When subsidies aren’t enough for local governments to fund all their ambitions, there are several attractive alternatives that come in the form of innovative finance, from green bonds to crowdfunding. Through our EU-funded Prospect+ project, we have worked with our partners to explore these approaches.
Below is a brief overview of each method we explored, explaining what the method is, how it works, as well as the advantages, targeted sectors, and an example for each. Remember, you can still join the Prospect+ communities of practice to continue to explore these methods with other cities and investors. If you’ve tried, or tried to try any of these methods, you can contribute to our policy recommendations to the EU Commission by telling us about your experience through this survey.
You can also check out part of a Prospect+ webinar examining some of these tools here, and another one here.
Finance by residents
Prospect+ has explored two types of funding by residents, crowdfunding and cooperatives.
Crowdfunding
Crowdfunding means pooling funds from individuals, groups, or organisations to support a project of common interest. It has gained momentum in recent decades due to the rise of the internet and digital technology, which allow project developers to promote their initiatives and gather contributions online. Crowdfunding is a form of citizen financing, offering transparency, direct communication with stakeholders, and the possibility of rapid project implementation.
A key advantage of crowdfunding is its democratic nature, allowing anyone to participate. It also improves financial efficiency by reducing intermediaries, making it a more streamlined way to fund projects. Crowdfunding is typically used for small-scale or short-term projects, which are often attractive to private investors.
For instance, the Windcentrale platform in the Netherlands allows locals to invest in windmill ownership, with the energy generated being delivered to their homes as a return on investment. Another example is the Green Energy Cooperative in Croatia, which crowdfunded the installation of a solar panel system on a public building in Križevci.
Read the cheat sheet here.
Cooperatives
Cooperatives are autonomous organisations with voluntary membership, designed to help members work towards a shared goal. In the energy sector, these cooperatives are often set up as not-for-profit community organisations. Residents invest collectively through a cooperative body to manage and implement energy-related projects. The cooperative typically handles all administrative and operational tasks, raising funds through membership fees and potentially government or donor support.
One of the primary benefits of cooperatives is their community-based structure, which enhances access to financing and business opportunities. They are built on democratic governance, empowering members and ensuring the sustainability of projects. Cooperatives can also involve long-term initiatives, offering mid-to-long-term returns on investments.
For example, the Cooperative Energy of Mouscron in Belgium is jointly owned by the city and its residents, supporting households in installing rooftop solar panels by subsidising upfront costs. Another example is the Energy Cooperative Company of Karditsa in Greece, which focuses on using agro-biomass to meet local renewable energy needs and aims to achieve energy self-sufficiency.
Read the cheat sheet here.
Energy performance contracting
Energy performance contracting is a scheme where an energy service company manages all aspects of the project and guarantees energy savings. The company finances the improvements based on the savings they will generate in the future, meaning they only receive payment and a return on their investment once the energy savings are achieved.
One of the major advantages of energy performance contracting is that the investment risks are transferred to the company, which guarantees the energy performance. Typically, no upfront capital is required from the client, and the scheme can also include non-energy solutions, making it a flexible option for public and private projects alike.
An example of energy performance contracting in action is Ljubljana’s work with the company Resalta to make local schools more comfortable and energy efficient. Another example is Rotterdam’s Green Buildings project in the Netherlands, which combines funding sources for public building improvements. These contracts are usually long-term, lasting between eight and 15 years, and the company is responsible for both the operation and maintenance of the energy-saving measures.
Read the cheat sheet here.
Internal contracting
Internal contracting is a financing scheme where public authorities fund energy-saving measures using their own municipal budget. It operates as a self-sustaining mechanism: Cost savings from energy efficiency improvements are recorded in a separate account and reinvested into future projects. This system allows municipalities to offer zero-interest loans with no banking fees, making it a highly efficient way to use public funds, especially for authorities with budget constraints.
The key advantages of internal contracting include its ability to reinforce itself financially, as savings continuously support new projects. It also enables rapid implementation of energy-saving measures without needing external consultants, keeping expertise and control within the public authority. This makes it ideal for smaller projects that may not attract interest from energy service companies.
A notable example is the city of Stuttgart in Germany, which has been using internal contracting since 1995 to finance energy efficiency and renewable energy projects within the city budget. Another example is Albertville, France, which used this method to refurbish public lighting with LED bulbs and solar technologies, maintaining financial autonomy by operating outside the banking system.
Read the cheat sheet here.
