Green investments and

green mortgages in Germany

By Dr. Ralph Henger and Prof. Dr. Michael Voigtlnder, Institut der deutschen Wirtschaft Kln

1. Background
The building stock has a key role to play in fulfilling the climate protection goals
set at European and national levels. Every member state of the EU has promised to
reduce its energy consumption considerably and to boost the usage of renewable
energy resources. Since new buildings consume only one third of the energy
required for existing buildings, the building stock offers a high potential for
reducing energy consumption and thus preventing carbon dioxide emissions.
However, to raise the energy standard of the existing stock, massive investments
will be needed. In addition, from an individual perspective, investing in energy
saving is often unattractive, because outlays seem to outweigh potential revenues.
Therefore, the availability of green mortgages for refinancing investment in energy
efficiency is essential if climate goals are to be reached.
In this article we present the extent of green investments and the use of green
mortgages in Germany. For clarity, we concentrate on the residential market since
the circumstances and concerns of owners of commercial properties are much
more diverse. First, the level and development of investments is presented and
compared with the targets set by the government. Then, we discuss the profitability
of energetic building refurbishments in view of the barriers and obstacles to green
investments. Next, the possibilities of financing green investments are discussed.
Here we focus particularly on the KfW, a German government-owned bank that
offers subsidised loans for green investments. Finally, the German approach is
contrasted with the experience of other countries, such as the United States and
Australia. The article ends with a summary and conclusions.

2. Green investments in Germany

Increasing the energy efficiency of buildings renovation, retrofit and refurbishment
are the terms used has, in recent years, been one of the most controversial
issues in Germany. This is not only because Germany aims to be a leader in
climate change policy and has set itself and the building sector very ambitious
targets. Debate has also been fuelled by the governments decision, in the wake
of the catastrophic Fukushima nuclear power plant accident in Japan in 2011,
to speed up the countrys nuclear energy exit. As a result, both energy efficiency
issues and renewable energies are gaining in importance.
German climate change policy is embedded in the European framework, and also
in the European emissions trading system. Energetic building refurbishments play a
key role within Germanys climate change strategy, as the building sector accounts
for about 40% of Germanys final energy consumption and about one third of CO2
emissions. The building sector is correspondingly playing a very significant role in
the transformation of the German energy system, the so-called Energiewende. In
2010, the German government set the following ambitious targets for the property
sector (Energy Concept 2050):
By 2020: a reduction of 20% in Final Energy Consumption
By 2050: a reduction of 80% in Primary Energy Consumption (also called
near-zero-carbon building stock)
In order to meet these targets, Germany has this year also implemented the EU
Directive on the Energy Performance of Buildings, which requires that, from the
year 2021 onwards, every new building must operate without fossil fuels and
with near-zero emissions. However, new building will not be enough to reduce
emissions in the building sector, because the German construction rate, i.e.
new buildings compared to the building stock, is currently around 0.4% per

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2013 EMF HYPOSTAT

year. Therefore substantial energy savings will have to come from the existing
building stock.
Over the last few years, investments have been shifting from construction to
renovation. In 2011, EUR 307 bn went into the building sector, 60% (EUR 183 bn) of
which was invested in the stock (BMVBS, 2012). At the same time, green renovations
are becoming more and more popular. As Table 1 shows, 29% (EUR 53.5 bn) of all
building stock investments can be classified as green investments, in the sense that
building refurbishment includes measures which explicitly improve energy efficiency.
Although green investments are increasing, climate targets are still unlikely to be
reached. One reason for this is the predominance of partial renovations. As a study by
the Institut fr Wohnen und Umwelt (Institute for Housing and the Environment) points
out, most investors restrict their investments to specific energetic improvements,
such as modernising the heating system, renewing the roof, cellar or wall insulation
or replacing windows (IWU, 2010). Only a small fraction of investors be they
households or enterprises undertake all the measures necessary to reach the
governments planned energy consumption level. As a result of this preference for
piecemeal refurbishment, the overall renovation rate amounts to only 1% of the
stock, while it would have to be twice this to attain the climate goals (Henger and
Voigtlnder, 2012). One important reason for this reluctance to fully modernise
residential properties lies in the limited profitability of energetic investments.

