Editing IPCC:AR6/WGIII/Chapter-9 (section)

=== 9.9.4 Financing Mechanisms and Business Models for Reducing Energy Demand ===

<div id="h2-32-siblings" class="h2-siblings"></div>

Grants and subsidies are traditional financing instruments used by governments when optimal levels of investments cannot be fully supported by the market alone. They can partly help overcoming the upfront cost barrier as they directly fill an immediate financial gap and thus enable a temporary shift in the market ( [[#Newell--2019|Newell et al. 2019]] ). These forms of support are usually part of policy mixes including further fiscal and financial instruments such as feed-in tariffs and tax breaks ( [[#Polzin--2019|Polzin et al. 2019]] ). Potential issues with subsidies are the limited availability of public financing, the stop and go due to annual budget and the competition with commercial financing.

Loans provide liquidity and direct access to capital important in deep renovation projects ( [[#Rosenow--2014|Rosenow et al. 2014]] ). There is empirical evidence ( [[#Giraudet--2021|Giraudet et al. 2021]] ), that banks make large profits on personal loans for renovation purposes. International financing institutions (IFIs) and national governments provided subsidies in public-private partnerships so that financial institutions can offer customers loans with attractive terms ( [[#Olmos--2012|Olmos et al. 2012]] ). Loan guarantees are effective in reducing intervention borrowing costs ( [[#Soumaré--2016|Soumaré and Lai 2016]] ). Combination of grants and subsidised loans financed by IFIs could be an effective instrument together with guarantees. An important role in financing energy efficiency can be played by green banks, which are publicly capitalised entities set up to facilitate private investment in low-carbon, including energy efficiency ( [[#Bahl--2012|Bahl 2012]] ; Tu and Yen 2015; Linh and Anh 2017; [[#Khan--2018|Khan 2018]] ). Green banks have been established at the national level (e.g., UK, Poland) and in the US at state and city level.

Wholesaling of EE of loans and utilities programmes, are other important financing instruments. Another financing mechanism for building efficiency upgrades, mainly implemented so far in the US, is efficiency-as-a-service under an energy services agreement (ESA), where the building owners or tenant pay to the efficiency service provider a charge based on realised energy savings without any upfront cost (Kim et al. 2012; [[#Bertoldi--2020|Bertoldi, 2020]] ). ESA providers give performance guarantees assuming the risk that expected savings would occur ( [[#Bertoldi--2020|Bertoldi, 2020]] ).

Energy Performance Contracting (EPC) is an agreement between a building owner and Energy Services Company (ESCO) for energy efficiency improvements. EPC is a common financing vehicle for large buildings and it is well developed in several markets ( [[#Carvallo--2015|Carvallo et al. 2015]] ; Bertoldi and Boza Kiss, 2017; Stuart et al. 2018; Ruan et al. 2018; Nurcahyanto et al. 2020; [[#Zheng--2021|Zheng et al. 2021]] ). Quality standards are a part of the EPC ( [[#Augustins--2018|Augustins et al. 2018]] ). Guarantees can facilitate the provision of affordable and sufficient financing for ESCOs ( [[#Bullier--2013|Bullier and Milin 2013]] ). The ESCO guarantees a certain level of energy savings and it shields the client from performance risk. The loan goes on the client’s balance sheet and the ESCO assumes full project performance risk ( [[#Deng--2015|Deng et al. 2015]] ). One of the limitations is on the depth of the energy renovation in existing buildings. According to ( [[#Giraudet--2018|Giraudet et al. 2018]] ), EPC is effective at reducing information problems between contractors and investors.

Energy efficient mortgages are mortgages that credits a home energy efficiency by offering preferential mortgage terms to extend existing mortgages to finance efficiency improvements. There are two types of energy mortgages: (i) the Energy Efficient Mortgages (EEMs), and (ii) the Energy Improvement Mortgages (EIMs), both can help in overcoming the main barriers to retrofit policies ( [[#Miu--2018|Miu et al. 2018]] ). The success depends on the improved energy efficiency with a positive impact on property value and on the reduction of energy bills and the income increase in the household. In the EU, the EeMAP Initiative aims to create a standardised energy efficient mortgage template ( [[#Bertoldi--2021|Bertoldi et al. 2021]] ).