Green bonds
Green bonds are a type of bond designed to finance or refinance projects that deliver environmental benefits. Like regular bonds, they offer a fixed return to investors, but the key distinction is that the funds raised must be used exclusively for green projects, such as those aimed at reducing carbon emissions or improving sustainability. These bonds can be issued by city governments, utility companies, corporations managing green assets, states, or development banks.
The main advantages of green bonds include improved liquidity, their appeal to new investors, and the relatively limited need for public funding. They also enhance the credibility of an organisation’s sustainability strategy and can be applied across a range of projects. Green bonds are an attractive option for large-scale projects that have clear environmental and social impacts, while still offering reasonable financial returns.
A notable example is the city of Gothenburg in Sweden, which was the first in the world to issue green bonds aimed at funding climate change mitigation and environmental sustainability projects. Similarly, the Paris Climate Bond, issued in 2015, supports the city’s ambitious climate action plan by financing projects aimed at climate mitigation.
Read the cheat sheet here.
Guarantee funds
Guarantee funds are loan guarantees provided to lenders which serve as buffers against first losses of non-payment by the borrowers.
Guarantee funds are commonly used to facilitate private investments in energy efficiency projects by sharing credit risks between financial institutions and guarantors. They allow commercial lenders or financiers to provide loans to debtors for sustainable energy projects, with the guarantee fund stepping in to absorb risks and cover losses in case of loan defaults.
Financial institutions provide loans, and the guarantor shares the risk or covers the loss if the debtor defaults. Guarantee funds leverage public funds, reduce risks for financial institutions, and improve the perceived creditworthiness of energy efficiency projects. They are typically used for large infrastructure projects and usually require additional public support instruments for debt financing.
An example is Bulgaria’s Energy Efficiency and Renewables Source Fund, which serves as a lending institution, credit guarantee facility, and consulting company for energy efficiency projects.
Read the cheat sheet here.
Soft loans
Soft loans are a financing scheme designed to support energy efficiency projects by offering loan interest rates below the market rate, or even at zero interest. These loans are typically provided by governments through tenders or direct negotiations and often come with favourable terms such as extended repayment periods. They help improve access to financing for borrowers by matching loan conditions to their investment capacity and ability to repay the debt.
The advantages of soft loans include their scalability and potential to recycle funds, along with longer durations compared to commercial loans. They can significantly reduce the financial burden of energy efficiency investments by lowering interest rates and offering better loan conditions. This flexibility makes them easy to implement and allows them to address the higher upfront costs often associated with energy projects.
For instance, the Ecopack scheme in Belgium has offered zero-interest loans since 2012 for home energy efficiency improvements, with loan amounts ranging from €2,500 to €30,000. Another example is the Ecoreno’v programme in Lyon, which was launched in 2015 to accelerate eco-renovation in private housing by providing financial support alongside technical advice.
Read the cheat sheet here.
Revolving funds
Revolving funds work by using the cost savings or interest revenues from energy efficiency projects to continuously fund new investments, creating a sustainable cycle of financing. There are two types of revolving funds: External ones managed by third-party organisations, and internal ones, which are developed and run by a municipality.
The key benefit of revolving funds is their ability to recycle capital for future projects, making public funds more efficient. They also provide long-term sustainability for public investments and help break down financial barriers by creating liquidity. Revolving funds demonstrate the commercial viability of energy efficiency projects by showing that such investments can generate enough savings to pay for themselves over time.
For example, Lithuania’s Energy Efficiency Housing Pilot Project was established in 2001 to improve energy efficiency in the residential sector. In another case, the Czech city of Litoměřice set up a revolving fund in 2014 to reinvest energy savings into new projects, helping reduce energy costs in public buildings while maintaining the sustainability of their budget.
Read the cheat sheet here.
Third party Financing
Third-party financing is a debt financing model where funding is sourced from external parties such as investors, banks, or financial institutions, rather than from internal funds or energy service companies. In developed energy performance contracting markets, this is the most common financing model.
In this arrangement, building owners secure financing from third parties, while the energy services company guarantee energy savings, which helps with debt repayment throughout the contract duration. This allows the borrower to avail of professional and technical expertise from third parties. Meanwhile, the energy services company manages performance risks, protecting the borrower from indirect factors affecting energy prices.
The building owner (energy user) enters into an energy performance contract with an energy services company and a third-party lender (bank). The energy services company guarantees energy performance, and the third party provides the financing, which is repaid through energy savings.
For example, Energetska Obnova, in Slovenia, mobilised €50.7 million in investments, with 90% funding from the European Local Energy Assistance. This has served as a model for similar projects in Slovenia.
Read the cheat sheet here.
