As Europe accelerates its transition to climate neutrality, cities are stepping up to the plate. However, this green transition comes with a significant challenge: funding. With public subsidies stretched thin, the European Commission estimates that traditional funding methods will only cover 20–30% of the investment needed for the scale of climate and energy transformation required. As Sylwia Słomiak, Senior Climate Finance Advisor at Eurocities, states: “Cities, public authorities and regions need to start looking elsewhere.”

This reality forms the backdrop of the European Commission’s work on the forthcoming Clean Industrial Deal, a framework that’s promising to strengthen Europe’s industrial competitiveness while meeting ambitious climate goals. Cities are testing innovative financing models that reduce reliance on subsidies, lower energy costs, and foster long-term sustainability. However, regulations and a lack of resources still constitute barriers for more cities to embrace these models.

Funding mix in Valladolid

Valladolid set out to tackle a familiar challenge faced by many European cities—how to retrofit ageing residential areas to improve energy efficiency, reduce emissions, and enhance residents’ quality of life.

The project, coordinated by CARTIF, focused on a 1960s residential district spanning 24,000 square metres and housing over 1,000 residents. The buildings suffered from inefficiencies, such as heat loss and inadequate insulation, which led to fluctuating indoor temperatures and high energy consumption. Additionally, the district relied on an outdated oil-based heating network that further compounded its carbon footprint.

The retrofit was financed through a combination of traditional subsidies and innovative financing models. Public funds, including European Commission grants and municipal budget, covered 75% of the total costs. For the remaining 25% of costs, the city facilitated a blend of innovative financing:

• An Energy Performance Contract (EPC) with Veolia, an Energy Service Company (ESCO).
• A soft loan negotiated with local banks.

Cities that may be hesitant to trust new financing solutions can get inspired by Valladolid’s mixed model.

A quick look at Energy Performance Contracting (EPCs) and how it works

Energy Performance Contracting (EPCs) is an innovative way for cities and organisations to fund energy efficiency projects without upfront costs. Take, for instance, a fictional case of a mid-sized city aiming to modernise its ageing municipal library. With an annual energy bill of €50,000, the library’s outdated heating and lighting systems waste both energy and money. However, the city lacks the budget to fund the €100,000 needed for comprehensive upgrades.

Enter the Energy Service Company (ESCO). The ESCO and the city negotiate a contract, the EPC, which states that the ESCO will finance and implement energy-saving measures—installing LED lighting, upgrading the heating system, and adding smart energy management tools—guaranteeing that these changes will reduce the library’s energy costs by 40%, or €20,000 annually. Under this EPC agreement, the city continues paying its current energy budget of €50,000 per year. However, the energy savings generated by the project are redirected to the ESCO to repay the initial investment.

This arrangement lasts for five years, during which the ESCO monitors the building’s performance to ensure the promised savings are achieved. If the savings fall short, e.g. because the energy management system works sub-optimally, the ESCO needs to improve the system before the city pays. Once the contract period ends, the library’s energy bill drops permanently to €30,000 per year, allowing the city to reap the full benefits of the upgrades.

Megan Gignac, from the Energy Agency of Upper Austria (ESV), emphasises that thorough preparation and trust are key to EPC success. Cities must define their goals clearly, understand their energy data, and work transparently with their ESCO partners. “EPC isn’t just a contract—it’s a long-term partnership,” she explains. Starting small and scaling up, she adds, can help cities gain confidence and lay the foundation for larger projects.

Regional and national support can also help cities and other entities take the leap and trust EPCs. For example, the Upper Austria region is an excellent example of effective strategies to support cities. Energy Performance Contracting has been very popular in the region thanks to professional facilitation and effective incentives provided by the regional government. This approach should inspire regions across the EU, where lack of regional and national support remains a major bottleneck.

One of the reasons EPC has gained popularity is its flexibility, allowing the contracts to be tailored to a variety of projects and needs. From short-term energy management improvements, through lighting upgrades with payback periods of 5–7 years, to more complex building retrofits spanning 15–20 years, EPC contracts can adapt to the scale and nature of the energy savings involved. This adaptability makes them an appealing option for municipalities and organisations with diverse infrastructure challenges.

The EPC model is particularly attractive because it removes financial barriers for clients while transferring technical and financial risk to the ESCO. EPC also guarantees results, as the ESCO’s profits depend on achieving the promised savings or energy production, in case of installation of renewable energy systems. This makes the model a low-risk, high-impact option for cities looking to implement energy-efficient solutions without straining public budgets.

Building trust and engagement

Valladolid’s success hinged on building trust with the residents. Convincing nearly four hundred families to co-fund the upgrades required extensive communication and collaboration. CARTIF’s team held workshops and meetings to ensure residents understood the long-term benefits of the investment, including improved comfort and lower energy bills. “We did a lot of work to convince the owners and to co-design actions and the financial models with them, this was crucial work,” says Miguel Ángel García-Fuentes, Associate Professor at University of Valladolid in Spain. The municipality consistently showed support for the project and highlighted how it aligned with the city’s broader climate goals.

This approach paid off: thermal losses in the district have been reduced by almost 80%, and indoor temperatures are now stable between 19–25°C, compared to the previous range of 15–29°C. Meanwhile, the shift from oil to biomass in the heating network has cut emissions and reduced peak power demand. The ESCO, Veolia, provides the energy supply, operations and maintenance, which will be repaid over an 18-year contract through guaranteed energy savings.

Models for inspiration

Outside of Valladolid, other cities and regions across Europe are testing creative ways to fund their climate and energy transitions. In Upper Austria, for example, over 300 Energy Performance Contracting (EPC) projects have been carried out since the 1990s, bringing in €100 million in investments and helping make significant energy savings. One impressive project saw streetlights switched to high-efficiency LEDs, cutting electricity use by more than 50% and saving on both energy and maintenance—thanks to a local electrician stepping up as the Energy Service Company (ESCO).

Meanwhile, in San Lazzaro di Savena, Italy, a Renewable Energy Community (REC) brought residents and the local council together, to use solar energy produced by panels on municipal buildings. This reduced their reliance on the national grid, generated energy savings and incentive benefits, and also built stronger community ties.

“Start small but think big,” Marco Costa, Renewable Energy Community Team Lead at Energy and Sustainable Development Agency Modena in Italy, advises cities. Transparent communication, clear incentives and local engagement are key to success. By leveraging EU and national schemes, municipalities can make RECs financially viable while delivering tangible benefits to their communities.

These examples show that cities can tap into different financing options to meet their climate goals, all while bringing people together and making positive changes in their neighbourhoods.
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The examples featured in this article were shared during a recent Prospect+ webinar, which focused on financing the energy transition through approaches like Energy Performance Contracting (EPC) and blended finance.

Want to dive deeper into these innovative financing approaches? Watch the webinar recording, explore the presentations and join the Prospect+ Community of Practice to connect with experts and peers across Europe.

Whether you’re retrofitting public buildings, exploring citizen finance, or planning your first renewable energy community, Prospect+ offers the tools, resources, and support to help you achieve your city’s climate goals.

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