High-Rise project >> Finding a Way Forward > Opportunities and barriers >

The ‘real’ cost of energy

As identified by the project's quantitative results, energy prices are a key determinant of the cost-effectiveness of investment in energy efficiency, and with respect to high-rise buildings in particular, there are a number of barriers related to the price of energy. Most salient is the fact that in the EU10 and AS3 countries in particular, energy prices are so low, due to subsidy, as to make investment in energy efficiency a far less attractive prospect than in EU15 countries, due to the increased payback time. The opportunity to overcome this barrier arises with the requirement of two European directives for all Member States to fully liberalise their gas and electricity markets by mid-2007. Nevertheless, in high-rise buildings in particular, because they are more frequently connected to district heating networks than other forms of housing, the tariff structure for heat from such networks creates a further barrier and disincentive to invest. Most district heating companies are locally or regionally based and charge for their services at a flat rate or independent of the amount of heat consumed. This system intrinsically does not place any incentive to save energy on the householder. Nevertheless, there may be an incentive to save energy, faced in principle by the heat supplier – this may be the heat producer, or the local authority, which frequently acts as an intermediary between producers and end-users. The incentive lies in the potential for charging the same tariff and providing the same level of service, but doing so more efficiently and increasing profit margins in the case of the producer supplying or enabling a decrease in cost to the consumer in the case of the local authority supplying. Depending on the supplier and the extent of public-private partnership, this may take the form of improving generation and distribution efficiency of heating networks, but also helping fund the efficiency improvement of the end-users dwellings.

Economics

It is generally accepted in economic theory and supported empirically that consumption, non-residential investment, residential investment and GDP all co-move positively. In particular, it can be argued that when the economy is stronger, this favours new construction, and when the economy is weaker, that refurbishment of housing is favoured more strongly than new build – though the refurbishment rate is likely to be higher when the economy is doing well. ‘Co-movement’ simultaneously implies that residential investment can drive economic growth; given the constraints placed on new construction by the availability of land and the related pressures to use brown-field sites, there may be a case for developing stronger economic arguments in favour of refurbishment of existing (by implication brown-field occupying) housing stock. The high density of high-rise housing stock should mean that it ought to be favoured by such arguments.

In the context of scarce public funds, even where high-rise refurbishment can be shown to be a sound investment, there are other areas of public spending which may have lower cost-benefit ratios. In particular, but not exclusively, in the context of unaccounted for and/or less tangible benefits (e.g. job creation or comfort) and costs (e.g. carbon and energy costs), investment in high-rise refurbishment will have to compete with other sectors that could be (justifiably) more beneficial. Though responses were incomplete, The figure below indicates the percentage of annual state budget and annual household budget spent on housing, according to the survey of European housing ministries.

Percentage of state budget and percentage of household budget spent on housing (VROM-commissioned survey)

A clear pattern emerges, with respect to both state and household expenditure. EU15 have the highest percentage expenditure on housing, followed by EU10 and AS3 countries. Simultaneously, those countries or regions expending the largest fractions also have the highest per capita GDP. This supports the link between GDP and residential investment and appears to suggest there are higher expenditure priorities in EU10 and AS3 countries compared to EU15. Furthermore, it also seems as if the amount of public funding available for housing where refurbishment of high-rise stock may be most needed is also lowest.

Additionally linked to the economy is the issue of interest rates, which in turn interacts with the cost of energy and payback times for energy efficiency investments. In addition to the political and institutional opportunities afforded with EU membership, there are potential financial and economic advantages. For the EU10 countries, joining the Euro-zone by 2006 to 2007 will ensure additional interest rate stability which should make energy efficiency investments a more attractive prospect than previously. However – and this applies particularly to lower income households and hence high-rise buildings – personal interest rates or the level of risk aversion may be so high with respect to residential investments that energy efficiency improvements are not even considered because they do not pay back quickly enough from the householder’s point of view; a problem made worse by heavily subsidised energy prices. In other words, there may be a strong preference for money today over money tomorrow. Indeed, this could provide a partial explanation for the differences in housing expenditure, but it also implies there are underlying social barriers to energy saving and refurbishment. Nevertheless, sustained economic stability can contribute to alleviating such ‘internal’ barriers.

Incentives and funding mechanisms

Financial incentive structures are one of the main instruments in redressing householders’ unwillingness or inability to invest in energy efficiency by themselves. Their absence can obviously act as a barrier to energy efficiency investment, though financial instruments can also conflict with one another, causing counter-incentives and diminishing the effectiveness of each. The recurring theme, heavily subsidised energy prices or flat tariff energy provision – commonly faced in high-rise buildings – always diminishes the strength of any incentive to save energy directed at the householder. In the case of the private-rented sector – i.e. when the owner or investor is not also the bill-payer – the same loss of incentive applies.

Much of the immediate object of financial incentives is to overcome the difficulty of the (sometimes) initially high investment required by (energy efficiency) refurbishment. In low income households – which have a high incidence in high-rise buildings compared to other types of housing – access to mortgaged finance, often used as a funding source for refurbishment, is frequently restricted precisely because income levels are low. Specifically set up revolving loan funds or favourable building- or estate-based savings accounts for refurbishment can of course offer a way around this problem and can also be offered to owner-occupiers and landlords alike.

A common barrier to investment exists when energy efficiency is not distinguished from other goods and services in its fiscal treatment; for instance, charging a higher rate of value added tax on energy saving materials and associated labour than on energy, or taxing an increase in property value brought about by energy efficiency refurbishment. There are many ways in which such imbalances and counteracting incentives can be redressed, such as increasing the level of subsidy for individual energy saving measures as long as they are installed as a package – a non-linear subsidy like this could conceivably go above 100%. With the requirement to produce energy certificates for buildings being introduced by the Energy Performance of Buildings Directive (EPBD), new opportunities for fiscal and financial instruments to encourage energy efficiency arise. For example, property taxes could be linked to the level of energy certification achieved, even the cost of certification itself could be subsidised on the condition of particular energy-saving measures having been installed. The EPBD provides an opportunity particularly relevant to high-rise buildings.

Other projects have gone into significantly more depth on incentives and funding mechanisms. The European SAVE project FRAMES is at the forefront of investigating options and best practice for financial incentives for energy efficient multi-family housing refurbishment, and is a key resource and opportunity in this respect.