EUROPEAN COMMISSION Brussels, 15.12.2021 SWD(2021) 453 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the Proposal for a Directive of the European Parliament and of the Council on the energy performance of buildings (recast) {COM(2021) 802 final} - {SEC(2021) 430 final} - {SWD(2021) 454 final}



Table of contents 1. Introduction: political and legal context 1.1 From the European Green Deal to the Fit for 55 package 1.2 The revision of the EPBD in the Renovation Wave strategy 1.3 The Energy Performance of Buildings Directive 2. Problem definition 2.1 Introduction 2.2 Barriers to energy renovations 2.3 What are the key problems? 3. Why should the EU act? 3.1 Legal basis 3.2 Subsidiarity: Necessity of EU action 3.3 Subsidiarity: Added value of EU action 4. Objectives: what is to be achieved? 4.1 General objectives 4.2 Specific objectives 4.3 Intervention logic 5. What are the available policy options? 5.1 What is the baseline from which options are assessed?

5.2 Description of the policy options 5.3 Options discarded at an early stage 6. What are the impacts of the policy options? 6.1 How the measures are grouped and assessed 6.2 Impacts of the EPBD revision as part of scenarios delivering the increased climate target 6.3 Environmental impacts 6.4 Socio-economic impacts 6.5 Impacts of e-mobility options. 7. How do the options compare? 7.1 Comparison of options 8. Preferred option 8.1 Introduction 8.2 Conclusions of the analysis and preferred option 8.3 Meeting the challenges of the proposed measures 8.4 REFIT (simplification and improved efficiency) 9. How will actual impacts be monitored and evaluated?



Glossary Term or acronym Meaning or definition AFID Alternative Fuels Infrastructure Directive AFIR Alternative Fuels Infrastructure Regulation BACS Building Automation and Control System BSO Building Stock Observatory BRP Building renovation passport CPR Construction Products Regulation CTP Climate Target Plan DHW Domestic hot water EEAG Energy and Environmental State Aid Guidelines EED Energy Efficiency Directive EGD European Green Deal EPBD Energy Performance of Building Directive EPC Energy performance certificate ESR Effort Sharing Regulation ETD Energy Taxation Directive ETS Emissions Trading System EU SILC European Union Statistics on Income and Living Conditions EV Electric vehicle GBER General Block Exemption Regulation GHG Greenhouse gases HVAC Heating, ventilation and air conditioning systems LMFH Large multi-family house LTRS Long-term renovation strategies MEPS Minimum energy performance standards MSs EU Member States Mtoe Million tonnes of oil equivalent NECP National Energy and Climate Plans NZEB Nearly zero-energy building RED Renewable Energy Directive RRF Recovery and Resilience Facility RRPs National Recovery and Resilience Plans SCF Social Climate Fund SFH Single family house SRI Smart readiness indicator ZEB Zero emission building

1. Introduction: political and legal context 1.1From the European Green Deal to the Fit for 55 package 1.1.1 Introduction

In December 2019, the Commission presented the European Green Deal . The Green Deal sets out a strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. The European Climate Law, as agreed with the co-legislators, makes the EU’s climate neutrality target legally binding, and raises the 2030 ambition by setting a target of at least 55% net emission reductions by 2030 compared to 1990. The building sector has a crucial role in achieving this goal. Buildings are the largest energy consumer in the EU, where they are responsible for approximately 40% of energy use and 36% of energy-related greenhouse gas emissions. The renovation of buildings has also a significant relevant economic dimension, as the construction industry ecosystem (buildings and infrastructure) generates about 9.6% of EU value added and employs almost 25 million people in 5.3 million firms. Based on the European Green Deal strategy and a comprehensive impact assessment, the Commission’s Communication of September 2020 on Stepping up Europe’s 2030 climate ambition (the ‘2030 Climate Target Plan’) proposed to raise the EU’s ambition and put forward a comprehensive plan to increase the EU’s binding target for 2030 towards at least a 55% net emission reduction, to be met in a responsible way. Raising the 2030 ambition now helps give certainty to policymakers and investors, so that decisions made in the coming years do not lock in emission levels inconsistent with the EU’s objective to be climate-neutral by 2050. The 2030 target is in line with the Paris Agreement objective to keep the global temperature increase to well below 2°C and pursue efforts to keep it to 1.5°C. The Climate Target Plan (CTP) 2030 identifies buildings as a major area where common EU decarbonisation efforts can be strongly increased. The analysis underpinning the CTP concluded that a mix of instruments from climate, energy and transport policies is needed. Moreover, the EPBD’s regulatory tools need to be strengthened to address the non-economic barriers that leave the renovation rate at a level which is too low and incompatible with achieving the enhanced climate and energy goals. Building renovation and improvement of their energy performance reduces energy needs and energy bills: better insulated buildings are therefore a safeguard against the volatility of energy prices and their increase, especially for more vulnerable consumers, and contribute to the goal of security of supply. In addition, the EPBD is expected to contribute to the reduction of emissions in the transport sector, specifically by enabling the charging of e-vehicles in private buildings and supporting sustainable mobility. The ‘Fit for 55 package’ was therefore conceived by the Commission as a comprehensive policy package to enable action to meet this increased ambition; the revision of the Energy Performance of Buildings Directive (EPBD) is part of the intended policy tools. The revision of the EPBD was in fact included in the 2021 Commission work programme listing all legislative acts to be reviewed under the heading ‘Fit for 55’. The analysis from the CTP was repeated in preparation of the ‘Fit for 55 package’ and the above findings and policy conclusions of the CTP were confirmed. Without a revision of the EPBD driving higher energy renovations, the net 55% greenhouse gas emissions reduction target for 2030 will not be achieved. In particular, without the policy drivers from a revised and strengthened EPBD, we will be facing a gap representing 49% of the efforts to decarbonise the building sector. This impact assessment fulfils the role of developing and assessing policy options to strengthen existing measures and tools to make them ‘Fit for 55’, and align them with climate neutrality in the long term, based on the policy conclusions of the Climate Target Plan and focusing on the areas identified in the Renovation Wave strategy. This initiative is part of a policy mix with strong interlinkages among instruments, similar to the assessment made when preparing legislative proposals for the revised Energy Efficiency Directive (EED), Emissions Trading System (ETS), the recast Renewable Energy Directive (RED II), Effort Sharing Regulation (ESR) and Alternative Fuels Infrastructure Regulation (AFIR). As such, the initiative takes into account the interplay with the other proposals, in order to maximise its complementary role. Significantly scaling up efforts in reducing emissions and increasing energy performance and renewable deployment in the building sector is imperative to achieve the EU decarbonisation goal. Nevertheless, the efforts to be made come with substantial challenges, which accompany the green transition. Lack of skilled workforce in the construction sector across its value chain, potential materials shortages and product supply-chain bottlenecks can hamper the upscaling of renovations across Europe and call for a wider policy response. In addition, with new buildings being constructed and existing buildings renovated, greenhouse gases are emitted during the extraction and manufacturing of construction materials, and during transport and construction. To address those challenges, it is essential that this initiative is accompanied by appropriate measures supporting the green transition. The Renovation Wave strategy has identified a series of measures which are being implemented, and buildings and construction activities also feature in the other strategies following the Green Deal, including the Pact for Skills, the Industrial Ecosystem Strategy, the Zero Pollution Action Plan, the Circular Economy Action Plan, the Biodiversity Strategy and the Climate Adaptation Strategy. Buildings also have a strong societal dimension and their use reflects behavioural trends and dynamics in society. The COVID-19 pandemic has had an impact on building use patterns, such as working more from home, which are likely to last beyond the recovery period and require adaptations of the building stock, both for residential and non-residential buildings. The revision of the EPBD is timely as it can contribute to ensuring improved building performance in this dynamic phase and is thus an important measure alongside the Recovery and Resilience Facility. 1.1.2 Alignment with the 2030 Climate Target Plan policy conclusions The Climate Target Plan (CTP) 2030 states that EU buildings by 2030 should reduce their overall greenhouse gas emissions by around 60%, their final energy consumption by 14% and energy consumption for heating and cooling by 18% in comparison to 2015. The analysis in the CTP also found that greenhouse gas emissions can only be lowered cost-effectively to a level compatible with achieving the goal of -55% by duplicating the floor area renovated every year to improve its energy performance, decarbonising heating and considerably increasing the energy savings achieved through renovations. The impact assessment of the 2030 Climate Target Plan provided an indication of what effects a combined policy mix could have on reaching the new climate target and subsequent climate neutrality by 2050. However, the impact assessment required further clarifications and additional analysis to reach the level of details needed to support the individual sectoral legislative proposals. As regards the EPBD revision, which focuses on sectoral building policy, the MIX scenario in the CTP impact assessment representing the most cost-effective mix of policies between regulatory and carbon pricing mechanisms, made revising the EPBD the driver of increased energy renovation through standards and strengthened regulations. Without the policy driver of the EPBD revision assumed in the MIX scenario, the renovations rate will not increase sufficiently. This would result in the target for reducing GHG emissions being missed by around 49% and the 2030 target for reducing final energy consumption attributed to the buildings sector in the Climate Target Plan being missed by 40% (see Section 6.2). The CTP analysis also confirmed the finding from other assessments that energy efficiency is an essential component of action towards increased climate ambition across sectors including in buildings, and also via systematic application of the ‘energy efficiency first’ principle. Reducing first the energy needs of buildings is a more sustainable and cost-effective way to reduce emissions than investing in additional clean energy generation to compensate buildings’ low energy performance. Even in an increasingly and progressively decarbonised energy sector, improving the energy performance of existing buildings is necessary to avoid unnecessary investments in energy infrastructure and to improve the living conditions of the EU public. For buildings, a combination of the ‘energy efficiency first’ principle and expansion of renewable energy is needed because renewables are not available indefinitely and can only contribute a limited amount of the greenhouse gas emission reductions in the buildings sector. Combining the green and digital transitions, smart buildings can enable efficient production and use of renewables at building, district and city level, help decarbonise the transport sector and promote the circular economy. The CTP identified specific measures to ensure the appropriate pace at which to improve the building stock. These include the potential introduction of mandatory standards for the worst-performing buildings and the gradual tightening of the minimum energy performance requirements. Additionally the CTP flagged up long-term renovation strategies within the context of the EPBD as a key policy vehicle. Their aim would be to introduce additional measures to remove barriers to building renovation and strengthen pull factors for faster and deeper energy renovation. 1.1.3 Coherence within the ‘Fit for 55’ package and the role of the EPBD revision To follow the pathway proposed in the European Climate Law and deliver this increased level of ambition for 2030, the Commission has reviewed the climate and energy legislation currently in place. These are expected to only reduce greenhouse gas emissions by 40% by 2030 and by 60% by 2050. The ‘Fit for 55’ legislative package, as announced in the 2030 Climate Target Plan, is the most comprehensive building block in the efforts to implement the ambitious new 2030 climate target, and all economic sectors and policies will need to make their contribution. The majority of the proposals in the ‘Fit for 55’ legislative package were adopted by the Commission on 14 July 2021, while the revision of the EPBD is scheduled for a slightly later date to take into account the analysis and steer coming from the Renovation Wave strategy adopted in October 2020. The ‘Fit for 55’ legislative package is a set of a comprehensive and interconnected proposals which will enable an acceleration of greenhouse gas emission reductions in the next decade. They combine the following initiatives: (i) application of emissions trading to new sectors and a tightening of the existing EU Emissions Trading System; (ii) increased use of renewable energy; (iii) greater energy efficiency; (iv) faster roll-out of low emission transport modes and the infrastructure and fuels to support them; (v) alignment of taxation policies with the European Green Deal objectives; (vi) measures to prevent carbon leakage; and (vii) tools to preserve and grow our natural carbon sinks. The proposals were accompanied by a ‘Fit for 55’: delivering the EU’s 2030 Climate Target on the way to climate neutrality Communication, which explain the logic of the policy mix chosen to deliver on the target of ‑55%, which is a careful balance between pricing, targets, standards and support measures in a whole-of-the-economy approach. The Communication clearly highlights the revision of the EPBD as parts of the efforts to deliver the EU’s 2030 Climate Target. Figure 1.1: EPBD Interactions with other key legislation affecting the energy performance of buildings The proposals adopted in July 2021 include measures targeting the buildings sector; the EPBD revision is consistent with and ensures complementarity with these. Without a strengthening of the EPBD, the -55% goal will not be achieved, making it necessary to strengthen other measures or to move to a higher carbon price.

