The energy transition is a defining challenge of our time, requiring urgent action at all levels. Cities and regions are at the forefront, yet many still rely heavily on grants and subsidies to fund climate initiatives. With the EU’s binding climate neutrality targets for 2050 – and key milestones in 2030 and 2040 – it is clear that public funds alone will not suffice.

The urgency of rethinking local-level financing

According to Giulia Pizzini, Senior Energy Expert at the Institute for European Energy and Climate Policy (IEECP), around most of the required investment for the energy transition must come from private capital. “Exact figures from sources like the EIB and the European Commission vary, but they agree in saying that around 80% of this money needs to come from private capitals. It cannot be coming from grants and subsidies,” she stated. This highlights the urgent need for cities to explore alternative financial mechanisms beyond traditional public funding. Local authorities must embrace innovative financing solutions to accelerate the transition while maintaining financial sustainability.

Cities are key drivers of climate action, yet they face an immense financing gap. For example, Poland is the biggest recipient of EU cohesion policy funds, yet the scale of the energy transition far exceeds available resources. “In Poland, according to the available data, the total cost of the energy transition is estimated at the level of €350 billion,” says Andrzej Urbanik, Policy Officer at the European Commission’s Directorate-General for Regional and Urban Policy (DG REGIO), “whereas the total allocation of ERDF for the seven years period in this country is only €47 billion. The needs are 7 times higher than the resources available.”

This stark imbalance highlights why grants alone cannot support the necessary investments, and why financial instruments must play a larger role in a viable long-term strategy. Cities must tap into financial instruments such as Energy Performance Contracts (EPCs), revolving funds, green bonds and crowdfunding to leverage private capital.

Some cities are already leading the way. In The Hague, for instance, a revolving fund for renewable energy has allowed the city to invest in geothermal heating projects, helping it move toward climate neutrality while ensuring financial sustainability. However, challenges remain, particularly in scaling such models.

The barriers local authorities face in using innovative financing

Despite the clear need for new financing models, many local authorities struggle to adopt them. One of the biggest obstacles is the lack of expertise and capacity within municipal governments. Many small and medium-sized municipalities simply do not have the financial expert knowledge.

“In a small municipality of 5,000 people, probably there is one or two persons in the municipality working on urban planning, finding the funds, and managing the technical office to give the permits for building constructions,” explained Pizzini. Cities’ resources are often stretched thin and without dedicated financial expertise, local governments repeatedly default to the mechanisms they know best: grants and subsidies.

Regulatory and administrative challenges also play a significant role. Energy Performance Contracting (EPC), for instance, has been successfully implemented in some countries but remains inaccessible in others due to national level legislation. “Some local authorities in some countries can benefit from the EPC model amazingly well, and for some it’s absolutely a no-go yet,” said Sylwia Słomiak, Senior Climate Finance Advisor at Eurocities. Unclear national regulations and inconsistent EU rules create further complications, making it difficult for cities to know whether certain financial instruments are even viable for them.

Petra Bijvoet, Senior Strategic Advisor for the Energy Transition & European Affairs at the Department of Urban Development in the City of The Hague, highlighted another issue faced by cities: fragmented funding streams. “We have several revolving funds that really help projects succeed, but the challenge is that they often target only one specific issue, making it difficult to integrate broader urban needs into a single investment package,” she noted. A more holistic approach to financing could allow municipalities to align multiple sustainability initiatives under one strategy, improving efficiency and impact.

Another major barrier is risk aversion and political concern. Many municipalities fear that engaging with private investors could lead to financial arrangements that disproportionately benefit private entities.

In Slovenia, for example, municipalities initially hesitated to engage with EPCs because they feared losing control over public funds. However, after national ministries developed clear guidelines and reassured local governments about the financial structure, uptake of EPCs dramatically increased.

“We started with very small projects, like changing only one boiler room, to show them the savings and the short payback period. After showing the first benefits, we went bigger,” explained Vlasta Krmelj, Mayor of Selnica ob Dravi and Member of the European Committee of the Regions. This approach gradually built trust and demonstrated the advantages of innovative financing.

What local authorities need to rely more on innovative financing

To confidently embrace innovative financing, cities require a combination of knowledge, support, and structural changes. First and foremost, they need capacity-building programmes that can equip municipal staff with the necessary financial expertise.

One crucial aspect of this is creating opportunities for cities to learn from each other. Peer-learning initiatives, such as those developed under the Prospect+ project, have proven to be invaluable in helping cities navigate complex financial mechanisms. “Only those who have implemented some schemes know what the barriers, the pros and cons of implementing these schemes are, and can really support, not just in theory but also in practice, other colleagues from other local authorities,” said Pizzini. By exchanging knowledge and best practices, cities can accelerate their ability to implement innovative financing instruments with greater confidence.

Another aspect of capacity-building is ensuring that cities have access to expert financial support, whether through structured programmes or financial advisors who can help municipalities navigate the complexities of financing mechanisms. “We cannot expect each public authority to develop the competences to manage an EPC contract or to do the financial engineering that is behind that,” stated Pierluca Merola, Policy Officer at the European Commission Energy Efficiency Policy and Financing Unit, and Member of the European Commission Directorate-General for Energy (DG ENER). Programmes like the European Investment Bank’s ELENA initiative provide advisory support to cities, but there is a need to continue and scale up these and similar efforts.

