Energy renovation of residential buildings through soft loans and third-party financing

6,000 buildings which cover almost 75% of the total floor area (12 million m2 ) were built during the post-war period and need urgent renovation. The city housing accounts for 36% of energy consumption. Emissions related to district heating account for about 28 % of total emissions in the city territory.

The city wants to achieve its climate goals

Latvia’s National Reform Programme was set up to reach the sustainable development targets defined in the “Europe 2020” strategy. At the local level, the city of Riga approved the Riga Development Plan 2030 which includes energy and climate related measures in the housing sector. The mayor also signed the Covenant of Mayors, thus committing the city to reducing its CO2 emissions by at least 20% by 2020. Since this objective has already been reached, the new emissions reduction plan approved by the City Council aims to reduce emissions by 60% by 2030.

Poorly insulated multi-residential buildings

In Riga, one can distinguish three types of buildings:

• Post-war buildings built before 1996 with poor insulation. These are privately owned and house about 60% of the city’s population. Homeowners pay high utility bills although comfort is low. During the winter period, approximately 10% of an average salary may be used to cover these bills. The energy saving potential is between 50 – 60% with the average cost of renovation being €150 /m2 .
• Pre-war buildings built before 1940 with relatively good insulation which are also privately owned.
• Buildings built after 1996 which comply with European construction standards.

The post-war buildings have the biggest energy saving potential.

The energy renovation process is too slow and existing financial instruments are not attractive

When it comes to energy renovation, 6,000 post-war multi-apartment buildings have the highest priority. However, the renovation process is too slow. By 2015, only 68 buildings (1.13%) had been renovated. One of the reasons is that 75% of households plus 1 have to agree with the renovation. Although this may seem quite feasible, there is not enough information on possible options for carrying out the renovation. Secondly, the financial benefits are perceived to be low and not motivating despite the fact that the initial projects have shown promising results (energy savings of up to 60%).

Several financial instruments for energy renovation were available in the past or are still on the market but they have proved to be unsustainable or unattractive for homeowners:

• Grants provided by the government through a national grant scheme set up in 2006 were successful from the point of view of homeowners. However, the whole budget had been spent by 2007.
• Loans provided by commercial banks. Banks offer individual loans which are not relevant for multi-apartment buildings where measures need to be taken collectively and the loan conditions are not very attractive for homeowners. They are often too expensive or require a guarantee which not all citizens have access to. In addition to high interest rates (up to 7%), banks require 70-80% of flat owners to agree with the renovation and they do not cover the renovation costs in full. Finally, banks issue individual loans assigning contractual obligations to each flat owner which can create a barrier when selling an apartment.

Solution

On behalf of the city of Riga, Riga Energy Agency (REA) assessed several financial instruments that could fill the market gap.

Finally, REA selected the most relevant tool and proposed setting up a revolving fund and offering low interest and long-term loans to homeowners and non-profit organisations via ESCOs and tenant cooperatives. The loans are gradually repaid and flow back to the fund. Then they can be used again (the money revolves).

The soft loan is designed in a way that the monthly loan installments are always lower than the money saved thanks to energy savings. The loan is paid back through the utility bills managed by the Riga municipality administration. Homeowners have more flexibility when selling their property as the future homeowner takes on the responsibility of paying the utility bills. The debt is attached to a property not a homeowner.

The city provides free-of-charge technical expertise to homeowners and does not require any guarantee apart from the homeowners’ utility cash flow (banks normally require a lot more). The Fund targets the homeowners of the priority post-war multi-apartment buildings with energy consumption exceeding 177 kWh/m2 /year, whose average annual debts on utility bills are below 10% and who have voted for renovation (75%+1 flat owner). Although 60% heat energy savings have proved to be feasible in the past, REA’s business model assumes energy savings of 40%, to be on the safe side.

A short-term goal is to renovate 10 buildings in the first year and then at least 20 buildings per year.

Fund value

It is planned that the Fund will start with EUR 34.5 million, of which EUR 4.5 million would be a contribution from Riga City Council and EUR 30 million would be a loan from a financing institution or an investment fund. It is expected that additional capital would come from a local municipal heating producer and supplier in addition to international financial institutions such as the European Investment Bank (EIB) or the European Bank for Regional Development (EBRD). The most important point with regards to external financing is that the interest rate charged by a financing institution / investor should be below 1% which will ensure the fund offers loans at the lowest possible rate for citizens. Should the city be unable to attract an external investor, the business model would probably fail. With capital of only EUR 4.5 million, the whole revolving concept would not be able to perform at the scale planned. The plan is to first carry out 5-6 pilot building renovations, make necessary adjustments if needed and gradually increase the renovation rate and scale. The proposed model can easily be adjusted in terms of financial flow changes. Thus larger investments will result in an increased renovation rate.

Fund management

• Governance of the Fund is ensured by a Board of Members which includes people who have the expertise, reputation and proper understanding of renovationrelated issues.
• Administrative decisions are taken by the City Council. One of the Council Committees also elects the Board of Members.
• Operational management of the loans and Fund cash flow in general is the role of the Managing Bank. The Bank will handle the accounts and provide advice on finance management if needed (in the event of unused capital, the funds could be reinvested short-term and risk-free). The City Council will be launching a public procurement tender to select a commercial bank who will fulfil this role. Meanwhile, the city Financial Department takes on these tasks.

Management costs: the Fund management costs are estimated at €100,000 per year. These will be covered by the interest rate the soft loan beneficiaries will pay.

Homeowners’ advantages

Technical assistance provided free of charge by the Riga Energy Advice Centre.

Reduced monthly costs, higher energy efficiency and more comfort. After renovation, homeowners pay for their energy and the monthly loan installments. The total annual costs (energy bill, redemption and interest) should be lower than the original energy bill. A 5% discount is introduced which makes the loan more attractive, especially for older people. As a consequence, the duration of the loan will be longer (on average 1 year). The table below gives an overview, assuming an energy bill of 100% at the start.

	Before renovation	After renovation	After renovation and after payback time
Energy bill	100%	60%	60%
Redemption and interest	0%	40%	0%
Discount	0%	-5%	0%
Total bill	100%	95%	60%

Soft loans

	Eligibility criteria
Type of housing	Type of households	Measures
Type of housing: – Housing units in Riga that require renovation. The loan targets multi-apartment buildings built after the war and before 1996. – Energy consumption above 177 kWh/ m2 (this is part of the energy audit). – 75% + 1 owner must agree with the renovation.	Type of households: – All types of households	Eligible measures: – Insulation of an attic, roof, ground floor and external walls. – Replacement of windows, replacement or insulation of external doors. – Renovation of a ventilation system. – Renovation or replacement of a hot water preparation system, incl. insulation of pipelines. – Renovation or replacement of heating units. – Renovation of a heating system, including replacement of radiators, installing temperature controls, allocators and other heat metering devices

Loan conditions

Loan amount: approx. €150/m2; on average €350,000 EUR per building
Maturity: between 10 and 15 years
Interest rate: below 3%
Guarantee: reduced energy bills are the guarantee for the Fund. The assumption is that all beneficiaries have lower monthly spending and are able to pay back the loan. Existing debts on utility bills must not exceed 10%.
Beneficiary’s own contribution: no own contribution is required.

Financing scheme highlights

Strong points	Weak points
– Focus on a target group with the highest energy consumption – Discount for homeowners makes the loan more attractive – Sustainable model, fund can operate for 30 years – Reimbursed money is used for new loans	– Decision to operate the fund for 30 years may slow down the pace of renovation.