The above figure illustrates the main measures addressing buildings in the ‘Fit for 55’ package. See Chapter 7 for more details on these and the interactions with the revision of the EPBD. 1.1.4 The scope of greenhouse gas emissions covered in the EPBD revision and coherence with other initiatives addressing whole-life cycle carbon emissions In line with the CTP, the scope of this initiative is to improve energy performance and reduce GHG emissions during the use phase of buildings. The emissions covered are direct emissions from energy use in buildings (e.g. from a gas boiler in the building used for space heating) and indirect emissions from the use of electricity and heating and cooling supplied to the building (e.g. through electric heating or a district heating network). For clarity, all GHG emissions mentioned in this document refer to operational GHG emissions, unless otherwise stated. In addition to emissions during the use phase, there are emissions that occur during other parts of the building life cycle. These include the extraction and processing of the raw materials, manufacturing of materials and equipment, transport to the site, the construction process of the building, the installations of equipment as well as the end-of life (e.g. deconstruction or demolition) process and transport and reuse, recycling or disposal of waste,,. The revision of the EPBD contributes to the policy efforts at EU level to address these emissions with a specific measure, which is the mandatory calculation and display of life-cycle emissions for new buildings (see Annex H, Section 3). Addressing the whole-life carbon impact issue was widely underlined by stakeholders during the open consultation, who suggested including measures in the EPBD to account for carbon emissions over the entire life cycle of buildings (68%). The measure proposed in the EPBD revision can complement other EU policies aimed at reducing lifecycle emissions in buildings. In particular, there will be no overlap between the measure in the EPBD revision and the Construction Product Regulation (CPR). The CPR provides a common technical language to assess the performance of construction products. The CPR ensures that reliable information is available to professionals, public authorities, and consumers, so they can compare the performance of products from different manufacturers in different countries. The calculation of life-cycle emissions on building level in one of the proposed measures under the EPBD will be made using the European Level(s) framework or equivalent (as also referenced in the EU Sustainable Finance Taxonomy). In the Level(s) framework, the life cycle analysis of buildings uses product data calculated on the basis of existing assessment methods under European standards or under the CPR when available. The EPBD is also in line with initiatives such as the forthcoming Communication on restoring sustainable carbon cycles and the proposal for a regulatory framework for carbon removal certification and the findings of the study on Circular Economy Principles for Buildings’ Design. The study analysed case studies of circular economy policies in construction at national and regional level across the EU and other OECD countries, and suggested policy options at EU level. It found possible opportunities in the Construction Products Regulation, the Energy Performance of Buildings Directive, in green public procurement, and in guidance for local and regional planning authorities. The proposed measure in the EPBD complements well the provisions in these policies. 1.2 The revision of the EPBD in the Renovation Wave strategy In line with the Green Deal, on 14 October 2020 the Commission adopted the strategic Communication A Renovation Wave for Europe – greening our buildings, creating jobs, improving lives. The Renovation Wave communication integrates climate, energy and environmental objectives, industrial strategy and circularity objectives, as well as skills, consumer welfare and fair and social transition goals. It contains an action plan with concrete regulatory, financing and enabling measures for the years to come and pursues the aim to at least double the annual energy renovation rate of buildings by 2030 and to foster deep renovations. It is expected that mobilising forces at all levels towards the objectives of the Renovation Wave will result in at least 35 million building units renovated by 2030. The Renovation Wave links with ongoing work on green finance and sustainable investments and includes targeted actions at EU, national and local level. It focuses especially on tackling energy poverty and the worst-performing buildings, on renovating public buildings and social infrastructure and on decarbonising heating and cooling. It also flags that research must spur innovation in the construction industry ecosystem for this transformation, in line with the twin green and digital transitions. Energy renovation of the existing building stock can open up numerous possibilities and generate far-reaching social, environmental and economic benefits. With the same intervention, buildings can be made healthier, greener, interconnected within a neighbourhood district, more accessible, resilient to extreme natural events, and equipped with interoperable, standardised smart charging points for e-mobility and bike parking. The construction industry ecosystem is expected to play a key role in the implementation of the Renovation Wave and in transforming buildings in line with climate objectives, in particular with integrated design and execution, enhanced quality controls and compliance checks, high resource efficiency in line with circularity principles, and uptake of skills in construction in line with the twin green and digital transitions. The 23 implementation action points identified in the strategy include regulatory measures, with a strengthening of the EU legislative framework of the Energy Efficiency Directive (EED), the Renewable Energies Directive (RED), the Ecodesign Directive and the EPBD. They also include the possible extension of emissions trading to the buildings and the road transport sectors, which would introduce a carbon price for fossil fuel use in those sectors. The strategy was also accompanied by the establishment of the New European Bauhaus. The extensive preparatory work and stakeholder consultation on the key aspects to be addressed in the Renovation Wave strategy identified key measures and instruments, either to be strengthened or newly designed in the EPBD revision. These include the introduction of mandatory minimum energy performance standards for all types of buildings, the revision of the energy performance certificates framework, and building renovation passports. The current EPBD revision addresses 3 of the 23 key Commission actions to implement the Renovation Wave and some of its main regulatory measures. 1.3 The Energy Performance of Buildings Directive 1.3.1 The current EPBD framework Over the last years, due to a well-established regulatory framework for the energy performance of buildings and higher standards for equipment and appliances, the EU building stock has become more efficient. This is particularly the case for new buildings. The market diffusion and lowering of price of renewables has increased their uptake by buildings owners. The EPBD Directive (2010/31) is the main legislative instrument for promoting energy performance improvements in buildings in the EU. The EPBD is the cornerstone of EU legislation on energy efficiency for buildings. It was first adopted in 2002 by means of Directive 2002/91/EC. This Directive was then replaced and also substantially reinforced in 2010 by Directive 2010/31/EU. That was a recast Directive, which was amended in 2018 by Directive (EU) 2018/844 as part of the Clean Energy Package for All Europeans. The objective was to modernise the building stock in the light of the latest technological developments by promoting an optional smart readiness indicator scheme, facilitating the deployment of infrastructure for electro-mobility in buildings, and the better integration of automation systems and renewable solutions. The amending Directive entered into force in July 2018 and Member States had to transpose it into national law by 10 March 2020. The EPBD (2010/31/EU), as revised by Directive (EU) 2018/844), aims to transform the EU building stock into a highly energy efficient and decarbonised building stock by 2050, moving towards nearly zero-energy building standards. The Directive works through two complementary mechanisms: (i) minimum performance requirements for new and existing buildings (raising the depth of any upgrades and the standards for new-builds); and (ii) information for the public and companies through energy performance certificates for buildings to enable them to choose the efficiency level that is right for them. The Directive sets specific energy performance requirements for new and renovated buildings and on technical building systems (which include renewable energy and heating and cooling systems). The cost-optimal methodology helps Member States set their ambition levels right and keep them under review. Taken together, these mechanisms contribute to setting the right energy performance standards for different buildings, and facilitate information on more energy-efficient housing. The most important measures in the current EPBD are: ·long-term renovation strategies aiming to decarbonise national building stocks by 2050, with indicative milestones for 2030, 2040 and 2050; ·cost-optimal minimum energy performance requirements for new buildings, for existing buildings undergoing major renovation, and for the replacement or renovation of building elements like heating and cooling systems, roofs and walls ;

