Multiple benefits of renovation in buildings - PU Europe

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Multiple benefits of investing in energy efficient renovation of buildings Chapter 2 Barriers and policy responses 2.1 Why are buildings interesting? Achieving energy efficiency is a key priority for the Commission and Member States. This is illustrated by the EU 2020 objective of increasing energy efficiency by 20 per cent. Renovating buildings is only one method of improving energy efficiency; however it is a very interesting method for at least two reasons 1) The building sector is a large source of energy consumption, and 2) studies show that renovations of existing buildings is one of the low-cost options to reduce emissions of CO 2. 27 Firstly, energy consumption in buildings constitutes 40 per cent of total final energy consumption in EU, cf. Figure 17. This is a larger share than both the transport and the industry sector. This figure includes both elements that can be affected by energy efficiency renovations such as heating consumption (can be affected through better insulation etc.), and elements that cannot be affected such as energy consumption by appliances such as TVs and washing machines. Figure 17 Final energy consumption by sector Transport 32% Buildings 40% Households 27% Industry 25% Services 13% Note: Energy consumption in agriculture, fishing and “other” makes up 3 per cent of final energy consumption, and is not included in the above figure Source: DG Energy: EU Energy in Figures 2012 27 McKinsey & Company (2010) for examples finds that such renovations are one of the most attractive options to bring down greenhouse gas emissions cost effectively. 26
Multiple benefits of investing in energy efficient renovation of buildings Secondly, much evidence has shown that renovating the existing building stock is one of the most attractive and low cost options to reduce CO 2 emissions, and potentially improve energy security by reducing imports of fossil fuels. A number of studies have suggested that the net cost of investing in renovating the existing building stock is not only low, but is in fact negative. 28 This means, that through the induced energy savings, investments in energy efficient renovation of buildings will pay for themselves at current energy prices. In addition to Marginal Abatement Cost curves (MAC-curves) prominent in several macro studies, several studies find that energy efficiency improvements in buildings are profitable even with very high financing cost. One assessment from 2011 found that the internal rate of return (IRR) on typical energy efficiency investments to be nearly 30 per cent on average for an individual firm (even higher benefits to society). 29 This implies that an investment will be profitable to undertake even when the real interest rate (the financing cost) is 30 per cent or less. The IRR varies across different types of projects, and can be as high as 49 per cent for an average investment in e.g. improving lighting. The largest absolute saving potential is typically found in the heating and cooling category, as its share of energy consumption is relatively larger. Some criticism has been raised against the MAC and IRR approach in general and specifically on the McKinsey approach on several accounts, inter alia: 30 1) that ex ante studies dominate much of the estimates, and that ex post assessments often show a lower than expected potential, 2) that “free riders” are not always properly accounted for, so that the overall potential includes behaviour that would have taken place even without policy, 3) most assessments ignore the rebound effects, which implies that as the price of energy is reduced in response to increased energy efficiency, demand for energy (consumption) increases, and 4) transaction cost, including e.g. scarce management time and resources are typically not included. In sum, this implies that such findings tend to value the potential too optimistically. However, even with a reduction in the profitability of energy efficiency projects, there is strong reason to believe that such projects are highly profitable. As the real interest rate in most European countries is currently very low – and even negative in several countries –, cf. Figure 18, projects will be profitable even with very low IRRs. 28 A large number of studies construct MAC-curves that makes this point. The MAC curve has been popularised by e.g. McKinsey & Company (2010). 29 United Technologies Corporation (2011) 30 See e.g. NBER (2009) 27
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