With a combination of public grants and private financing, Lithuania has carried out 1 billion euros’ worth of energy-efficient building upgrades. Now the EU wants to scale up its success.
The apartment building at the end of Cosmonauts Street in the small Lithuanian town of Marijampolė is flashy for the neighborhood. Built in 1993, the narrow nine-story building is newer than a lot of the Soviet-era apartment blocks to be found across the city. After a renovation in 2018, the 54-unit building looks fresh, with alternating columns of peach- and cream-colored siding to distinguish it from towers of drab concrete.
Yet changes at the Cosmonauts Street building go beyond the cosmetic. Before the work-up, its energy use was typical for a building of its age, which is to say, not great. But after the retrofits — including new windows and insulation, solar and geothermal heating systems and all-weather glazed balconies — costs for heating the building fell from 140 kilowatt hours per square meter to 28, a decline of 80%.
Three Retrofits, Many Tons of Emissions Avoided
Energy performance data on three Lithuanian buildings
That’s good news for residents of this and hundreds of aging apartment buildings across Lithuania that have invested in similar upgrades — especially after a summer when energy costs surged following Russia’s invasion of Ukraine. The Baltic states in particular are bearing the brunt. Prices spiked so high in August that one Lithuanian grocery chain temporarily dialed back lighting and air conditioning in its stores.
Despite the ongoing crisis, Lithuania may serve as a model for securing a more energy-independent future for Europe.
Buildings across Europe consume 40% of the continent’s energy and generate 36% of its greenhouse gas emissions, according to the European Commission. So governments are betting heavily on modernizing the continent’s building stock as a way to combat climate change: Reducing energy consumption by improving building performance is the cornerstone of the European Green New Deal. Yet high inflation and rising interest rates (both especially severe in the Baltics) could diminish the curb appeal of this approach. It’s simply not as cheap as it once was for property owners to invest in capital-intensive upgrades with returns that pay out over the long term.
Lending authorities have a plan to keep this effort moving. The European Investment Bank (EIB) — the European Union’s lending arm, which financed more than 96 billion euros in urban development projects between 2017 and 2021 — is expanding a model product for financing retrofits, one that couples grants with loans. The goal is to catalyze different kinds of public–private partnerships based on long-term, low-interest, low-cost financing. EIB’s “fi‑compass” platform aims to provide a blueprint for all 27 EU member states to leverage limited grants to incentivize owners and residents to invest in upgrades themselves.
It’s a model that so far has yielded more than 1 billion euros in upgrades across Lithuania.
“The Lithuania example is pretty far-sighted in terms of doing this from a government perspective, to use funds for grants in that way,” says James Hooton, program director for the Coalition for the Energy Efficiency of Buildings at the UK-based Green Finance Institute, an independent government-backed organization. “Not using grants to crowd out private finance, but to be able to use them as an enabling tool, which is what happened in Lithuania — that’s exactly the right way to do it.”
The energy shocks resulting from Russia’s war in Ukraine have made the case for energy-efficiency upgrades more urgent, not less, say EIB officials, even as a punishing summer gives way to a potentially dreadful winter.
“The fact that energy prices have gone up makes it more self evident that this is something you need to do, if you have an apartment building or if you have a house. It makes the whole renovation idea more compelling, because clearly you have a lot to save if you do the work, compared with just two years ago,” says Frank Lee, head of the financial instruments advisory division.
“On the other hand, the cost of the work has gone up significantly. There’s going to be a cost-benefit analysis,” he says. “This is where we feel that the instrument we’re promoting is quite powerful.”
While the building on Cosmonauts Street stands out on its block, it’s not alone in Marijampolė. The city of 34,000 has branded itself as the “renovation capital” of Lithuania: Residents and owners of more than 10% of the multifamily buildings in Marijampolė have elected to invest in retrofits.
Today building upgrades are a high priority across the country. Aging Soviet housing blocks and other multifamily buildings, most built before 1993, make up 66% of Lithuania’s housing stock. Household energy consumption in Lithuania significantly outpaces the European average and the country was until recently reliant on its domineering neighbor for its energy needs. (It swore off Russian gas in April.) To achieve its national energy and climate plan of reductions by 2030, Lithuania has identified building efficiency as a top priority.
All told, there are about 30,000 apartment buildings in Lithuania in need of renovation, according to local EIB investment officer Junona Bumelyte.