·requiring, since 31 December 2020, all new buildings to be nearly zero-energy buildings (NZEBs); new public buildings already had to be NZEBs since 31 December 2018; ·energy performance certificates (EPCs) to be issued when a building is sold or rented and requiring their rating to be visible in the advertising media; ·inspection schemes for heating and air conditioning systems; ·electro-mobility is supported by minimum requirements for charging points and ducting infrastructure car parks over a certain size; ·an optional European scheme for rating the ‘smart readiness’ of buildings (SRI); ·the promotion of smart technologies, including through requirements on the installation of building automation and control systems (BACS), and on devices that regulate temperature at room level; ·addressing the health and well-being of building users, for instance by considering the air quality and ventilation that Member states should take into account when defining energy needs. The EPBD requires Member States to establish a long-term renovation strategy to support the renovation of their national building stock, so that by 2050 the building stock is highly energy-efficient and decarbonised. The long-term renovation strategies must include: (i) an overview of the national building stock policies and actions to stimulate cost-effective deep renovation of buildings, (ii) policies and actions to target the worst-performing buildings, split-incentive dilemmas, market failures, energy poverty and public buildings; and (iii) an overview of national initiatives to promote smart technologies and skills and education in the construction and energy efficiency sectors. The strategies must also include a roadmap with measures and measurable progress indicators indicative milestones for 2030, 2040 and 2050, an estimate of the expected energy savings and wider benefits, and the contribution of the renovation of buildings to the EU’s energy efficiency target. The 2020 long-term renovation strategies (LTRS) adopted by Member States have been assessed by the Commission . These strategies fed into the preparation and assessment of national resilience and recovery plans and this impact assessment. In addition, the Directive is accompanied by secondary legislation. The Commission published in October 2020 two regulations (an implementing act and a delegated act) on establishing an optional common EU scheme for rating the smart readiness (SRI) of buildings, accompanied by associated annexes (based on the empowerment given by Article 8 EPBD, introduced by Directive (EU) 2018/844). The delegated act on cost-optimality (Delegated Regulation No 244/2012) and the accompanying guidelines support Member States in calculating cost-optimal levels of minimum energy performance requirements for buildings and building elements, using the comparative methodology framework established by the Commission. The Commission has also published a series of recommendations on building renovation ((EU)2019/786) and building modernisation ((EU)2019/1019) aspects. These are linked to the new rules introduced in 2018 in the EPBD. 1.3.2 The progress achieved While the evaluation of the EPBD in 2016 revealed some weaknesses, notably inefficiencies in national implementation, the EPBD is overall a successful regulatory instrument that has led to significant energy savings in the buildings sector (about 49 Mtoe of energy savings from 2007 to 2013 ) and has grown over time in ambition and scope. It has spurred significant changes in the national buildings codes and standards for minimum energy performance requirements, in relation to major renovations of existing buildings and in relation to new buildings, and has introduced the energy performance certificate, an information tool which is present and used in each country and by the financial sector. The nearly zero-energy building requirements for new buildings provided the necessary longer-term predictability for investors, offered stakeholders a common vision for the sector, and mobilised industry to deliver business models and technologies. One of the main reasons why the current EPBD does not yet deliver on the required push for building renovation is that it does not contain any obligations directly triggering building renovation. 2. Problem definition 2.1 Introduction This section provides first an overview of the barriers preventing higher levels of renovations, which are complex and multi-layered. Not all are addressed by the revision of the Energy Performance of Buildings Directive (EPBD). Annex N provides key information related to the characteristics of the building stock and the ownership structure of buildings, which are relevant to understand the origin of the problems addressed. Such an overview helps identify key drivers of the problems addressed in this initiative and also assess the interplay of the EPBD revision with other measures of the ‘Fit for 55’ package, in particular carbon pricing. This section finishes by outlining the two key problems addressed by the EPBD revision and their drivers, concluding with their expected evolution. 2.2 Barriers to energy renovations The strategic Communication on the Renovation Wave addressed the need to significantly increase energy renovations in the EU by setting the objective to at least double the annual energy renovation rate of residential and non-residential buildings by 2030. While preparing both the Renovation Wave Communication and the impact assessment, a number of stakeholder consultations, in-depth literature reviews and targeted studies were undertaken to identify the different sets of barriers to energy efficiency renovation in buildings in EU countries. Some of these barriers are more or less relevant depending on the Member States, and sometimes on regions within them. However, albeit with a different weight across Europe, all of these barriers taken together account for the insufficient annual renovation rates in the EU and the existing gap towards the 2030 decarbonisation target for the building sector.

The barriers to energy renovations can be divided in six main categories: (1) Economic and financial barriers associated with building renovations – from the high upfront costs and affordability of renovation, access to finance, the issue of split incentives (which are also and organisational barrier), to the relevant opportunity and transaction costs and high discount rates; (2) Behavioural barriers related to consumer support for the uptake of energy renovations – from the lack of knowledge and conflicting information on the energy performance of buildings and multiple benefits of energy renovations, to a general lack of acceptance of the need to step up decarbonisation efforts, including in buildings, the inertia (bounded rationality), the perceived hassle of renovations, and the aversion to indebtedness and financial risk; (3) Information barriers associated with the lack of accessible, transparent and comparable information across the board and in EU countries on the decarbonisation trajectory for buildings, lack of comparable and standardised information tools on the energy performance of buildings across the EU, as well as the lack of information on available funding for energy renovation investments and on the potential lower credit risk associated with energy efficiency investments; (4) Administrative barriers related to both insufficient technical expertise and capacities among local and regional authorities to support building renovation programmes, lengthy administrative processes and permit procedures; (5) Technical barriers related to the possible shortage of skilled workforce for energy renovation, lack of standardised practices and industrialised solutions in the building renovation market, as well as the lack of skills and accessible advisory and quality assurance support for non-professional building owners; (6) Organisational barriers associated with the complexity of building ownership and use, where co-ownership and collective decisions are often the norm, and where the commercial lease of buildings and building units add to the complexity and split incentives. On top of these six categories of stable barriers, some temporary and periodic barriers might arise that affect energy renovations across EU countries. These are often of a macro-economic nature and related to market cycles, market interventions and market adjustments. In the last 2 years, a number of consequences that stem from the COVID-19 pandemic have affected the market of energy renovations. The interruption of global shipping routes has had a cascade effect on the availability of construction materials. At the same time, the high number of public subsidies in EU countries for energy renovation released on the market, in particular by the Recovery and Resilience Facility, has generated a temporary shortage of skilled workforce for energy renovations and made renovations more expensive. While the demand for energy renovations in buildings is expected to grow in the next year, these initial shocks are expected to recede and the market is expected to adjust. The following table outlines the barriers to building renovations, with Annex E (Intervention logic and common barriers to building renovations) explaining them in more detail. Table 2.1: Barriers to building renovations Type of barrier Barrier Financial barriers Upfront costs and affordability of energy renovations Weak economic signal Split incentives Lack of access to public and private financial support for affordable renovations Limited public funds, public financial support not sufficiently targeted towards deep renovations Lack of clear property value differential Transaction costs, high discount rates Behavioural/consumer barriers Lack of knowledge, conflicting or lack of information on energy performance of buildings and multiple benefits of energy renovations Time and hassle factor, inertia and bounded rationality Perceived risk, attachment to incumbent technologies Lack of acceptance of need to step up decarbonisation efforts, including in buildings Aversion to financial risk and indebtedness for energy efficiency investments Information barriers Lack of well-communicated decarbonisation trajectory Lack of standardised information tools on energy performance Lack of information on available funding opportunities (public and private) for energy renovations on buildings, and on the potential lower credit risks of energy efficiency investments Administrative barriers Regulatory & planning (e.g. limitation in façade intervention, approval process for renewable installation and renovation permits) Lack of technical expertise and capacities in regional and local administration for energy efficiency renovation programmes Burdensome administrative processes (multiple permit procedures, no single entry point) Technical barriers Lack of skilled workforce for energy efficiency renovations, lack of low-carbon renovation skills Lack of standardised practices and industrialised fast-track solutions for energy renovations in buildings Lack of quality assurance for complex renovation Organisational/building complexity barriers Collective decision problems for co-owned properties Commercial lease barriers The barriers identified in the above table are largely common across EU countries, although their weight in the overall decision-making process to embark on energy renovations can be different depending on specific national circumstances. Two of the most common barriers are the issue of split incentives and access to finance to bridge the upfront cost and affordability of energy renovations. In their long-term renovation strategies, 16 Member States clearly underline the issue of split incentives as one of the most relevant barriers to energy renovations. Although the issue of split incentives is common across Europe, some of its most striking features are affected by national differences. While the issue of split-incentive is included into ‘economic and financial barriers’ as it relates to the mismatch of economic incentives, it cannot be alleviated by economic incentives alone, and it combines with organisational barriers. As outlined in Annex N, the owner-tenant ratio presents some differences across Member States, with the number of people living in rented accommodation much higher in Germany (49%), Austria (45%), Denmark (39%), and France (36%), compared to an EU average of 30%. The owner-tenant ratio has a direct impact on the relevance of the split incentive issues in designing policy for energy renovations of national building stock. In southern Europe, south-east and north-east Europe, people own rather than rent housing, with countries in south-east Europe having a high ownership ratio. Similarly, the possibility to increase rents following energy renovations is regulated differently across EU countries, with northern and western European countries having more regulatory social safeguards. The difficulties in finding appropriate measures that properly address the issue of split incentives was also highlighted, especially by non-governmental organisations (NGOs), in the consultation on the inception impact assessment. While tenant associations largely favoured the need for measures that introduce obligations for building owners, the renovation hassle and risks of ‘renovictions’ was also mentioned as a possible negative consequence of renovations. Access to finance to bridge the upfront costs of energy renovations is also a very common barrier across all EU countries. This was underlined by multiple stakeholders during the targeted EPBD revision and Renovation Wave consultations (Annex B). Moreover, private financing products for energy efficiency renovations are not sufficiently developed and marketed across EU countries, which reduces access to favourable financial offers. Moreover, insufficient cost-effective use of EU and national financing to leverage additional private investments and the lack of appropriate information tools to better target financing towards deep renovation and the worst performing buildings is often underlined across the board as part of public resources spending. Across the EU, technical barriers experience similar trends to administrative and information barriers. Overall, they are more relevant in Member States where the uptake of energy renovations appears to be less strong. In addition, a number of Member States identify a close link between the administrative burden barriers of renovation, the behavioural barriers related to the hassle of renovations, and organisational barriers linked to building ownership status and the collective decision-making of co-owned immovable goods. 2.3 What are the key problems? While the previous sections focus on the overall barriers to renovating buildings, this section focuses on the barriers that can be addressed by the revision of the EPBD. 2.3.1 The first key problem: The EPBD framework is insufficient to achieve the 2030 climate objectives. No specific measure is in place to address non-economic barriers that limit the energy renovation of buildings. As previously indicated, the main aspect currently hampering the progressive decarbonisation of the building stock in the EU is the low renovation rates across EU countries. The EPBD framework is incapable of overcoming this problem because it does not contain measures to trigger building renovations. The EPBD defines the energy performance levels that have to be reached when a new building is built or when an existing building undergoes a major renovation, but it does not trigger additional renovations. Stakeholders also recognised that the EPBD framework was inadequate. In the consultation on the inception impact assessment, several stakeholders across all categories indicated the need for the EPBD to include additional measures to (radically) increase the rate of renovations in order to help achieve the decarbonisation objectives.

