Stuttgart saves around 7200 tonnes of CO2 each year through an innovative form of internal contracting, making use of a revolving fund to finance energy and water-saving measures. The city is able to reinvest savings directly into new activities, creating a virtuous circle of environmental improvements and emissions reductions.
What is it?
Stuttgart has the ambitious goal of reducing CO2 emissions by 40% between 1990 and 2020. A wide range of measures and significant investments are being made to ensure this target is met, particularly in the fields of local energy management and energy efficiency in buildings. One innovation is internal contracting, a financing tool used to implement energy or water-saving measures.
Internal contracting enables local governments to recoup cost savings achieved by such measures, as planning, financing and implementation is not undertaken by a third party (as in contracting) but by units within the municipal administration.
How does it work?
Units within the municipal administration finance the energy and water-saving measures of other departments, enabling the implementation of smaller projects for which external contracting would be too extensive, but from which significant accumulated financial savings and emissions reductions may be realized. Cost savings thus release funds for other investments.
In Stuttgart, internal contracting is part of the city’s Climate Protection Programme and is conducted by the city’s Office for Environmental Protection and Finance Department. The Climate Protection Programme has three central aims – retrofit and renovation of buildings; implementation of energy and water-saving measures through internal contracting; and awareness-raising activities. From 2002-2006 the programme cost over €4.7million for internal contracting and reduced CO2 emissions by 2,200 tonnes per year. In 2008 and 2009 the fund for internal contracting will increase to total €6.3 million.
Pre-financing of investments is made by the Energy Department (part of the Office for Environmental Protection) and energy cost savings obtained through investments are returned to this Department by the implementing department until costs are paid off. After this, energy savings are passed on to the building’s user. This means energy-saving projects can be rapidly realized without interest or private profits, on both a small or large scale and as full or partial financing.
Stuttgart has used internal contracting successfully in a wide range of facilities – e.g. combined heat and power plants for swimming pools; heat recovery in ventilation systems; water saving faucets; lighting controls; etc. In total, 215 individual projects were realized from 1995-2006, at a cost of €8m.
Internal contracting programmes reduce the costs of municipal services by raising the quality and efficiency of housing and other buildings. This has a beneficial impact on citizens, whose living environments are improved and who profit from lower energy/water charges. Moreover, citizens are engaged in projects, meaning their levels of awareness and sense of responsibility increase.
Stuttgart’s experience shows that effective administrative is key to successful internal contracting. A lack of capacity may lead to ill-defined institutional roles and a lack of clear responsibilities, limited staff resources or poor cooperation, poor information, or failure to divest funds to participants and into new schemes. Such problems can not only hinder successful implementation, but may also act as a disincentive for further action.
CO2 emissions reductions
Higher levels of energy-efficiency permit a reduction in the burning of fossil fuels for energy, realizing reductions in CO2 emissions. Stuttgart estimates that 6,200 tonnes of CO2 emissions per year are reduced as a direct consequence of internal contracting.
In a typical city, over 70% of total private energy consumption occurs is in buildings. Stuttgart has demonstrated that adopting simple measures to achieve higher levels of energy-efficiency can yield savings as high as 30%. Water consumption is another area in which buildings are often inefficient consumers. Other cities may achieve higher savings, depending on their conditions.
Internal contracting enables the municipality to realize savings made through its energy efficiency and water-saving measures, an activity made increasingly profitable in a world of energy price rises. This means investments can be released in other areas. From 1995-2006, investments in 215 individual projects cost a total €8 million.
German law permits the incorporation of initial costs into communal service charges for rented properties, but tenants do not pay more for rentals, since their heating and water costs fall. Thus, the municipality, housing associations and tenants all profit from internal contracting. Other beneficiaries from internal contracting include local businesses and tradesmen.
The drawback with internal contracting is that, when budgets are in deficit, restrictions may be placed on municipal budgets by the local authority itself or by federal or national governments. In such circumstances, the lack of financial flexibility limits the opportunity for internal contracting, since all funds are tied up in essential expenditure and non-essential budgets are reduced. A fear of such scenarios may lead municipalities to undertake internal contracting programmes that are only highly profitable or have short amortisation periods.
Stuttgart has yet to introduce internal contracting to its waste sector and sees great potential for increased efficiencies. Internal contracting is of interest to all public authorities, housing associations and industry, both as a cost-saving instrument and as a mechanism through which to reduce emissions and improve environmental performance. Cities could be helped to use internal contracting through national financing programmes or by off-balance sheet schemes that would enable them to raise credits through the performance savings a scheme will guarantee.