Frequently Asked Questions
What are innovative financing models?
The phrase “innovative financing model” refers to mechanisms and instruments that were developed to provide suitable financing for large-scale and in-depth energy efficiency renovations in buildings. Examples of innovative financing models include instruments such as:
- Energy Performance Contracting (EPC)
- Third Party Financing (TPF)
- revolving funds
- cooperative models (REScoop)
- crowdfunding
- green bonds
Although these schemes have proven successful and have been applied in several contexts, they have not yet been widely used across Europe. There are still some barriers that block replication and extensive application of those schemes. This is why CITYnvest aims to overcome those obstacles.
A financial instrument is the financing technique that is being used to fund the projects. It can be:
- equity,
- loans,
- grants,
- bonds (public or private),
- utility incentives (green or white certificates),
- EPC or ESC financing,
- risk-sharing facility, etc.
Energy Performance Contracting (EPC) is a form of creative financing for capital improvement which allows funding energy upgrades from cost reductions. Under an EPC arrangement, an external organisation (Energy Service Company - ESCO) implements a project to deliver energy efficiency, or a renewable energy project, and uses the stream of income from the cost savings or the renewable energy produced to repay the costs of the project (including the costs of the investment). Essentially, the ESCO will not receive its payment unless the project delivers energy savings as expected. The definition of EPC, and more information on it, can be found on the European Commission’s website.
ESCO stands for Energy Service Company. The term Energy Savings Company is also used. It is a company or an entity that delivers energy services or other energy efficiency improvements in an energy user’s premises, and accepts some degree of financial risk in doing so. The payment for the services delivered is based (either wholly or in part) on the achievement of energy efficiency improvements.
The Third-Party Financing refers solely to debt financing. The project financing comes from a third party, usually a financial institution or other investor, or the ESCO, which is not the user or customer.
A revolving loan fund is a source of money from which loans are made for multiple sustainable energy projects. Revolving funds can provide loans for projects that do not have access to other types of loans from financial institutions, or can provide loans at a below-market rate of interest (soft loans). The fund gets its name from the revolving aspect of loan repayment, where the central fund is refilled as individual projects pay back their loans, creating the opportunity to issue other loans to new projects. Revolving funds for sustainable energy provide financing to parties to implement energy efficiency, renewable energy, and other sustainability projects that generate cost savings. These savings are tracked and used to replenish the fund for the next round of investments, thus establishing a sustainable funding cycle while cutting operating costs and reducing environmental impact. The London Green Fund is a good example of a revolving loan fund. The definition can be found on the ManagEnergy website.
REScoops are examples of cooperative models. REScoop is short for Renewable Energy Sources Cooperative. REScoops are citizen-led initiatives that develop projects for renewable energy and/or energy efficiency, sell renewable energy or provide services to new initiatives. The term REScoops does not just refer to cooperatives in the legal sense, it also encompasses community energy initiatives under any other legal statute. There are about 2,500 REScoops in Europe. More information can be found on the Rescoop website.
Crowdfunding is an emerging alternative source of financing. It refers to open calls to the public, generally via the internet, to finance a project through either a donation, a monetary contribution in exchange for a reward, product pre-ordering, lending, or investment.
This definition can be found on the European Commission’s website.
Bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are issued by companies, municipalities, states and sovereign governments to raise money and finance their projects and activities. Green bonds are all those instruments which are used exclusively to fund qualifying green investments.
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