The energy performance trend in buildings depends on the combination of the quantity of building renovations (renovation rates) in EU countries and the quality of the energy efficiency improvements achieved by single renovations (renovation depth). Based on the latest available data, 11% of the existing building stock in the EU undergoes some level of renovation each year. This means that in terms of floor area affected, the annual renovation rate appears to be at a satisfactory level. However, renovation works seldom address the energy performance of buildings, and the weighted annual energy renovation rate at EU level is only around 1%. This applies to residential and non-residential buildings, including public buildings, with only marginal differences. This rate, if maintained, is not compatible with the achievement of the 2030 energy and climate goals, as illustrated in the Climate Target Plan analysis. Figure 2.1 illustrates that the current level of annual renovation rates tends to favour building renovation with small primary energy-saving impacts overall (light renovations), while a wide range of technologies that would allow for much deeper renovations are available. Only a residual share of building interventions therefore target medium and deep energy renovations, which are able to achieve more than 40% and 60% primary energy savings respectively. For households, renovation is ultimately a private decision that is driven by several considerations. These often do not relate primarily to energy efficiency improvements but rather to the comfort, functionality, aesthetic and structural resilience of a building. For professional operators, the decisions can be based on more commercial considerations. Without appropriate regulations and increased awareness of the numerous benefits of energy renovations (indoor comfort, reduced energy needs, higher property value), several opportunities to greatly improve buildings will be missed. Similarly, financial institutions often express difficulties with navigating the technical aspects of renovations and their financial benefits. As a result, there is a lack of understanding, which would be necessary to offer targeted instruments such as favourable loans to building owners that plan to undertake renovations that also cover energy improvements. Across the building stock in the EU, the worst performing buildings, i.e. buildings in the lower energy performance classes, are responsible for a large share of energy consumption and GHG emissions. However, despite this relatively high impact, the number of renovations among the worst performing buildings is lower than the average. There are several reasons for this: on the one hand, the lack of upfront capital and targeted funding and technical assistance tailored to buildings that require a more complex package of renovation measures, while investments in building renovations tend to prioritise single measures with relative short payback. On the other, worst performing buildings, both in the residential and service sector, are often rented out, meaning that the barrier of split incentives between owners and tenants to renovate buildings applies. 2.3.2 The drivers of the first key-problem. Based on the general analysis of barriers to energy renovation in buildings in Section 2.2, the EPBD can address several but not all barriers to energy renovation. The problem drivers related to the first key problem that the EPBD revision will address are as follows (also detailed in Annex E): ØSplit incentives ØLack of information on the energy performance of buildings and multiple benefits of energy renovations ØLack of standardised information tools on energy performance ØLack of well-communicated decarbonisation trajectory ØPublic financial support not sufficiently targeted towards deep renovations ØBehavioural barriers. The issue of split incentives, or ‘owner-tenant dilemma’, is a very well-known barrier to the uptake of energy renovations in buildings. On the one hand, this affects the financial case for the energy renovation of rented buildings and the possibility to stimulate enough interest in energy renovations of such buildings by splitting its two main economic benefits: increase in property values and reduction of energy costs. Building owners would be required to pay for efficiency investments, while building occupants would reap the benefits of lower energy costs. In parallel, the advantage for building owners in terms of property values would be directly accessible only through the increase in rents. This would not be possible in the short term and/or would have relevant economic and social impacts in terms of rent increases for tenants. This is why, in the absence of mandatory obligations and dedicated support to building renovations, the issue of split incentives probably remains one of the most relevant barriers to the uptake of energy renovations in buildings through market measures. The EPBD currently does not include any specific measures to address the lack of incentives for landlords to renovate. There is a significant lack of information and awareness from both private, public (such as municipalities, the public health sector, social housing) and professional owners or tenants of buildings on the overall energy performance of the buildings they own or live in, possible energy efficiency improvements, costs and benefits, carbon performance and options to decarbonise. Although energy performance certificates (EPCs) regulated by the EPBD are well-recognised tools and provide some of this information, which is also valued by the market , the coverage, diffusion and proper advertisement of EPCs is relatively low. 65% of the respondents to the public consultation indicated that EPCs should be updated and their quality improved. Stakeholders criticised the current EPCs for appearing inadequate, with sub-optimal rating methodologies and poor recommendations for improving cost-effective energy performance. They also highlighted the low reliability of the data provided by EPCs, questioning the quality of the calculation methods or of the audits. EPCs are only required at specific moments in the lifetime of a building (sale or rent for the majority of buildings, while public buildings of a certain size should always have a valid EPC and display it). This never happens for many buildings during their life cycle. In addition, the information on EPCs remains limited and is not sufficient to illustrate all the qualities and technologies of buildings nor the full range of benefits that improvements could bring. Carbon performance is for instance not a compulsory element in EPCs. The content of EPCs and the EPC classes attributed to buildings also vary significantly across countries. This limits their value to investors and financial players that operate in multiple markets. In this respect, 75% of the respondents to the public consultation acknowledged the issue. Closely linked with the information and technical barriers, public financial support for energy renovations are currently also not sufficiently targeted towards deep renovations. In particular, there is a clear link between the lack of appropriate and standardised information tools for building renovations and the difficulty in targeting public financial support towards deep energy renovations able to deliver large benefits in terms of energy consumption and GHG emission reductions. At the same time, regulatory measures are needed to provide the necessary legal certainty, clarity and direction to better guide financial investors and public support schemes. In that respect, the current framework lacks clear definitions of deep and staged renovations. Behavioural barriers, including risk aversion and inertia, are also key drivers behind low renovation rates, at a level that fails to exploit the techno-economic energy efficiency potential of buildings.

