Ramping-up energy efficiency: opportunities and challenges

The European Commission's Scale-up Initiative is a strategic effort launched earlier this year with EIB to accelerate and expand investments in energy efficiency across the EU. This initiative is designed to address the urgent need to decarbonise the European economy by fast-tracking financial support for energy efficiency projects. By mobilising both public and private funds, the initiative aims to help national authorities to bridge the significant investment gap and enable a more sustainable energy future for Europe.   

The impulse behind the Scale-up Initiative stems from a confluence of environmental imperatives and geopolitical shifts. The EU's ambitious decarbonisation targets require rapid advancements in reducing energy consumption and increasing renewable energy output.  

Urgency Behind the Initiative 

Originally aimed at mitigating the environmental impacts of economic activities, energy efficiency became much more urgent after Russia’s aggression in Ukraine. Sanctions against Russia, and the imperative to decouple European energy needs from Russian production led to soaring energy prices and heightened supply insecurity.  

This crisis has made the reduction of energy demand in buildings not just a priority but a necessity. Efficiently insulated homes and offices can significantly cut greenhouse gas emissions, helping to prevent the extreme weather events—such as the severe floods and heat waves that have recently hit Eastern Europe and Spain—that exacerbate social inequalities, migration, and conflict.  

At the same time energy efficiency investments will strengthen European economies by reducing dependence on imports. Lastly, it can also be argued that lower energy bills will allow businesses to invest in productivity and innovation: a win-win for the competitiveness of European companies.  

Funding Challenges and the Case of Poland 

The energy transition is an expensive undertaking, and public funds alone cannot meet the vast financial needs. In Poland, the largest beneficiary of EU cohesion policy, climate and energy transition costs from 2021 to 2040 are estimated at around €550 billion. In contrast, the European Regional Development Fund (ERDF) allocation to Poland stands at €47 billion—meaning the required investment is nearly 12 times the available ERDF funding, only part of which is designated for energy efficiency.  

Overall, in the whole EU we need around €275 billion of additional investment in building renovations every year to achieve the 55% climate target by 2030. 

This disparity between what is available and what we need to do, highlights the critical role of private capital, leveraged through financial instruments such as loans and guarantees, which not only amplify available funds but also create a revolving fund effect, enabling reinvestment in future projects. 

Financial instruments, unlike grants, offer a sustainable and cost-effective approach by incentivising high-quality projects with a focus on long-term impact, effectively achieving "more with less." 

The Role of Financial Instruments in the Scale-up Initiative 

The Scale-Up initiative is the most recent idea of DG REGIO and the EIB to further help increasing the pace and scale of energy efficiency investments in Europe. The whole idea is about bringing together most experienced practitioners from the selected member states who will identify main bottlenecks when designing and setting up energy efficiency financial instruments, but foremost to elaborate practical solutions, that can be replicated in some if not all MSs, especially those that are still hesitating. 

This working group comprises experts from 11 EU member states, including Managing Authorities, National Promotional Banks, the European Commission, and the European Investment Bank Group.  

The members are chosen for their expertise and commitment to energy efficiency financial instruments (EE FIs) and meet every 2-3 months to address complex legal, financial, and psychological barriers to green investment. The latter barriers appear to be the odd-ones out, but experience taught that the perceived risk for investment in energy efficiency is higher than the actual risk.  

Topics in recent meetings have included structuring combined financial instruments, designing funding agreements, state aid and managing perceived credit risks associated with energy efficiency projects.  

Despite challenges, the initiative's goal remains clear: to help accelerating green investments that cut greenhouse gas emissions, enhance economic resilience, and secure a sustainable future for Europe. 

Overcoming Reluctance and Key Prerequisites for Success 

Despite these efforts and evidence showing the positive experience for members states that relied on financial instruments there is still widespread reluctance in their uptake. There are still doubts that financial instruments are the only solution to meet unprecedented needs with limited resources. Paired with a short-term perspective, skepticism prevents financial instruments from imposing themselves as a better option than grants in the long-term. For instance, financial instruments entail the possibility of re-using the funds that are repaid, the so called ‘’reflows’’, that will remain in the regions. 

Nonetheless, it appears clear that to face the climate crisis and the war in Ukraine - independence from fossil fuels and a rapid energy transformation is simply a necessity. 

Ultimately, to drive broader adoption of financial instruments (FIs) across EU member states, three key prerequisites stand out: 

1. Clear Differentiation from Grants: The most crucial factor is reducing “cannibalisation,” where grants overshadow financial instruments. As long as grants are available, beneficiaries naturally prefer them over repayable instruments. Cohesion policy programmes should clearly delineate which investments qualify for grants and which for financial instruments. Poland, for example, has seen increased allocations to FIs for renewable energy by stipulating that only emerging technologies like hydrogen qualify for grants, while mature, short-payback investments (like solar and wind) are supported through loans or guarantees. This approach ensures that financial instruments fulfil their role without competing with grants.

2. Standardisation of Financial Products: A higher level of standardisation at the national level, especially for financial products addressing similar needs, can greatly boost the effectiveness and appeal of financial instruments. Standardisation reduces adaptation costs for financial intermediaries and makes programmes more accessible for end-users. This consistency also minimises market confusion and unrealistic expectations from different regions, ensuring smoother implementation and higher absorption rates. Excessive variety, by contrast, can overwhelm potential recipients and discourage adoption.

3. Knowledge and Technical Support: Adequate information and support are essential for all stakeholders, from end recipients and building owners to policymakers and banks. There are gaps in awareness about the environmental and health impacts of poorly insulated buildings, and people often lack knowledge about available financing and advisory services. To address these issues, cohesion programmes should invest in awareness campaigns and skill-building initiatives, equipping stakeholders with the knowledge they need to access and effectively use financial instruments for energy efficiency.

These three conditions are pivotal to scaling financial instruments and achieving the EU’s energy and climate objectives. 

Andrzej Urbanik, a policy officer with DG Regio who led negotiations on expanding financial instruments in Poland's energy sector, shared insights on what more can be done to scale up energy efficiency (EE) investments through financial instruments. Reflecting on the successes that saw Poland increase its FI allocation from under €300 million in 2014-2020 to over €1.6 billion in the current period, Andrzej emphasised the importance of building stakeholder awareness, stating, “EE investments are essential and must remain independent of the political climate, economic cycles, or fluctuations in energy prices. Demand for EE investments shouldn’t dip simply because energy prices fall.” 

He noted that awareness-raising efforts should focus on dispelling stereotypes, addressing risk aversion, and connecting with those who might be sceptical or have limited financial means. “It’s crucial to engage these people with empathy, understanding their concerns. Rather than lecturing sceptics, we should guide them. Financial instruments can even support those facing energy poverty by combining loans with grants that shorten payback periods,” he explained. 

According to Andrzej, “One stop shops” are a concrete example of how EE investments can be better supported. These centres provide citizens with comprehensive information about energy efficiency and financing options. “[People] working in these shops or at financial intermediaries should actively reach out to citizens, using simple language and persuasive arguments,” he said. Drawing on his experience in Poland, Andrzej added, “Showing someone how much they can save by retrofitting their home and how taking a loan can help them finance improvements more quickly and affordably often proves more compelling than expecting them to save on their own.” 

Asked to give some recommendations, Andrzej said that it is paramount to keep an open mind and benefit from the more experienced administrations. “Scaling up and replication of good examples across borders is usually more efficient and faster than reinventing the wheel’’, adding that no matter how needs and problems can be similar, solutions need to be bespoke.