THIRD-PARTY FINANCING COMPANIES: AN INTERESTING MODEL FOR STIMULATING DEMAND FOR DEEP HOME RENOVATION

26 October 2022

25 May 2022

Retrofitting residential buildings to energy-efficient standards has been a key component of the action plans developed by successive French governments to achieve the objectives of the national low-carbon strategy (SNBC). This, however, requires individual homeowners to overcome a number of financial, organisational and even psychological barriers. Third-Party Financing (TPF) companies were created to reduce the complexities inherent in each retrofit project and to act as reference aggregators for other actors at the regional and metropolitan levels.

TPF companies have demonstrated their relevance in meeting households’ requirements but still need to strengthen their economic model. To achieve this, they must convince public authorities that all the regulatory and incentive levers should be focused on promoting energy-efficient retrofits, instead of wasting subsidies on one-off retrofit measures with a low energy impact.

 

TPF companies: AN INTEGRATED SERVICE AND FINANCIal OFFER WHICH MEETS THE demand FOR SUPPORT, FINANCING AND SIMPLIFICATION EXPRESSED BY HOUSEHOLDS

The definition of the renovation projects, the characterisation of the work to be carried out, notably in terms of quality guarantee, as well as the complexity of grants and access to the public information and support services, are all limiting factors identified as hampering the development of an efficient renovation market. In addition to these obstacles, financing is a major stumbling block for households, despite their motivation.

These market shortcomings explain the creation of a “Third-Party Financing company” legal status for financing home renovation in the 2014 ALUR Law, which was later reinforced by the 2015 Law on the Ecological Transition for Green Growth. These entities must offer comprehensive support to individual homeowners and co-owners, including the financing of renovation work.

There are currently six Third-Party Financing companies in France. They were established at the initiative of five regional and a metropolitan councils and provide a standardised service adapted to local specificities broken down in several stages:

 

  • Prior visit to the dwelling and energy audit,
  • Presentation of a home renovation project including several work scenarios,
  • Proposal of a financial plan adaptedto the retrofit project,
  • Coordinationof the renovation process,
  • Preparation of a financial planto facilitate bank loan applications, or an affordable direct financing offer is made, to be repaid over a period of up to 25 years to limit the amount of the monthly instalments, with the energy savings made being included in the assessment of the household’s capacity to repay,
  • Energy use is monitored after completion of the work to ensure the targets have been met.

 

The TPF companies therefore aim to provide attentive support and individualised responses, adapted to the specificities of each household and dwelling.

 

FINANCIAL SOLUTIONS SUITABLE FOR ALL HOUSEHOLDS WITH A HOME RENOVATION PROJECT

Standard bank loans are not suitable, either in duration or in amount, to the financing of energy-efficient renovation, the cost of which ranges from €30,000 to over €60,000. Indeed, consumer loans offered to finance the work rarely exceed 7 to 10 years, while, in practice, home loans can only be used when work is planned at the time of purchase.

Moreover, the administrative procedure, including verification of expenses eligible for aid, is fearsomely complex for owner and banker alike.

However, the taxonomy introduced by the European Union, classifying economic activities with a favourable and sustainable impact on the environment, and the emergence of new performance indicators such as the Green Asset Ratio (applicable from 2022), a measure of the involvement of banks in financing assets compatible with the taxonomy, will require them to increase the share of “green credits” and therefore to increase control of the compliance of such credits.

To achieve this, banks will have to invest massively in their procedures and IT tools to ensure the necessary management of a large volume of data, and at the same time develop a more individualised and less industrial approach to their customers and their needs. This will take time to put in place and the TPF company support model can help bridge the gap during this necessary transition period.

 

Financial engineering by TPF companies has been kept simple to encourage homeowners to take the plunge: the financial flows are managed by the TPF company until completion of the work and payment of the subsidies; the household then repays the loan in a single monthly instalment, whose amount is close to the savings made, thus drastically simplifying its budget management. TPF companies are therefore able to make a financial offer to all households, including those for which access to standard bank financing is difficult.

Is renovating your home cost-efficient?

The question of the cost-efficiency of a home renovation project is also problematic as the way cost-efficiency is determined is not generally explained. The benefits of a renovation project are often reduced to energy savings, whereas such projects are also, and even primarily, undertaken to remedy the wear and tear of the building.