2.3.3 The complementary role of regulatory measures and carbon pricing to address the barriers to energy renovations As illustrated in the previous section, multiple factors hamper the roll-out of energy renovations, and not all of them can be addressed by the EPBD. The policy mix of measures included in the ‘Fit for 55’ package includes elements able to address the different drivers, in particular carbon pricing, non-regulatory signals (such as targets), regulatory measures, information tools, standards and support measures. The strengthening of the EPBD and its revision will address measures that are mainly regulatory, including information tools and planning. Current experiences with the EPBD show that the regulatory approach is effective in increasing the energy performance of buildings and in scaling up construction activities and the market uptake of materials, products and highly performing technologies necessary to meet the regulatory levels. The review will deepen the successful policies, leading to higher energy performance levels for new buildings and extending them to existing buildings. One key complementarity exists in the legal framework between carbon pricing mechanisms and regulatory instruments in the building sector. While the carbon price acts as a key tool in delivering rapid decarbonisation both in the buildings and transport sector, market failures and barriers affecting the building sector would remain unaddressed without regulatory measures and investment support. The EU Emissions Trading System (EU ETS) currently covers around 30% of building emissions from heating. This is related to the system’s coverage of district heating and electricity used for heating purposes. These are direct emissions from larger fossil fuel district heating system installations included in the EU ETS (> 20 MW) and indirect emissions from electricity use in appliances, heating and cooling equipment such as heat pumps and lighting. The carbon price from the existing EU ETS is largely passed onto consumers via their electricity bill and heating costs. However, its price signal is limited as not all fuels are covered. With the proposed extension of ETS to heating fuels as part of the ‘Fit for 55’ package, all heating fuels will be subject to a carbon price. Consumer heating bills will therefore internalise carbon costs, indirectly incentivising the shift towards low-carbon heating and investments in solutions that reduce energy consumption and exploit the existing energy efficiency potential in the building sector. Adding to heating costs derived from fossil fuels, the carbon price acts as an economic incentive and makes investments in low-carbon heat and energy efficiency more cost-effective. An ETS extension and higher costs for heating buildings with fossil fuels would result in an additional economic incentive for the energy efficiency measures promoted by the EPBD and the EED, provided that the carbon price signal is sufficiently high. If the price is set at a sufficiently high level, energy efficiency measures would likely become more cost-effective and have a shorter payback period. The non-rational response of economic agents and the effects of non-economic barriers and market failures, which prevent the markets alone from delivering cost-effective emission abatement solutions, are illustrated by price elasticities – ‘the higher, the bigger’ being the response. Price elasticities vary from short-term (reflecting the fact that behavioural responses to changes in prices are small as space heating is a necessity) to long-term ones (reflecting the factors that constrain investment). Price elasticities of consumers to the costs of heating in the residential and service sector are not well documented, but are considered to be low based on the studies available. In the building sector, the information available from the literature is very limited. However, the results indicate that buildings’ total energy consumption has a long-term price elasticity of ‑0.23 on average at EU level. The presence of low elasticities indicate that even if there is a significant carbon price, an abatement decision will not be taken, and that a very high price is needed in the absence of complementary regulatory measures. These constraints may prevent energy consumption from responding to a carbon price signal quickly and strongly enough. Especially in case of low price signals, carbon pricing alone would be insufficient to drive the uptake of the cost-effective carbon abatement actions in the building sector. The following tables present the abatement (MtCO2) and energy savings (Mtoe) potential respectively in the residential sector in 2030 for the EU-27, at different carbon prices. Table 2.2 Marginal energy savings (Mtoe) for residential building sector within EU-27 in 2030 2030 Energy consumption (mtoe) Energy savings potential (mtoe) % savings potential Carbon price 0 (EUR/tC02) 16.1 8% Carbon price 30 (EUR/tC02) 16.9 9% Carbon price 50 (EUR/tC02) 17.1 9% Carbon price 90 (EUR/tC02) 20.6 11% Carbon price 150 (EUR/tC02) 21.2 11% Table 2.3 Mitigation measures implemented at each carbon price Carbon Price 0 (EUR/tC02) Adaptive Thermostats Advanced Power Strips RET Advanced Power Strips Air Infiltration Central Air Conditioner Tune-Up Central furnace efficient fan motor Central heat pump tune-up Condensing gas boilers and water heaters Insulation (draft proofing, duct sealing, piping) Efficient appliances (refrigerator, ceiling fans, dehumidifiers, clothes washer and dryer, television, window air conditioner) Heat pumps (electric air-source cold climate, ground source) Energy efficient homes (20% above code) Energy efficient pool pumps Lighting efficiency (exterior, CFL, incandescent) Water appliances (faucet Aerators, low flow shower head) Water heater (high efficiency gas storage water heater, hydronic heating, tankless) High efficiency windows Social benchmarking and home energy monitoring Carbon price 30 (EUR/tC02) Crawlspace insulation Early furnace replacement - 70% AFUE - 90% AFUE Carbon price 50 (EUR/tC02) Integrated heating and domestic hot water (forced air heating) Carbon price 90 (EUR/tC02) Insulation (attic/ceiling, basement wall (R-12), slab (unfinished basement) High efficiency heat recovery ventilators (HRVs) Water heater replacement Carbon price 150 (EUR/tC02) 95% or higher efficiency furnaces Active solar water heating systems The analysis in the above tables shows that at higher carbon price levels, more expensive measures – but also more rewarding ones in the longer term – will be adopted. This is also illustrated in the modelling scenarios underpinning the ‘Fit for 55’ package. With carbon price alone, at the level estimated in the MIX scenario of EUR 48/tonne in 2030, several measures necessary to exploit the energy efficiency potential will not take place, leaving untapped potential. The ‘Fit for 55’ package therefore envisages a mix of instruments to address economic and non-economic barriers in a complementary way, together with financial support. In this framework, regulatory measures are crucial to driving demand for decarbonisation solutions and to addressing structural barriers. The EPBD revision aims to strengthen the current measures and introduce new ones to address the persistent barriers to energy renovation, in complementarity with carbon price signals, other regulatory instruments envisaged in the Energy Efficiency Directive, Renewable Energy Directive and the mechanism in the Effort Sharing Regulation. Standards are needed to direct renovations towards buildings with the highest potential and at the same time with the highest structural barriers of risk aversion, split incentives and information asymmetry, and to stimulate more complex deeper renovations. The carbon price is in fact expected to be effective in driving light renovation, but it would have limited effects on medium to deep ones. According to the analysis made in the Climate Target Plan and confirmed in the scenarios underpinning the ‘Fit for 55’ legislative proposals, it would need to increase six times from the level estimated of 0.1% each year in the REF baseline scenario. 2.3.4 The second key problem: The EPBD framework is insufficient for the 2050 climate objectives and to foster energy system integration Net zero emission buildings have been identified as a key enabling pathway needed to deliver on climate neutrality. While the EPBD, through national long-term renovation strategies, already requires planning towards decarbonisation, there is a lack of a clear pathway to deliver on climate neutrality. There is currently a lack of a coherent framework to allow Member States to develop and plan their building decarbonisation pathway in more detail, with clear milestones and targets towards 2030 and 2040. While around 85 million m² of residential buildings and 40 million m² of service buildings are built each year in Europe, the current EPBD requirements for new buildings do not ensure that buildings are built in a way that makes them fully decarbonised (‘2050-ready’). With reference to the pathway towards climate neutrality, existing buildings with poor energy performance are characterised by high energy consumption, high GHG emissions and often relatively poor integration in the energy system. In the majority of cases, worst performing buildings are usually the ones that rely more heavily on fossil fuels for heating and cooling, and where the uptake of renewable energy sources is more difficult because of the poor quality of the technical building system. Even if the building’s energy demand could be fully covered by renewable energy, the low energy efficiency of the building would lead to a waste of energy resources.