Table 1

Share of green building stock investments (in EUR)

Residential
buildings
2010

2011

Non-residential
buildings
2010

Construction
work on existing 118.9 bn 125.3 bn 55.6 bn
building stock
Green invest38.6 bn 38.4 bn 14.3 bn
ments (share in
(33 %)
(31 %)
(26 %)
brackets)

2011

Total
2010

2011

57.8 bn 174.5 bn 183.2 bn

15.1 bn
(26 %)

52.9 bn
(30 %)

53.5 bn
(29%)

Source: BMVBS (2011, 2012)

3. Profitability of energetic building

refurbishments
The profitability of energetic building refurbishments depends on technical, socioeconomic and regulatory factors (e.g. ASBEC, 2012). One of the most important
technical criteria is the current energy performance of the building in question, which
is determined by its age and the date of the last renovation. The type of building, e.g.
detached or semi-detached, also affects the energy saving potential. Socio-economic
factors such as energy prices and interest rates set the general financial framework
for the investment. The many studies which have focused on such factors find that
higher energy prices, a shorter amortisation period, and the prospect of increasing
the property value or rent are key drivers for investing in a retrofit (e.g. Kok et al.,
2011). Regulatory factors include building codes and regulations, financial incentives
and the availability of information (e.g. energy certificates). In Germany, minimum
performance requirements and energy standards are defined in the German Energy

Green investments and green mortgages in Germany

200

100

Chart 2

ARGE 2011 (KfW 70)

ARGE 2011 (KfW 100)

empricia / LUWOGE 2010

(1949-1957)

empricia / LUWOGE 2010

(1919-1948)

Dena 2010 (KfW 55)

Dena 2010 (KfW 100)

ARGE 2011 (KfW 70)

E nergy efficiency costs in relation to total costs

(Costs in EUR/m)

800
Full costs
Energy efficiency costs

700
600
500
400
300
200

ARGE 2011 (KfW 70)

ARGE 2011 (KfW 100)

empricia / LUWOGE 2010

(1949-1957)

empricia / LUWOGE 2010

(1919-1948)

Dena 2010 (KfW 55)

Dena 2010 (KfW 100)

ARGE 2011 (KfW 70)

ARGE 2011 (KfW 100)

100

Source: Henger and Voigtlnder (2012)

Chart 3

 o energetic building refurbishments pay off?

D
(Costs and energy savings in EUR/myr)

60
Full costs - subsidy (kfw)
Energy efficiency costs - subsidy (kfw)
Energy savings

50
40
30
20

ARGE 2011 (KfW 70)

ARGE 2011 (KfW 100)

empricia / LUWOGE 2010

(1949-1957)

empricia / LUWOGE 2010

(1919-1948)

Dena 2010 (KfW 55)

Dena 2010 (KfW 100)

10
ARGE 2011 (KfW 70)

Germany has a range of policies and programs which support a variety of different
measures to improve energy efficiency. Though Germanys building stock is
already relatively efficient, there remains such a huge savings potential that the
German government has made the building sector a focus of its climate change

ARGE 2011 (KfW 100)

Source: Henger and Voigtlnder (2012)

4. Green mortgages and more:

the German KfW programs

IWU for BSI 2008

(1958-1968)

ARGE 2011 (KfW 100)

The conclusion to be drawn here is that the profitability of energetic refurbishments

essentially depends on whether they are carried out in combination with alreadyplanned or necessary modernisations, i.e. within the renovation cycle. Normally,
residential buildings are completely renovated every 30 to 40 years. If energetic
measures are included in this investment, there is a chance of recouping the
investment if (i) homes are in a bad condition, i.e. energy consumption is high,
(ii) (KfW) subsidies can be claimed, and (iii) investment costs can be shifted to
tenants (by increasing rents).