Retrofitting one’s house or block of flats is an investment that gives the residents immediate benefits in terms of well-being and comfort, and ultimately individuals who wish to undertake renovation work to improve their quality of life are more concerned with whether they can afford to finance the work, rather than whether it is ‘cost-efficient’. The financial plan must therefore demonstrate that the investment is both relevant and affordable.

A retrofit project is also an opportunity for households to increase the value of their property: the energy performance rating of a dwelling has an impact on its value and the gap between the best performing dwellings (rated A or B) and the worst (rated F or G) (known as the “green value”) can be as high as 30%, depending on the region.

 

PUBLIC FUNDING IS NECESSARY TO GUARANTEE THE ECONOMIC MODEL OF THIRD-PARTY FINANCING COMPANIES

The Climate and Resilience Law of August 2021 provides for greater public role in the energy performance of residential buildings in the form of support which is a condition for the award of energy renovation grants and subsidies.

Like the ‘France Rénov’ aid scheme advisers, TPF companies spend a considerable amount of time informing and convincing homeowners, but this support, which is essential, is not billed to households for the amount it actually costs.

TPF companies therefore rely on the co-financing of these services, as made possible with the “Service d’Accompagnement à la Rénovation Energétique” (Energy Renovation Support Service), a programme coordinated by ADEME (national energy transition agency) and financed by the Energy Efficiency Certificates paid by energy suppliers, which provides additional remuneration of €600 to €1,500 for each retrofit project supported.

 

AN INCENTIVE REGULATORY framework

The Climate and Resilience Law also provides for a gradual ban on renting out homes with E, F or G energy ratings.

The threat of a large number of dwellings being excluded from the rental market, combined with the increased importance given to the Energy Performance Certificate (DPE), a mandatory energy rating of the dwelling enforceable by buyers and tenants which provides greater transparency on the real condition of properties on the market, will create a major shock wave: the status of poorly insulated dwellings – the so-called “thermal sieves” with a F or G energy rating – will impact the values of properties financed or used as collateral by banks. The “green value” created by energy-retrofitted dwellings should therefore become an essential criterion for assessing the value of the debt portfolios held by banks and insurers.

 

TOWARDS A MORE STRUCTURED NETWORK OF THIRD-PARTY FINANCING COMPANIES  

The latest figures about the activity of TPF companies are from 2021 and show their efficiency in engaging efficient renovation projects:

  • 8,800 energy audits or design studies,
  • 1,200 efficient renovation projects,
  • 5 million euros committed to renovation work,
  • Expected average energy savings of 18.3 Mwhfe for single-family houses and 7.7 Mwhfe for blocks of flats.

 

To develop their action more quickly, four TPF companies (ARTEE, Hauts-de-France Pass Rénovation, Ile-de-France Energies and Oktave) have joined forces within the EU-funded ORFEE project coordinated by Energies Demain with the participation of Effinergie, Energy Cities, GNE Finance, Latournerie Wolfrom Avocats, Marsh and Pouget Consultants. This 4-year project aims to standardise their methods, optimise their financial resources, coordinate and share their resources and investments, and contribute to the development of an insurance policy covering the quality of the work carried out.

Thanks to the ORFEE project, the 6 existing TPF companies, joined by Énergies Demain, Pouget Consultants and Effinergie, decided in December 2021 to create an association, SERAFIN, with the following aims:

  • Deploy and disseminate the model of third-party financing companies,
  • Create a privileged space for exchange between the different energy renovation actors,
  • Build a portfolio of common tools and methodologies,
  • Contribute to the management and optimisation of financial resources for retrofit projects.

 

SERAFIN will therefore be a vehicle for disseminating the third-party financing model and representing its members at the national and European levels, where they are considered a reference for the so-called Integrated Home Renovation Services, one of the key measures of the revised European Directive on the Energy Performance of Buildings.

 

Article written by Françoise Réfabert, Managing Director of Énergies Demain, Raphaël Claustre, Director of Ile-de-France Energies, Matthieu Flahaut, Operations Officer for Oktave, together with Sébastien Descours, Marie Pourchot and Lola Dornier (Énergies Demain)