As a consequence, the current building stock is not always ‘technically fit’ for the energy transition and ready to be integrated into a decarbonised and digitalised energy system. This is a major barrier to the decarbonisation of heating and cooling and to increasing the uptake of energy from renewables (i.e. geothermal heat) in households. A more energy-efficient building stock is often a prerequisite for the energy switch for heating and cooling from fossil fuels to renewable energy sources. In addition, there are also similar technical and administrative barriers in the existing building stock. This hampers the uptake of e-mobility solutions because of the lack of charging points in residential and private buildings. 2.3.5 The problem drivers of the second key problem ØLack of standards and requirements for new and existing buildings in line with decarbonisation goal. The current definition for nearly zero-energy buildings (NZEB) in the EPBD was developed over 10 years ago and does not reflect the goal of decarbonisation and zero carbon buildings enough. In addition, NZEB energy consumption levels differ across Member States and do not address whole-life carbon nor the readiness of buildings to provide flexibility and play an active part in the energy system by integrating smart solutions for storage and demand response/management services to the grid. On these aspects, 57% of the respondents to the public consultation indicated that NZEBs are not ambitious enough. ØInsufficient measures to facilitate the integration of digitalisation and smart solutions in new construction and building renovations. Digitalisation is a key enabler in the decarbonisation of the building stock. Digital technologies that can be used across the life cycle of buildings, from design and construction to operation, are still not appropriately established in the EPBD framework and in the renovation processes. First, it has great potential to increase the quality and scalability of energy efficiency solutions, with optimal design and collaboration (for example, building information modelling), execution (for example, automated construction techniques), and use of buildings (for example, automated management systems, controllable devices and smart appliances, and data collection). Second, in line with the energy system integration strategy, it gives building users smart and flexible energy services, allowing the development of demand-side management strategies that help further integrate variable and decentralised renewable energy sources into the energy system, as well as energy storage technology. However, the appropriate framework is still not in place for the energy demand side to increasingly contribute to the smart energy grid flexibility effort. Third, digitalisation can enable better resource efficiency and facilitate circular approaches during design as well as construction and renovation. These are essential for lowering embodied emissions and achieving climate neutrality in buildings. Digitisation is a topic that was often highlighted by stakeholders as requiring targeted measures in the EPBD. Stakeholders underlined its contribution to greater efficiency, transparency of information, flexibility of the energy system and therefore reduction of emissions. To complement this, in the public consultation conducted between 30 March and 22 June 2021, 72% of the respondents expressed the view that the EPBD can contribute to making available and accessible a wider range of building-related data on the energy performance of buildings and its related construction and renovation works across its life cycle. ØInsufficient measures to support the uptake of electro mobility in private buildings. Current requirement for new buildings do not seem adequate to address existing barriers and support the uptake of sustainable mobility and to contribute to transport decarbonisation. With currently up to 90% of electric vehicles, recharging taking place at home or at the workplace, the role of buildings in providing recharging infrastructure is crucial, alongside publicly accessible infrastructure, which is regulated in the Alternative Fuels Infrastructure Regulation (AFIR). The share of recharging at publicly accessible points is expected to increase after 2030, but between 60% and 85% of all recharging will still take place at private recharging points. According to a recent study, the lack of deployment of smart private recharging infrastructure is a barrier to the development of the market for EVs. Lengthy and complex approval procedures can be a major barrier to owners and tenants installing recharging points in existing multi-tenant residential and non-residential buildings. Obtaining the necessary approvals can create delays or prevent their installation. 2.4 How will the problem evolve? 2.4.1 The building sector in the Reference scenario The magnitude of the challenge ahead, caused by the current inefficiency and low rate of renovation and decarbonisation of Europe’s building stock, is illustrated by the CTP’s impact assessment and the updated scenarios drawn up in other proposals of the ‘Fit for 55’ package. The current decrease of CO2eq emissions from the use of buildings is estimated to be maximum 1%/year. This is three or four times lower than what would be necessary to sufficiently contribute to the ‘-55% by 2030’ target. In the baseline of the ‘Fit for 55’ package (REF), which describes ‘business as usual’ conditions and evolution based on current policies, primary energy consumption decreases by 32.7% in 2030, but this is insufficient for the net -55% climate target. For final energy consumption, REF projects 823 Mtoe, which is 29.6% below the trajectory of the 2007 baseline and therefore below the agreed 2030 energy efficiency target of at least 32.5%. The use of buildings is responsible for more than 40% of final energy consumption. Residential and service buildings consume 333 Mtoe together each year, with residential buildings representing almost 65% of the total. Figure 2.2 displays the combined consumption of residential and services in buildings in REF by fuel type.

In the REF scenario, energy consumption for the use of buildings already falls significantly thanks to policies already in place and better performance and lower costs of technologies (such as heat pumps). However, their effects are partially offset by increased consumption to satisfy higher comfort levels and increased demand also for cooling needs. Looking towards 2050, the importance of fossil fuels decreases and electricity expands its already significant share further. However, solar energy and distributed heat remain marginal. Figure 2.3 displays the projected decline in GHG emissions. Both residential and service sectors need to reduce their emissions. Due to their share in energy consumption, residential buildings in terms of absolute amounts have to make a bigger effort to reduce emissions than service buildings. The EU’s total GHG emissions in the REF in 2030 (including all domestic emissions & intra-EU aviation and maritime) will be 43.8% below the 1990 level. Climate neutrality will not be achieved in the baseline, falling short of the European Climate Law objective. 2.4.2 The need for a more efficient building stock in a progressively decarbonised energy system In the CTP and the ‘Fit for 55’ package, REG and MIX ‘core’ scenarios illustrate the need to step up efforts in comparison to current trends across all sectors. Depending on the policy mix, ‘core’ scenarios achieve a significant decarbonisation of building stock through a fuel switch combined with energy efficiency progress thanks to renovations and the use of more efficiency appliances. For the decarbonisation of buildings, the reductions needed by 2030 range between -54% and -61% (compared to 2015) in the scenarios for achieving -55% GHG. This is a step change in comparison to the reference scenario in which the level of GHG reductions is -33% in 2030. The reasoning behind the significantly higher cost-effective emission reductions for buildings (and the power sector) compared to other sectors in modelling is that buildings have greater potential for abatement at a lower cost and therefore compensate for other ‘hard to decarbonise’ sectors. Those sectors are unlikely to level off their expansion and growth trends by 2030 with the increased speed of decarbonisation (e.g. transport, heavy industry that needs technologies such as hydrogen) or to simply achieve a similar level of emission reductions technically (e.g. agriculture, which has very few abatement options). The power sector also has greater potential and needs to significantly cut its direct emissions too. In the long term, it will be one of the first to decarbonise completely. Furthermore, a strong link exists with the building sector due to the significant trend towards electrification of heating via heat pumps. To some extent (given that heat pumps are very efficient in electricity consumption and electricity is the sector that decarbonises the fastest), with the electrification of heating, direct emissions from buildings are ‘moved’ into the power sector, e.g. by replacing fossil fuel boilers with heat pumps (which run on electricity). Importantly, core scenarios show that in the absence of energy efficiency, the effort in terms of fuel switch needs to be bigger. This effect would exacerbate climate neutrality pathways, leading to a strain on scarce resources (biomass-based fuels for heating or hydrogen-based innovative synthetic fuels). To avoid a certain sectoral shift of emissions from buildings to power generation in the medium term or too high demand for low-carbon H&C in the long term, energy needs therefore need to be reduced, together with phasing out the remaining fossil fuel consumption. Analysis and projections converge, indicating that a cost-effective and feasible pathway towards decarbonisation should rely partly on the decarbonisation of power generation, partly on low-carbon fuels, including the direct use of renewables in buildings (on-site), and partly on reducing the energy needs in key energy consumption sectors. The optimal pathways towards decarbonisation balance renewable deployment and energy efficiency improvements across the energy sectors. In long-term EU scenarios, achieving carbon neutrality, demand-side solutions and, in particular, high-performance buildings plays a critical role in reducing the demand for electrical heating in winter, addressing the seasonal supply-demand mismatch. In particular, the temporal mismatch between the non-dispatchable renewable supply and peaks in electricity demand is in fact one of the key challenges to achieving high percentages of renewable electricity supply. Minimising the space heating requirements through the building envelope and its air tightness performance while covering the remaining energy demand by renewable sources, especially electrification, has been identified as an optimal strategy to ensure grid balancing and to find the cost-optimal pathway towards decarbonising the energy sector. While this is true at aggregate level, also at the level of single buildings, analysis shows that while comparing new constructions implementing the NZEB requirement in order to minimise life cycle costs and the environmental impacts across their life cycle, buildings with higher energy performance outperformed those for which electricity production was maximised. Such analysis suggests that the focus should be placed on (i) minimising the space heating requirements through a building envelope with high thermal and air tightness performance; and (ii) covering the remaining energy demand, to a significant extent, by renewable sources that compensate for buildings’ specific energy source during their operational phase. 3. Why should the EU act? 3.1 Legal basis The legal basis is Article 194(2) TFEU, the legal basis for Union policy to promote energy efficiency and energy savings. Energy policy is a shared competence between the EU and Member States. As this initiative concerns amendments to an existing Directive, only the EU can effectively address the issues. 3.2 Subsidiarity: Necessity of EU action Climate change being a transboundary problem, Member States’ action alone on buildings’ emissions would lead to suboptimal outcomes. To decarbonise the buildings stock, its annual rate of refurbishment must be scaled up. Low renovation rates are also linked to the underachievement of the energy efficiency goals in 2020, as energy consumption in the buildings sector has not decreased along a pathway compatible with it. The issue of insufficient rates and depths of renovation to achieve the GHG reduction objectives is a common one in the EU. As mentioned in the Renovation Wave Communication, across the EU, deep renovations that reduce energy consumption by at least 60% are carried out only in 0.2% of the building stock per year and in some regions, energy renovation rates are virtually absent. No Member State achieves a yearly deep renovation rate of 1% or more. Similarly, yearly rates of medium renovation (30% or more of primary energy savings) are below 5% in all Member States when looking at both residential and non-residential buildings. Those consistently low renovation rates show that a step change towards stronger requirements at EU level is needed. In addition, as laid down in Chapter 2 and in Annex E, the underlying problem drivers and relevant barriers to building renovations, such as market failures (notably split incentives owner-tenant-dilemma), information barriers, organisation and behavioural barriers, lack of targeted finance and technical capacities and skills, prove to be similar in all EU Member States. These economic and non-economic barriers are largely present in all Member States and cannot be overcome solely with economic or monetary incentives. This is acknowledged in the set-up of the ‘Fit for 55’ package which includes a reasoned policy mix of targets and non-regulatory signals, carbon price mechanisms, regulatory standards and financial incentives. If buildings were not to be decarbonised in an effective and coordinated manner across the EU, this would lead to an unfair distribution of burden and a spillover effect of higher energy consumption and greenhouse gas abatement costs for the EU as a whole. A key underlying reason is the increasing marginal cost of GHG emission abatement, including for investments targeting buildings’ energy performance. The more a building or building stock is already energy performant (because of high insulation and low-carbon heating already installed), the more difficult and thus costly it becomes to tap into additional energy and GHG savings. The fragmentation of the buildings’ energy performance, leading to shares of inefficient buildings in certain Member States not being targeted (low-hanging fruits) could therefore lead ultimately to a possible failure in meeting the long-term EU decarbonisation objective, but also reduced energy security due to higher energy consumption More ambitious and more prescriptive EU level action is therefore necessary to ensure policy alignment towards decarbonisation of buildings across the EU. The role of the EU is crucial to make sure that the regulatory framework reaches comparable ambition levels and is consistently enforced. The revision of the EPBD follows the need to update it to reflect the increased ambition of the EU climate and energy targets. This is on top of the fact that the assessment of the EU-wide impact of the National Energy & Climate Plans that the Commission published in September 2020 showed an ambition gap as regards energy efficiency: 2.8 percentage points for primary energy consumption and 3.1 points for final energy consumption in the EU, as compared to the 2030 goals currently in force. Further EU wide measures in the revised EPBD would thus be needed in any case in line with what foreseen in the Energy Union Governance Regulation.

