EUROPEAN CENTRAL BANK OPINION ON THE ENERGY PERFORMANCE OF BUILDINGS DIRECTIVE

Publication date:January 30, 2023

The Opinion is limited to a few provisions that fall within the ECB’s core competence, one of which concerns EPF: EPCs, for which the ECB wants greater harmonisation of definitions and methodologies so that across the Union, ‘G’ or ‘D’, etc. mean the same thing.

The ECB’s key complaint is that, given that:

  • EPC class ‘G’ “15% worst-performing building stock” means a building stock that is radically different from country to country according to the degree of energy efficiency currently achieved in each country;
  • and that member states retain considerable freedom over what exact degree of energy efficiency classes ‘F’ to ‘B’ stand for (‘A’ is zero-emission);

from a risk perspective, this very limited harmonisation of EPCs reduces their usefulness as proxies for the riskiness of a specific real estate asset and reduces the Eurosystem*’s capacity to monitor and assess the impact of the climate-related financial risks on the assets it holds on its balance sheet, and to ensure adequate risk protection of its balance sheet.
* the ECB and the national central banks considered as one interlocking entity

ECB Opinions can be game-changers if systemic financial stability issues are involved as is the case with the Capital Requirements Regulation for which the ECB has caused Council and Parliament to wipe out key Commission-proposed provisions. However, those concerned potentially systemic valuation issues whereas in this case, although they make it sound like a major banking supervisory concern, it’s not as if divergences in energy performance certification are going to cause a run on banks. So one could be sceptical about the ECB’s chances of engineering serious change at this late stage were it not for a convergence of interests with some big players in Council, Parliament and the Commission.

We saw under epf22-45 of 14.10.2022 & epf22-46 of 28.10.2022 that Belgium, France, Germany, Ireland, Luxembourg and the Netherlands rebelled against too-divergent EPCs. They want EPCs to be replaced as renovation triggers by “equal and verifiable parameters” so as to ensure a more equal effort by member states.

The ECB doesn’t go that far and instead suggests improving the EPC:

A more accurate, but simple methodology to harmonise EPCs could be to find a common indicator at Union level as main driver, such as primary energy use in kWh/(m2.y) or CO2 emissions or preferably the combination of both, then calculate it for all buildings and divide the results into seven classes. To complement the information from EPCs on the energy efficiency, based on primary energy use in kWh/(m2 .y), an upper limit on acceptable greenhouse gas emissions (kgCO2eq/(m2.y) for each EPC class could be considered to ensure a speedier decarbonisation of real estate. (page 4, footnote 4)

If this were just the ECB in isolation complaining about impediments to assessing energy efficiency impacts on banks’ real estate exposures, it might not go far. But in the current political context, it may help Commission, Council and Parliament reach a compromise.

The ECB also points out difficulties that will arise from years of coexistence of EPCs issued before or after revision of the Directive:

5.1 As newly issued EPCs will be valid for up to 10 years, adoption of the proposed directive will imply the coexistence, after 2025, of two generations of EPCs for a considerable period of time. The transposition of the proposed directive should therefore clarify how those old and new generations of EPCs correspond to each other, whether they should be treated identically for regulatory purposes and how owners will receive the updated EPCs based on Union standards, as it would impact the value of buildings. For instance, ‘zero-emission buildings’ (ZEBs) are linked to energy performance class A under the proposed directive, but it is not clear whether buildings that have obtained an energy performance class A under the existing directive will count as ZEBs. It is particularly relevant to consider this point in conjunction with other Union law, such as the Taxonomy Regulation and the SFDR*, that cross-references EPCs and the definitions of ZEB and ‘nearly zero-energy buildings’.
*Sustainable Finance Disclosure Regulation

5.2 In addition, Member States should identify the most appropriate solutions to incentivise building owners to update their EPCs in a timely manner, as a means of raising awareness of recommended cost-efficient renovations to improve energy performance.
(pp. 6-7)

Full EPF Secretariat report and text of ECB Opinion under epf23-02 of 26.01.2023