In pursuit of this goal, while European authorities boosted financing options for borrowers, Lithuania also made it something of a national initiative to expand awareness among residents. Hence the 2019 declaration by the state’s Housing Energy Efficiency Agency (BETA) naming the Cosmonauts Street building the renovation project of the year, the winner of a nationwide annual challenge.
“One of the main goals of this competition was to show the public that renovation is not just insulating the walls, changing the roof or windows, but it can contribute to fundamentally changing the quality of life,” Valius Serbenta, director of BETA, told the news site Delfi in 2019.
In Lithuania, the opportunity for retrofits was significant, but so was the challenge of overcoming skepticism from owners, investors and lenders. It can take a long time to recoup investments in efficiency upgrades: Although returns are immediate in the form of energy cost savings, the payback period can be long. That was particularly true when energy costs were low.
Many apartment blocks in the country are owned by a homeowner association. Owner-occupants, longtime residents in particular, might not see the benefit of investing in building upgrades. So the Lithuanian government set a standard that retrofits could proceed with the approval of a simple majority of a building’s owners, lowering a common barrier to renovation.
Also, the specific instrument that has helped to finance these projects across the country is linked to the building, not the resident. So if a unit sells, the loan flows with the property. Meanwhile the advantage of lower energy costs arrives right away.
“The idea is to make an instrument that’s attractive and easy to understand for the homeowner, even though there are lots of regulations and rules going on in the background,” Lee says.
Since 2007, the push for renovations in Lithuania happened in two phases, through a program known as the Joint European Support for Sustainable Investment in City Areas (JESSICA). Phase one deployed 173 million euros in European Regional Development Funds and national co-financing to yield 250 million euros’ worth of energy-efficiency upgrades for apartment blocks and student housing. The second phase, through 2020, expanded this drive, with 250 million euros in grants leading to more than double that amount in financing for upgrades so far.
By the end of this period, the financial mobilization — a joint effort by EIB, the European Commission and the Council of Europe Development Bank — led to loans for the renovation of more than 1,000 buildings across all 60 municipalities in Lithuania. Some 50,000 households stand to gain, with an average savings per building of 65%.
Lessons for a Renovation Wave
In October 2020, European Union leaders announced a “renovation wave” to help bring about a carbon-neutral future for the continent. This sweeping transformation of European cities would involve renovations for as much as 2% of the continent’s building stock each year.
The pandemic has slowed the rollout of these policies, and high inflation and energy prices have tripped up the fundamentals. Going forward, greater energy independence may be as much of an upside to building modernization as long-term sustainability. The upfront challenge remains the same: getting buy-in from owners and lenders.
Many EU member states call for unanimous consent of owners, not simple majority approval, for retrofits to proceed. Hooton says the European Parliament is considering revisions to the central Energy Performance of Building Directive to bring the EU standard in line with the Lithuanian model — another way the Baltic state is ahead of its time.
Under the Lithuanian and EIB model, for building owners, grants provide technical assistance, interest-rate subsidies and capital rebates to offset the loan. For investors the grants serve as a first-loss guarantee. Lee says the EIB sold the idea of pairing grants with loans to reluctant private lenders in two ways. “If you invest a euro, you get that euro back and you can use it again and again and again,” he says. “The other benefit is leveraging. You use one euro of public money and bring in 10 private euros.”
Still another benefit of using grants to garner private financing is that it can bolster supply-side reforms and investments. Facilitating the financing for these projects in Lithuania has led to about 7,000 new jobs, many in green construction or service sectors.
“If you look across Europe, different countries are having different success in terms of catalyzing motivation. I would say there’s different measures of success,” Hooton says. “If you look at Spain, or countries like Estonia and Latvia, obviously closer to Lithuania, where they have similar building stock in terms of multifamily apartment blocks, similar in terms of financial market maturity, I think this product is absolutely impeccable.”
Despite the success of this model in Lithuania (and in Greece and Portugal, too), other EU member states have not yet rushed to adopt this same grant-guarantee approach. So far only about 5 to 10% of European Commission structural and investment funds are being used this way. The vast majority of the rest is devoted exclusively to grants.
Greater take-up may help more people secure the same advantages as the residents of Cosmonauts Street.
“The commission is pushing for a higher share of these funds being used in this way,” Lee says. “We all hope that it will change.”