On-bill financing is a mechanism that reduces first-cost barriers by linking repayment of energy efficiency investments to the utility bill and thereby allowing customers to pay back part or all costs of energy efficiency investments over time ( [[#Brown--2009|Brown 2009]] ). On-bill finance programmes can be categorised into: (i) on-bill loans (assignment of the obligation to the property) and (ii) on-bill tariffs (payment off in case of ownership transfer) ( [[#Eadson--2013|Eadson et al. 2013]] ). On-bill finance programmes can be more effective when set up as a service rather than a loan (Mundaca and Klocke 2018).

Property Assessed Clean Energy (PACE) is a means of financing energy renovations and renewable energy through the use of specific bonds offered by municipal governments to investors ( [[#Mills--2016|Mills 2016]] ). Municipalities use the funds raised to loan money towards energy renovations in buildings. The loans are repaid over the assigned long term (15–20 years) via an annual assessment on their property tax bill ( [[#Kirkpatrick--2014|Kirkpatrick and Bennear 2014]] ). This model has been subject to consumer protection concerns. Residential PACE programmes in California have been shown to increase PV deployment in jurisdictions that adopt these programs ( [[#Kirkpatrick--2014|Kirkpatrick and Bennear 2014]] ; [[#Ameli--2017|Ameli et al. 2017]] ). In US commercial buildings, PACE volumes and programs, however, continue to grow ( [[#Lee--2020|Lee 2020]] ).

Revolving funds allow reducing investment requirements and enhancing energy efficiency investment impacts by recovering and reinvesting the savings generated ( [[#Setyawan--2014|Setyawan 2014]] ). Revolving fund could make retrofit cost-neutral in the long term and could also dramatically increase low carbon investments, including in developing countries ( [[#Gouldson--2015|Gouldson et al. 2015]] ).

Carbon finance, started under the Kyoto Protocol with the flexible mechanisms and further enhanced under the Paris Agreement ( [[#Michaelowa--2019|Michaelowa et al. 2019]] ), is an activity based on ‘carbon emission rights’ and its derivatives ( [[#Liu--2015a|Liu et al. 2015a]] ). Carbon finance can promote low-cost emission reductions ( [[#Zhou--2019|Zhou and Li 2019]] ). Under Emission Trading Schemes or other carbon pricing mechanisms, auctioning carbon allowances creates a new revenue stream. Revenues from auctioning could be used to finance energy efficiency projects in buildings with grants, zero interest loans or guarantees ( [[#Wiese--2020|Wiese et al. 2020]] ).

Crowdfunding is a new and rapidly growing form of financial intermediation that channels funds from investors to borrowers (individuals or companies) or users of equity capital (companies) without involving traditional financial organisations such as banks ( [[#Miller--2018|Miller and Carriveau 2018]] ). Typically, it involves internet-based platforms that link savers directly with borrowers ( [[#European%20Union--2015|European Union 2015]] ). It can play a significant role at the start of a renewable and sustainable energy projects ( [[#Dilger--2017|Dilger et al. 2017]] ).

The One-Stop Shop (OSS) service providers for buildings energy renovations are organisations, consortia, projects, independent experts or advisors that usually cover the whole or large part of the customer renovation journey from information, technical assistance, structuring and provision of financial support, to the monitoring of savings ( [[#Mahapatra--2019|Mahapatra et al. 2019]] ; Bertoldi 2021b). OSSs are transparent and accessible advisory tools from the client perspective and new, innovative business models from the supplier perspective (Boza-Kiss and [[#Bertoldi--2018|Bertoldi 2018]] ).

<div id="9.9.5" class="h2-container"></div>

<span id="policies-mechanisms-for-financing-for-on-site-renewable-energy-generation"></span>