300

IWU for BSI 2008

(1958-1968)

Chart 3 compares the costs with the energy savings shown in the first two charts.
For their comparison, Henger and Voigtlnder (2012) translated the costs into a
loan (in other words into an annuity) for a period of 20 years at an interest rate of
4%. They also had to assume a price for energy, which was done by choosing the
current price of seven eurocents per kilowatt hour. They also account for the KfW
subsidies, including soft loans (discussed in the next section). The amount of the
subsidy depends on the standard achieved. In 2012, KfW paid up to 20 % of the
total costs up to a maximum of EUR15,000. The KfW schemes are also translated
into an annuity and are subtracted from the costs. In Chart3 the full costs are
displayed in blue, the energy efficiency costs in yellow, and the cost saving in green
bars. It can be seen that the full costs are too high ever to be recouped with future
energy savings. Under these circumstances, energetic refurbishments should not
be carried out outside the regular renovation cycle of a building. However, the
result is quite different for the energy efficiency costs, which are much closer to the
energy savings. In 7 out of the 10 calculations the energy savings are higher than
the energy efficiency costs reduced by the amount of the subsidy.

End energy demand before

End energy demand after

IWU for BSI 2008

(1958-1968)

As Chart 2 illustrates, expenditures on energy efficient refurbishments also

differ significantly across buildings and measures. The difference between
the total costs and the costs for saving energy or achieving energy efficiency
also varies greatly. Total costs are all investments for the whole refurbishment,
whilst energy efficient costs are only those connected with the energy savings.
For example, triple-glazing can represent a substantial proportion of energy
efficiency costs (e.g. 50%), depending on the exact price of new windows with
only a single pane. As Chart 2 shows, the energy efficiency costs are at most
50% of total costs.

400

IWU 2008 (1969-1978)

Chart 1 shows selected case-study calculations carried out over the last few
years. Although not representative, they give a good impression of the range of
energy savings. There are 10 calculations from the 6 most important case studies
conducted on this issue in recent years in Germany (Henger and Voigtlnder, 2012).
The first four calculations refer to single-unit houses, the remaining six to multi-unit
buildings. Almost all examples concern buildings built between 1945 and 1970.
The energy requirement immediately before a refurbishment is in most cases
over 200 kwh per square meter and year. After an energetic refurbishment the
final energy demand falls below 100. In some cases, where high KfW standards
have been met, the energy demand is substantially lower. In all cases, the energy
savings greatly exceed 50%, and are quite often in a range of 70 to 80%.

 ow much energy can be saved by refurbishment?

H
(Demand in kwh/myr)

IWU 2008 (1969-1978)

The average energy consumption is 172 kWh/myr for a single family house
(weather-adjusted and including hot water) and 145 kWh/myr for multi-unit
buildings, some 20 % less (ARGE, 2012). The consumption level is considerably
higher for homes built before 1979, when the first Energy Saving Ordinance was
introduced. Without renovation, their energy consumption average 220 kwh/
myr. The current minimum standard for new buildings is 90 to 100 kWh/myr.

Chart 1

IWU 2008 (1969-1978)

Saving Ordinance (Energieeinsparverordnung EnEV). Financial incentives include

subsidies and tax deductions. Such measures are particularly effective in lowering
the key barriers to refurbishment: the high upfront investment costs and the long wait
for a return. The strategies adopted and the level of public funding vary considerably
from country to country (Hamilton et al, 2010).