3.3 Subsidiarity: Added value of EU action Setting a common framework for the enhanced decarbonisation of buildings at EU level will ensure that the buildings sector reduces its GHG emissions at the required scale to achieve the EU’s energy and climate targets and in the most cost effective way. Since the adoption of the first EPBD in 2002, the EU legislative framework on buildings’ energy performance has prudently expanded, setting a common minimum framework at EU level and leaving significant flexibility for implementation and adaptation to Member States. The experience with joint EU ambition for all new buildings to be nearly zero-energy by 2020 shows the significant impact of mobilising the buildings sector around a common objective and language. Nonetheless, so far similar market signals have been missing for the existing building stock, which represents the largest share of the cost-effective potential. Action at EU level offers a better leverage in mobilising the sector around a common ambition and leads to higher expected market outcomes. The development of industrialised fast-track solutions for the uptake deep energy renovations and zero-emission buildings would benefit from a closer integration of the EU market for energy renovations and sustainable constructions. In order to achieve these objectives, common framework and methodologies on the evaluation of energy performance of buildings and renovation practices have to be established at EU level. The experience from the implementation of the current EPBD shows that a common EU framework allows national policy-makers to build on each other’s’ best practices, stimulates innovation and increases the benefits of the internal market for construction products and appliances. Additionally, differences in the current national frameworks for monitoring and evaluation of energy performance of buildings prevents the possibility to exploit synergies and economy of scale for cross-border professional and financial investors in energy efficiency renovations of buildings. Today, the absence of a common EU framework methodology and of national databases on energy performance frameworks is identified as relevant to the uptake of private financing for energy renovations. Construction products and services, heating, cooling, air-conditioning and lighting devices, as well as on-building renewable systems, smart controls, building automation systems, smart meters, and other products are an important part of the internal market. The construction sector overall contributes to 9% of the EU’s GDP. A joint EU framework for building renovation will send strong market signals that promote the development of these markets and will lead to economies of scale. In relatively new areas such as industrialised solutions for building renovation, strengthening the common language and requirements will help the EU industry expand. Consulted stakeholders underlined the importance of common standards and access to information for the scalability of innovative projects (e.g. turnkey renovations, which benefit from transparent access to information on permits and financing sources). On financing specifically, having a common definition of ‘deep renovations’ will allow investors to aggregate funding to be channelled to projects which meet the deep renovation criteria. Action to upgrade the energy performance of the existing building stock will also generate other common EU benefits. As an example, the reduced energy demand from buildings and higher reliance on renewable energy, which is overwhelmingly generated within the EU, will contribute to the security of energy supply for all EU Member States. Changes to the current EPBD framework do not mean that no margin for manoeuver will be left to Member States. Building typologies, ownership structures, climatic conditions and energy poverty levels vary across Europe. Therefore, while the direction of travel and a common ambition level need to be set at EU level, sufficient flexibility is given to Member States in order to adapt their buildings regulatory and financing policies to national and local circumstances. 4. Objectives: what is to be achieved? 4.1 General objectives Together with the other actions from the Renovation Wave action plan and the other elements of the ‘Fit for 55’ package, the revision of the EPBD aims to strengthen the legal framework for the energy performance of buildings to ensure a higher contribution to the achievement of the EU’s energy and climate objectives for 2030 and the climate neutrality objective for 2050, in particular through a higher renovation rate. The revision will also aim to modernise buildings and strengthen their role as an active part in the energy system, for instance through smart charging of EVs. The following figure provides an overview of the problems, drivers and objectives of the EPBD revision. In particular, two general objectives have been identified for this EPBD revision: Ø2030 objective: Contribute to reducing buildings’ greenhouse gas emissions and final energy consumption by 2030, to a level commensurate with the CTP goals. Ø2050 objective: Provide a long-term vision and ensure that buildings make an adequate contribution to achieving climate neutrality in 2050. In order to achieve the general objective and to tackle the key problems and problem drivers identified, four specific objectives that pave the way to the policy options (described in Chapter 5) have been identified. The specific objectives identified aim in particular to address, among the several additional drivers of a broader nature, those that can be directly tackled by the EPBD and contribute to the identified key problems. As set out in Article 1 EPBD, the EPBD promotes the improvement of the energy performance of buildings within the EU. Several key elements of the Renovation Wave strategy, such as finance, adequately skilled workforce, seismic safety of buildings and safety of workers, fall outside the EPBD scope and cannot, or only to a limited extent, be addressed by the EPBD revision. 4.2 Specific objectives 4.2.1 Increase the rate and depth of building renovations. The first specific objective addresses the first key problem and related problem drivers, namely the barriers identified to the increase of annual energy renovation rates and deep energy renovations. Increasing the renovation rates and the depth of building renovations is necessary to put the building sector on track towards achieving the 2030 energy and climate targets and the specific target contribution for decarbonisation efforts in buildings. To improve the energy performance of the EU building stock in the most cost-effective way, the scale of building renovations (renovation rates) in EU countries need to increase in parallel with the quality of the energy efficiency improvements achieved by the single renovation (renovation depth). Increasing the renovation rate and thereby realising the energy savings potential in existing buildings is important to cut carbon emissions, improve well-being and reduce energy poverty. The increased rate and depth of renovation should be commensurate with the decarbonisation efforts required to achieve the increased climate target and will have to be maintained also post-2030 in order to achieve EU-wide climate neutrality by 2050. Doing this with circularity in mind will reduce waste and keep embodied carbon low. Several stakeholders supported this and called for ‘greener’ renovations that integrate circular economy principles.

The aim is to trigger, with updated policy measures, energy renovations at certain moments in the buildings’ life cycle, or by addressing split incentives and the organisational barriers to energy renovations, also bearing in mind that by addressing the worst performing buildings the benefits are maximised. Improved information and comparability of the energy performance of individual buildings will also increase awareness and contribute to greater renovation efforts. This will also be addressed by strengthening the links between the depth of renovations and the aid intensity accessible through public budget support. For this objective, there are synergies with the energy-saving goals, policies on the public sector, public building renovation and split incentives in the EED and with the introduction of emissions trading in the building sector. It is supported by the ESR, which sets binding GHG emission reduction targets for Member States that cover several sectors, including buildings. 4.2.2 Improve information on the energy performance and sustainability of buildings, with the use of digital tools. Improving information on the energy performance of buildings addresses multiple barriers to achieving decarbonisation of the building stock and the climate neutrality goal by 2050. This specific objective aims to address both key problems identified and the information barriers to the uptake of energy renovations and of a clear decarbonisation trajectory for buildings. It specifically addresses the problem drivers linked to the lack of information on the energy performance of buildings and multiple benefits of energy renovations and linked to a lack of standardised information tools on energy performance. By strengthening the reliability of the tools already available to measure the energy performance of buildings, the awareness of the general public as well as professionals of the multiple benefits that could be achieved thanks to deeper renovations would be improved and property values would reflect this. Overall, the objective is to increase the number of buildings with an EPC, as well as their quality and comparability across Member States, and to further EPC mainstreaming and accessibility to consumers and investors. This increased coverage should go hand in hand with the higher quality of EPCs as fully digital tools. By increasing the quality and comparability of EPCs as fully digital tools, the aim is also to reduce the administrative burden for building renovations. By increasing the scope, range of information and coverage of EPCs and other building information tools such as building renovation passports, the objective is also to ensure that public support such as EU funding can be better targeted towards high-impact projects and qualitative investments. This will also facilitate follow-up in terms of reporting and monitoring and the long-term impact of public support to building renovation. Digitalised EPCs and digital tools could reduce the administrative burden and simplify procedures. Stakeholders stressed that improving the quality is key as only high-quality EPCs will be trusted by owners/occupiers and the finance sector. In particular, 77% of the respondents to the public consultation pointed out that funding support to renovations should be linked to the depth of renovations. They also underlined that EPCs are the key tool for assessing energy efficiency improvements for financing purposes. Alongside EPCs, stakeholders largely supported the inclusion of the building renovation passport in the revision of the Directive to address the information gap of owners and investors by providing documentation on the renovation roadmap of buildings. 4.2.3 Ensure that new buildings are in line with the 2050 climate neutrality objective. This objective addresses the second key problem and the related problem drivers of the lack of standards and requirements for new and existing buildings in line with decarbonisation goals. For new buildings and for the transformation of existing buildings, a new vision going beyond nearly zero-energy buildings is needed. This will ensure that new builds are fully compatible with carbon neutrality goals and that lock-in to technologies with a long lifetime, which rely on fossil fuels for heating and cooling, is avoided. To achieve this objective, an update the current nearly zero-energy buildings requirements towards zero-emissions buildings requirements is necessary. The concept of zero-emissions buildings received support from 84% of the respondents to the public consultation. For new buildings, this will mean designing building performance requirements that ensure much lower energy needs and phasing out fossil fuels for heating and cooling thanks to the deployment of renewables technologies. These include direct renewable-based electrification and modern low-temperature district heating and cooling that harness local renewable energy and waste heat resources. By addressing whole life carbon and resilience, such a new vision would maximise decarbonisation and make new construction future-proof. For this objective and the previous one there are synergies with the RED for heating and cooling target, the planned introduction of emissions trading for buildings, EED on heat planning and Ecodesign requirements and energy labelling of heating and cooling appliances. 4.2.4 Integrate buildings into decarbonised and digitalised energy systems. This specific objective targets key enabling conditions to address the second key problem of putting building decarbonisation efforts on the right trajectory towards climate neutrality, as buildings today are not technically fit for the energy transition and for increased renewables deployment. However, this objective also addresses the first key problem and the need to step up energy renovations towards 2030, in particular with regard to the increased benchmarks for RES uptake in buildings as well as the benefits to energy performance through a deeper integration of buildings into a digitalised energy system. The expected increase in the integration of renewable energy needed to achieve energy and climate goals and pave the way to carbon neutrality will require buildings fit for renewables with high thermal integrity and modern technical building systems. Given that part of the renewable energy will come from intermittent sources, buildings should also be able to provide flexibility and play an active part in the energy system by integrating storage and demand response/management services into the grid thanks to the smartness of their technical building systems. The more flexibility that buildings can offer to ‘serve the energy infrastructure system’ (mainly the power system) through storage, own power production and connected EVs, the more valuable they will be in the future energy system. Under this objective, the EPBD revision aims to further modernise buildings and their systems (for heating, cooling, ventilation, renewables, flexibility and storage) across their whole lifetime, with digitalisation as the key enabler. In this regard, policy measures and options will explore the possibility to ensure building preparedness and to strengthen and improve the integration of the smart readiness indicator with new tools like digital logbooks and building renovation passports, in synergy with the forthcoming Digitalisation of Energy Action Plan. Another specific aspect to address under this objective is the problem of lack of charging points in residential and work parking spaces and administrative barriers for the owners of electric vehicles that need access to charging points. According to stakeholders, there is a need to strengthen the existing provisions on e-mobility, in particular for new buildings, and to introduce a ‘right to plug’ in multi-dwelling buildings. From this perspective, specific policy measures and options are proposed to ensure that new and existing buildings are being prepared for the introduction of e-vehicles and introduce the ‘right to plug’. This will also complement the requirements on the deployment of publicly accessible infrastructure in the Alternative Fuels Infrastructure Regulation and is closely linked to the recast Renewable Energy Directive. 4.3 Intervention logic The intervention logic to the EPBD revision is developed in Chapter 2 – Problem definition, Chapter 4 – Objectives, and Chapter 5 – Policy options. The three chapters are developed in a coherent and interlinked way feeding one into another – from the identification of key problems and problem drivers, general objectives and specific objectives, to policy areas of interventions and policy options. At the beginning of Annex E, the overall intervention logic, from problem drivers to policy options, is presented in a dedicated figure. 5. What are the available policy options? 5.1 What is the baseline from which options are assessed?