Clear regulatory frameworks are another essential component. Many financing models remain underutilised simply because municipalities are unsure of how they fit within national and EU regulations. In Slovenia, for example, EPC adoption surged after ministries created official guidelines clarifying legal uncertainties, such as whether EPC investments should be counted on or off balance sheets. Similar clarity is needed for other financial instruments.

Aggregation and scaling also play a critical role. Some financial mechanisms, such as green bonds, require a minimum investment volume to attract investors. Small municipalities often struggle to reach this scale alone. “Development banks, can play the role of pooling together different cities’ project needs and therefore getting the volume that sometimes is needed,” explained Anna-Maria Spyriouni, Head of EU Affairs at the Climate Bonds Initiative. By grouping resources, smaller municipalities can create investment packages that are attractive to private investors.

Marco Costa, Renewable Energy Communities and One Stop Shops Team Lead at the Energy and Sustainable Development Agency in Modena, emphasised the role of regional cooperation in unlocking innovative financing models. “In the Emilia Romagna region, we launched 15 energy community pilots in parallel, allowing municipalities to share methodologies and reduce the risks of pioneering new schemes,” he explained. Such cooperative approaches can help cities overcome institutional inertia and streamline the transition to sustainable energy models.

Finally, multi-level governance must be strengthened. Many cities express frustration that they are not heard at the national and European levels. “We have a lot of competence, but we have no direct access to the negotiating table on the European level,” said Andries Gryffroy, Member of the European Committee of the Regions. Improving coordination between local, national, and EU institutions is essential to ensuring that financial mechanisms meet cities’ actual needs.

What the European level can do to support cities

The European Union has a critical role to play in helping cities transition away from subsidies and toward innovative financing. One of the most immediate steps the EU can take is simplifying access to finance.

The current system of EU funding is often seen as overly complex and bureaucratic. As Marcin Gradzki, Director of the Climate and Air Quality Department at the City of Warsaw, noted, “We have talked about the availability of funds, the stream of funding, the amount of different sources, etcetera. But at the same time they are so inconvenient for the end users.” Streamlining application processes and reducing regulatory fragmentation across member states would make it easier for cities to tap into available resources.

Expanding advisory and technical support is another key priority. As Cristina Mestre Martínez, Project Advisor at the European Climate, Infrastructure and Environment Executive Agency (CINEA) pointed out, “Collaboration among peers is absolutely essential. We must continue to provide platforms where cities can exchange knowledge and co-develop solutions that are tailored to their realities.” This reinforces the importance of long-term capacity-building initiatives like Prospect+ that enable cities to learn from one another while also improving their access to financial and technical expertise.

“The technical expertise is lacking. We need to do more to bring the capacity there,” said Bianca Faragau Tavares, Institutional Policy Officer at theEuropean Investment Bank. Increased funding for advisory programmes, such as ELENA, would help cities develop structured investment plans and navigate the complexities of innovative financing.

Ryan McManus, Vice President of Bankers Without Boundaries, stressed that cities need to be equipped to negotiate effectively with private investors. “So that local authorities are negotiating from a position of strength rather than weakness. Suddenly the private sector must take on a suitable amount of the risk for the reward that they’re getting,” he said. By empowering cities with financial literacy and strategic advice, the EU can help local authorities maximise the benefits of private capital without exposing them to undue risks.

Simplifying administrative procedures and reducing red tape is essential to making financial instruments more accessible for cities. Many municipalities, particularly smaller ones, struggle with the administrative burden of applying for and managing innovative financing schemes. Complex regulatory frameworks and bureaucratic hurdles can deter cities from seeking alternative financial solutions, even when they could provide long-term benefits.

“For example, in the context of energy performance contracting, it can take years to develop the contract between public and private entrepreneurs, and a lot of energy and money goes to the discussions and not to the actual renovations,” noted Gryffroy. By streamlining processes and reducing the complexity of compliance requirements, the EU can help cities focus their resources on implementing climate action rather than navigating unnecessary administrative challenges.

Finally, enhancing collaboration between cities and financial institutions is essential. Many financing models fail simply because they are not designed with municipal realities in mind. Strengthening these partnerships will be key to ensuring that financial products are fit for purpose.

Making the transition happen

Cities must move beyond subsidies if the energy transition is to succeed. The barriers to adopting innovative financing are real but not insurmountable. By building financial capacity, simplifying regulations, and fostering collaboration, cities can accelerate their climate action efforts.

The Prospect+ project has demonstrated that peer learning and knowledge exchange are essential. Now, it is up to policymakers at all levels – local, national, and European – to act on these insights and create the conditions that will allow cities to lead the energy transition.

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The insights in this article come from the final event of the Prospect+ project titled ‘Rethinking Funding at the Local Level: Moving Beyond Subsidies to Fast-Track the Energy Transition’ and held in Brussels on 11 March 2025.

Prospect+ has played a key role in supporting cities to exchange knowledge and build capacity on innovative financing for the energy transition. If you are interested in learning more about the project and its outputs, visit the project website.