The biggest problem dealing with financing energy efficiency projects is a large upfront investment needed. Especially for smaller municipalities and for those which want to keep flexibility and responsibility it is a big barrier for financing sustainable and profitable projects.
Eventually, many municipalities, whose own funding resources are limited, obtain debt which is paid back from the municipal budget, e.g. tax revenue of municipalities, saved energy costs etc.
Municipalities can sometimes obtain low-interest loans from low-interest rate lending programs offered by a national development banks, dedicated funds, or by the European banks and funds such as the European Investment Bank(EIB), European Bank for Reconstruction and Development (EBRD) or the European Energy Efficiency Fund. These are widely used for energy efficiency investments by municipalities in Central Europe.36
However, these opportunities are not always available on the national level, or, the municipality is not able to reach for them from various reasons including lack of experience, capacities or limited budgets of public lending programmes.
As a result, commercial loans are obtained at a market interest rate from commercial banks for municipalities´projects, including financing energy efficiency. The interest rate doesn´t depend on anything else but the credit record of the concrete municipality as assets given under energy efficiency projects are irrelevant for obtaining the loan.
However, in this situation there are several tips municipality can follow so that the commercial loan was eventually obtained for affordable interest rate such as:
- Utilizing existing credit record history the municipality has at a concrete bank. Applying for the loan from a bank where the municipality has its banking accounts may increase the credibility of municipality and willingness of the bank to provide the loan with moderate conditions.
- Consolidation of existing bank loans the municipality already has is another way how to improve current cash-flow and in some cases the municipality after the consolidation and with an additional bank loan for an energy efficiency project may pay even lower instalments than before the consolidation.
- Public procurement for a bank loan also increases the likelihood of getting an affordable bank loan with lower interest rates than is actually usual.