Source: Henger and Voigtlnder (2012)

2013 EMF HYPOSTAT |

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Green investments and green mortgages in Germany

policy. The governments central strategy for reducing carbon emissions takes
the form of subsidies and soft loans (green mortgages) granted by the KfW,
which itself receives subsidies to offer loans below market prices. In Germany,
mortgages are typically offered by private banks, but these private mortgages can
be combined with KfW programs, so that in fact a significant part of the investment
is financed by the KfW. The most important of the KfWs programs with respect
to energy efficiency are Energieeffizient Sanieren (Energy-Efficient Renovation)
and Energieeffizient Bauen (Energy-Efficient Construction), which are part of the
governments CO2-Gebudesanierungsprogramm (CO2 Building Refurbishment
Program). Besides comprehensive refurbishments this program also subsidises
single measures, such as the insulation or replacement of building components
or upgrades of the heating system. To meet the technical requirements of the
program, a certificate from an approved energy consultant is required (Schrder
et al. 2011). The KfW subsidies are not meanstested.
Compared to similar programs in other countries, the KfW programs are financially
well endowed. Chart 4 shows the federal expenditures for the KfW programs.
The recent volatility stems from the fact that this support for green mortgages
is part of the federal budget and must therefore always compete with other
government policies, such as cutting taxes, investing in traffic infrastructure or
increasing social security benefits. Spending rose significantly in 2006, when
the decision was made to supplement the soft loans with a subsidy program for
those not needing a loan. Investors have to decide which kind of support is more
helpful for them. Table 2 offers an overview of the programs offered by the KfW
for renovations. Soft loans are combined with a redemption subsidy in Program
151. Alternatively, homeowners can apply for a subsidy within Program 430. The
amount of the subsidies varies according to the energetic measures undertaken.
All in all, the programs have an important impact on all green investments in
the property stock. For instance, nearly half of all low carbon refurbishments in
Germany receive support from the Energieeffizient Sanieren program (see also
Schimschar et al., 2011).

Chart 4

F ederal expenditures for the KfW programs

for energy-efficient renovation and construction
(In EUR bn)

2500
2000
1500

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

500

Source: Henger and Voigtlnder (2012)

Table 2

5. Green mortgages in other countries

Green mortgages are based on the idea that energy efficient measures reduce
the future expenditures of homeowners, enabling them to pay higher monthly
mortgage rates. In other words, they allow borrowers to qualify for bigger loans, as
lenders permit the estimated savings on utility bills to be added to the borrowers
income. However, there is no standard definition of green mortgages. Some
countries, such as Belgium and the Netherlands, have started national programs
to promote and to stimulate energy efficiency. In most other countries, though no
such formal programs have yet been implemented, a market for green financial
products has been established and individual lenders will offer a discount on their
standard variable rate if your home is energy efficient or you are borrowing to
invest in energy efficiency improvements. As the KfW subsidies in Germany are
available independently of an applicants income, they are not, strictly speaking,
green mortgages. However, as most of the loans are not drawn directly from the
KfW, but come from a credit institution, they manifest similar characteristics.
In the United States, the Energy Policy Act of 1992 introduced two types of green
mortgage one for new construction and one for existing buildings. The Energy
Efficient Mortgage (EEM) for home buyers uses energy savings from a new
energy-efficient home to increase the home-buying power of consumers and
capitalises the energy savings in the appraisal. The Energy Improvement Mortgage
(EIM) for home owners finances the energy upgrading of an existing home using
monthly energy savings. For both types of mortgage, it is necessary to have an
evaluation of your homes energy efficiency and expected energy costs with the
Home Energy Rating System (HERS) (Amram et al., 2010). This national scheme
is flanked with several state- and lender-specific loan programs. Homebuyers
can also benefit from tax breaks as the interest on mortgage payments is tax
deductible. Although this financing scheme has been available in the United States
for 20 years, the uptake has remained low (ASBEC, 2010), possibly due to the
relatively modest interest rate reductions and the fact that the soft loans are not
combined with (redemption) subsidies, as is the case in Germany.
In Australia, the government launched a Green Loans Programme in 2009 to assist
residents with energy efficient refurbishments of their existing homes (ANOA, 2010).
One element of the program is a loan subsidy that covers all the interest on loans
from participating financial institutions up to AUD 10,000 for four years. As in the US,
applicants must have a Home Sustainability Assessment conducted by certified
assessors. Experience with the program suggests that it has encouraged the renovation
of energy and water systems, but has not so far proved a strong driver for energy
efficient refurbishments, e.g. retrofit measures. The reason for this is that the rebates
are given only for a narrow set of individual measures rather than comprehensive
refurbishments. However, detailed information on the effects of this program is lacking.

