons that cities across the globe might benefit from. An innovative financing tool that allows access to affordable and long-term funding to upgrade residential and commercial buildings to use renewable energy, improve energy and water efficiency, and increase resilience is driving this success.
Known as Property-Linked Finance (PLF) or Property Assessed Clean Energy (PACE), this public-private partnership model has enabled more than 353,000 building owners in the US to finance $15 billion worth of such improvements. While state legislation initiated the programs, this massive investment can largely be attributed to efforts undertaken at the local level, especially by cities with climate action plans (CAPs) that have adopted non-traditional financial strategies to fund their climate goals. With 39 states across the US having enabled PACE legislation, it has gained wide acceptance as a climate investment tool to incentivize building efficiency upgrades.
The PLF success story can be replicated by cities in emerging markets too.
Aligning with the 2015 Paris Agreement, cities in emerging markets are developing CAPs that focus on key sectors such as energy, transportation, waste, and water to curb GHG emissions. While the built environment is responsible for a substantial share of GHG emissions, it also offers a proportional opportunity for reduction.
In addition to playing a key role in achieving decarbonization goals, retrofitting existing buildings also presents a sizeable investment potential of approximately US$3 trillion globally. According to a recent report published by International Finance Corporation (IFC), the retrofit market is estimated to have grown at a compounded annual growth rate of 8 percent from 2018 to 2023, driven mainly by demand from high income economies. In emerging markets, the dissemination and adoption of deep retrofitting practices remains limited due to the high costs of replacing energy inefficient mechanical and electrical systems, and modifying building envelopes.
Buildings need to be upgraded with high-impact measures to meet cities’ ambitious decarbonization targets.
Buildings typically have a long operational life with retrofit cycles occurring every 10-15 years. Given this scenario, retrofits can deliver similar or even higher energy savings than the construction of new green buildings. While energy efficiency upgrades such as LEDs can reduce energy use by a quarter, “deep” energy retrofits such as installation of solar panels, high-efficiency boilers and chillers, roof replacement, façade and HVAC upgrades etc., can cut energy use by more than half.
PLF can help cover the high upfront costs of energy efficiency retrofits and yield immediate payback, incentivizing owners to opt for the most effective measures. Moreover, since it is difficult for cities to regulate existing buildings, PLF provides a framework to support cities’ decarbonization goals. Upgrading buildings to energy-efficient standards reduces resource use, keeps cost of operations down, increases property value, and creates job opportunities, all of which contribute towards raising a city’s brand value.
Atlanta and Melbourne are harnessing this market opportunity, successfully implementing PLF programs for energy-efficient building upgrades:
Supporting green retrofits is one of the easiest ways for banks to finance significant emission reductions.
Improving energy efficiency of existing buildings is one of the easiest ways for cities to lower GHG emissions because green retrofits deliver a long economic lifespan and reliable ROI, making it an attractive investment proposition for financial institutions (FIs).
Cities can nudge the green retrofit market through property-linked finance.
PLF can help overcome the barriers associated with at-scale pursuit of high-impact building retrofits by enabling financing up to 100% of the cost upfront through FIs, which is then paid back by the property owner to the city through increased property tax over a long-term period (20-30 years). The monthly utility savings from the upgrades compensates for the increase in property tax.
The borrowing is not technically a loan but a lien against the property because it is set up as an assessment through the building’s property tax. The loan is attached to the property and not the owner (or occupant). If sold, the loan continues to remain with the property, and can be transferred and paid off by the next owner.
PLF enables the shift of energy-efficient building upgrades from CAPEX to OPEX projects, making them more attainable and impactful with zero upfront cost to the owner.
The working of a typical PLF mechanism is summarized below:
Financing building upgrades through PLF is a win-win for all.
When managed correctly, PLF is a win for all: greener buildings for cities, affordable finance and energy savings for building owners and a reliable investment for lenders.
The business case for PLF speaks for itself: where traditional finance mechanisms would fail owing to the compressed nature of the payback over a shorter-term, PLF incentivizes building owners to pursue high-impact upgrades with more immediately visible results and low-to-no risk for the lender and the owner because the loan stays with the property.
Cities can lead the charge by tapping into the vast potential of the green retrofit market.
Implementing energy efficiency at scale in the built environment continues to prove challenging owing to diverse stakeholders and their competing interests. Often, building owners are unable to support implementation on their own – innovative retrofit technologies are either inaccessible or unaffordable, and the increased financial responsibility is a deterrent. FIs, too, require legal and regulatory support – they also require a low-risk market to cater to.
Visionary city leaders are in a pre-eminent position to drive a program like PLF that binds all stakeholders within a stringent policy and regulatory framework with the unified goal of mitigating climate risks and amplifying positive impacts so that green retrofits can flourish at scale.
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