5.1.1The baseline for assessment All the ‘Fit for 55’ initiatives share a common baseline, the EU Reference Scenario 2020 (REF). It is the common starting point for energy system modelling in the respective impact assessments for all the proposals adopted in July 2021. The EU Reference Scenario 2020 reflects current and planned policies, notably as stated in Member States’ national energy and climate plans, and takes account of COVID-19 impacts. It models the policies already adopted, but not the target of net-zero emissions by 2050. As a result, there are no additional policies driving decarbonisation after 2030. The same baseline approach is followed in this impact assessment and the key parameters used are aligned to REF. From a methodological point of view, this ensures coherence across the ‘Fit for 55’ initiatives. The effects of the legislative proposal adopted by the Commission in the July 2021 ‘Fit for 55’ package are therefore not included in the baseline for this impact assessment. The impacts of the revised EED, RED II, AFIR, ESR and of the introduction of a separate ETS on heating in buildings are assessed from the point of view of coherence and complementarity, in particularly in section 7.2. In addition, the interplay between the ‘Fit for 55’ proposals is modelled by specific policy scenarios. This is done by the central policy scenario (MIX) and by a dedicated scenario (MIX-without-EPBD) which with a certain level of approximation disentangle the EPBD policy drivers (See section 6.2). Source: Guidehouse et al. The specific baseline used in this impact assessment focuses on the buildings stock only (and not to the overall energy system) and the impacts of the policy options are assessed bottom-up. Given the long lifecycle of buildings, to illustrate the expected evolution of its energy performance and overall consumption, and the consequent CO2 emissions, it is therefore important to look at the renovation of floor area over time. Figure 5.1 illustrates the expected renovation of the EU floor area (both residential and non-residential buildings) in the coming decades based on current policies and technology trends. Approximately 80% of the 2050 building stock already exists today. Thanks to existing policies, technological drive and autonomous trends, the floor area renovated will slightly but progressively increase in the coming decades. It is estimated that more than half the existing building stock (13.3 billion m2 out of a total of 24 billion m2) has not been renovated since construction, while the remaining part has been renovated to a certain extent. The figure above shows that at current renovation levels the non-renovated share will progressively decrease. However, in 2050 about 40% of the stock will still remain in its original state, while in 2030 and 2050 respectively 17.6% and up to 60% of the stock will be subject to renovation to average levels, locking-in a significant amount of potential energy and emissions savings that could be achieved with higher rates of renovation. The development of the EU floor area also illustrates that new construction more than compensate for demolition by 2050. In line with current renovation rates and trends, it also shows that most energy renovations are shallow (‘reno-average’) while deeper renovations (e.g. ‘reno-ZEB’) happen at a much lower rate. It is also assumed that until 2050 a small share of new buildings will go beyond the current NZEB standard. Without accounting for new builds, in the baseline scenario the total final energy consumption of the building stock will decrease by 1.4%-1.7% every year in the coming decades. 5.2 Description of the policy options Based on existing studies, on the inputs from stakeholders and on internal analysis, a range of policy options and measures were screened to respond to the problems identified. The selection of options also builds on the analysis and stakeholder consultation made in preparation of the Renovation Wave strategy, which already identified key policy measures to be considered in the revision of the EPBD. The measures identified were examined in detail and various options for their design were considered. Stakeholders were consulted specifically on each area and the available information was examined. The options are grouped into three areas (A, B, C) responding to the specific objectives as described in Chapter 4 and addressing specific barriers identified in Chapter 2. The above figure visualises which are the policy measures contributing to each of the specific objectives identified. Figure 5.2: Overview of objectives and policy options

Area A. Measures to increase the number of buildings being renovated and renovation depth. Area A is at the core of the EPBD revision and contributes to the main objective of reducing buildings’ greenhouse gas emissions and final energy consumption by 2030, to a level commensurate with the CTP goals. As regards the specific objectives of this initiative, the measures proposed in Area A aim at an increase of the number of buildings being renovated, especially those with a very low energy performance. In relation to the problems identified in Chapter 2, area A addresses the first key-problem which is that the EPBD framework is insufficient to the achievement of the 2030 climate objectives and lacks measures to address the non-economic barriers limiting energy renovations. The underlying problem drivers are illustrated in the below table. Table 5.1: Problems drivers addressed by the measures in Area A. Problem drivers/barriers MEPS BRPS EPCQ DEEP LTRS Split incentives ++ Public financial support not sufficiently targeted toward deep renovations + + ++ + Lack of information on energy performance of buildings and multiple benefits of energy renovations + + Lack of well-communicated decarbonisation trajectory + + Lack of standardised information tools on energy performance + Behavioural barriers ++ + + Lack of standards and requirements for new and existing buildings in line with decarbonisation goal + + Insufficient measures to facilitate the integration of digitalisation and smart solutions in new construction and building renovations + Insufficient measures to support the uptake of electromobility in private buildings This area addresses as well the second specific objective of the EPBD revision, which is to improve information on energy performance and sustainability of buildings with the use of digital tools. It contributes in particular to the improvement of the quality and comparability of information tools on energy performance of buildings across the EU. Respondents to the open public consultation have shown a key interest in strengthening some of the EPBD tools and provision under this policy area. In particular, 75% of respondents supported the introduction of minimum energy performance standards (MEPS) for buildings in the revision of the EPBD, 68% were in favour of the introduction of a legal definition of “deep renovation”, and 89% confirmed the need to strengthen the monitoring of the objectives identified in the Long-Term Renovation Strategies. Some stakeholders have spoken against the introduction of MEPS, arguing that their set up should be handled at Member State level. They also stated that Member States are still implementing the Clean Energy Package and that excessive regulation should be avoided. Rather, indicative guidance should be provided with technical and financial support. The large majority however expressed the need for a EU framework giving sufficient flexibility to Member States to adapt to local conditions. Few respondents indicate that the MEPS would not be necessary if the EU ETS is extended to the building sector. Few also consider that such minimum requirements will have a too strong impact on property rights that cannot be justified even in light of the need to act against climate change. The measures in area A are: -A.1 Minimum energy performance standards (MEPS): MEPS1, MEPS2, MEPS3, MEPS4 -A.2 Buildings renovation passport (BRP): BRP1, BRP2, BRP3 -A.3 Energy performance certificates (EPCs) –