1000

There are also other kinds of funding schemes, such as the market incentive
programs offered by the Bundesamt fr Wirtschaft und Ausfuhrkontrolle (Federal
Office of Economics and Export Control - BAFA), which is more focused on renewable
energy. In addition, at a local level there are over 500 different programs offered
by regional banks and utility companies (Henger and Voigtlnder 2012), but even
their total impact is low compared to the KfW programs.

KfW conditions depending on different energy efficiency standards

Program 151
Redemption subsidy

Efficiency House standard

115
100
85
70
55
Individual measures
Source: KfW 2013a, 2013b

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2013 EMF HYPOSTAT

Proportion of loan that can be

covered by KfW subsidy (%)

Maximum redemption subsidy

per housing unit (in EUR)

17.5%
12.5%
7.5%
5%
2.5 %
--

13,125
9,375
5,625
3,750
1,875
--

Program 430
Subsidy
Proportion of investment costs
Maximum subsidy per housing
that can be covered by KfW
unit (in EUR)
subsidy (%)
10%
7,500
12.5%
9,375
15%
11,250
20%
15,000
25 %
18,750
10%
5,000

Green investments and green mortgages in Germany

6. Conclusion
Over the last few years, many countries have implemented programs to encourage
people to purchase greener homes and to make renovations to existing homes greener.
This article has focused on Germany, describing the extent of green investments and
discussing the availability of green mortgages. With the KfW programs, offering either
direct subsidies or indirect subsidies combining green mortgages with redemption
subsidies, Germany has a more sophisticated subsidy scheme for green investors
than most other countries. The programs are continuously monitored, and adjusted
if necessary, but nevertheless offer scope for improvement. In particular, the role
of the KfW itself could be questioned, since state-owned enterprises of all kinds
tend to waste money by creating oversized administrations. Instead of funding and
operating a state-owned bank, the government could directly subsidise the granting
of green mortgages by private banks, awarding subsidies, for instance, to those
banks offering their customers the best conditions. Thus, competition would insure
that public money is used most efficiently. A second and more important drawback
of the German approach is the unpredictable funding of green mortgages from the
federal budget. With constant debate on cutting subsidies of all kinds, investors
can never be sure whether the federal government will grant subsidies for green
investments the following year, and it is difficult for them to draw up long-term plans.
Moreover, even the current level of funding is insufficient to reach the governments
climate goals. Despite subsidies amounting to EUR 1.5 bn per year, only half of the
necessary green investments have been made. The primary reason is that most
such investments offer investors a poor return, even if KfW programs are included in
their calculations. To boost the renovation rate, therefore, even more subsidies and
probably other kind of incentives, such as taxes based on energy consumption will
be needed to ensure that the climate goals are reached.

KfW, 2013b, Energieeffizient Sanieren Investitionszuschuss. Programm 430.

http://www.kfw.de/kfw/de/Inlandsfoerderung/Programmuebersicht/
Energieeffizient_Sanieren_-_Investitionszuschuss/Konditionen.jsp
Kok N., M. McGraw and J. M. Quigley, 2011, The Diffusion of Energy Efficiency in
Building, American Economic Review, 101(3), 7782
Klinckenberg F., M. F. Pirie and L. McAndrew, 2013, Renovation Roadmaps for
Buildings, A report by The Policy Partners for Eurima, London
Schimschar S., K. Blok, T. Boermans and A. Hermelink, 2011, Germanys path
towards nearly zero-energy buildings Enabling the greenhouse gas mitigation
potential in the building stock, Energy Policy 39(6), 3346-60
Schrder M., P. Ekins, A. Power, M. Zulauf and R. Lowe, 2011, The KfW experience
in the reduction of energy use in and CO2 emissions from buildings: operation,
impacts and lessons for the UK, UCL Energy Institute, London School of Economics
Housing and Communities

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2013 EMF HYPOSTAT |

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