Explainer: Low-carbon buildings & retrofits — what it is, why it matters, and how to evaluate options

Buildings account for approximately 40% of total energy consumption and 36% of greenhouse gas emissions across the European Union—yet the current annual renovation rate hovers at a mere 1%, with deep energy renovations representing less than 0.2% of the building stock. This fundamental mismatch between climate ambition and on-the-ground action defines one of Europe's most pressing decarbonization challenges. For decision-makers evaluating low-carbon building investments, understanding the unit economics, navigating adoption blockers, and anticipating regulatory trajectories has become essential to unlocking value in this €275 billion annual market opportunity.

Why It Matters

The urgency of building decarbonization has intensified dramatically since the European Commission adopted the revised Energy Performance of Buildings Directive (EPBD) in 2024. Under these new requirements, all new buildings must achieve zero-emission status by 2030, while existing residential buildings must reach at least Energy Performance Certificate (EPC) class E by 2030 and class D by 2033. For non-residential buildings, the timeline is even more aggressive: EPC class E by 2027 and class D by 2030.

The scale of the challenge is staggering. According to the European Commission's 2024 Building Stock Observatory, approximately 75% of EU buildings are energy inefficient, with 35% of structures over 50 years old and nearly 75% built before modern energy performance standards existed. The International Energy Agency's 2025 Global Buildings Report indicates that building-related CO₂ emissions in Europe reached 520 million tonnes in 2024, representing a slight decrease from 2023 but still far from the 2030 trajectory required for net-zero by 2050.

The economic implications extend beyond environmental compliance. Energy costs for commercial buildings in the EU increased by an average of 47% between 2021 and 2024, creating powerful financial incentives for efficiency improvements. Research from the Buildings Performance Institute Europe (BPIE) demonstrates that deep retrofits can reduce energy consumption by 60-90%, translating to operational savings of €15-45 per square meter annually for commercial properties. Additionally, properties with higher EPC ratings command rental premiums of 6-14% and sales premiums of 10-25% across major European markets, according to 2024 data from JLL.

From a risk perspective, the European Central Bank's 2024 climate stress tests revealed that approximately €1.4 trillion in commercial real estate loans across the eurozone are exposed to transition risk from energy performance requirements. Buildings failing to meet minimum energy performance standards (MEPS) by regulatory deadlines face potential stranded asset scenarios, making retrofit investment decisions increasingly material to portfolio valuations.

Key Concepts

Low-Carbon Buildings refer to structures designed, constructed, or renovated to minimize operational and embodied carbon emissions throughout their lifecycle. In the EU regulatory context, this increasingly means buildings achieving near-zero or zero-emission status, consuming minimal energy (typically <50 kWh/m²/year for heating in temperate climates), sourcing remaining energy needs from renewables, and accounting for embodied carbon in construction materials. The concept encompasses both new construction meeting stringent performance standards and existing buildings upgraded through deep retrofits.

Energy Performance Standards in the EU operate through the EPC rating system, ranging from A (most efficient) to G (least efficient). The revised EPBD introduces Minimum Energy Performance Standards (MEPS) requiring buildings to meet specific thresholds by defined deadlines. Member States must also establish Building Renovation Passports—digital documents outlining staged renovation roadmaps tailored to individual buildings. These standards increasingly incorporate whole-life carbon assessments, moving beyond operational energy to include embodied emissions from materials and construction processes.

Deep Retrofits describe comprehensive building renovations achieving energy consumption reductions of at least 60%, compared to shallow retrofits targeting 30-40% improvements. Deep retrofits typically integrate multiple measures simultaneously: building envelope improvements (insulation, high-performance windows, airtightness), heating and cooling system replacement (often transitioning from fossil fuels to heat pumps), ventilation upgrades with heat recovery, smart building controls, and on-site renewable generation. The European Renovation Wave strategy targets 35 million building unit renovations by 2030, with deep retrofits as the priority intervention.

Transition Risk and Compliance in the building sector refers to the financial exposure arising from failing to meet evolving regulatory requirements. For building owners, this manifests as potential rental restrictions (some Member States are implementing "rent freezes" for low-EPC properties), declining asset valuations, increased financing costs (green finance incentives versus brown penalties), and potential forced sales. The EU Taxonomy for Sustainable Activities establishes technical screening criteria determining whether building activities qualify as "green"—with significant implications for access to sustainable finance instruments.

Demand Charges and Grid Integration represent an increasingly critical consideration for low-carbon buildings. As electrification accelerates—particularly through heat pump adoption—buildings face growing exposure to electricity demand charges, which can constitute 30-50% of commercial building electricity costs in some EU markets. Low-carbon building strategies increasingly incorporate demand flexibility, battery storage, and vehicle-to-building technologies to optimize grid interaction and reduce peak demand charges while supporting grid stability.

What's Working and What Isn't

What's Working

Industrialized Retrofit Solutions are demonstrating significant cost reductions and quality improvements. The Dutch Energiesprong model, which pioneered factory-manufactured facade and roof elements enabling whole-house retrofits in under two weeks, has now scaled across Europe. By 2024, over 7,000 homes had been retrofitted using this approach in the Netherlands alone, with projects expanding to France, Germany, and the UK. The standardized approach has reduced deep retrofit costs by 30-40% compared to traditional methods while guaranteeing performance outcomes through energy service contracts.

Public-Private Financing Mechanisms are successfully addressing the upfront capital barrier. The European Investment Bank's dedicated building renovation lending, totaling €5.8 billion in 2024, has catalyzed significant private co-investment. National programs like Germany's KfW efficiency loans and France's MaPrimeRénov' have achieved substantial scale—MaPrimeRénov' supported 670,000 renovation projects in 2024 alone. Innovative financing structures including Property Assessed Clean Energy (PACE), green mortgages with preferential rates for high-EPC properties, and energy service company (ESCO) models are removing first-cost barriers while aligning incentives around actual performance.

Digital Building Technologies are enabling more precise diagnosis and optimization. Building energy management systems incorporating AI-driven optimization have demonstrated 15-25% energy savings with payback periods under three years, according to 2024 research from the Fraunhofer Institute. Digital twins and building information modeling (BIM) are improving retrofit planning accuracy, while smart metering rollouts—reaching 56% of EU electricity customers by end of 2024—provide the granular consumption data necessary for benchmarking and performance verification.

What Isn't Working

The "Split Incentive" Problem remains a fundamental adoption blocker, particularly in the rental sector that represents approximately 30% of EU housing stock. Landlords bear renovation costs while tenants capture energy savings, creating misaligned incentives that standard lease structures fail to resolve. Despite regulatory attempts to address this—including Germany's modernization rent increase provisions allowing landlords to pass 8% of renovation costs to tenants annually—uptake in the rental sector continues to lag owner-occupied properties by a factor of 2-3x, according to BPIE analysis.

Skilled Labor Shortages represent an acute constraint on renovation capacity. The European Commission estimates that an additional 1-2 million skilled workers are needed in the construction sector to meet Renovation Wave targets. Current vocational training pipelines and immigration policies are insufficient to close this gap by 2030. Labor constraints are particularly severe for specialized trades including heat pump installation (where lead times in some markets exceed 12 months), building envelope specialists, and building automation technicians. This scarcity is driving labor cost inflation of 8-12% annually in key trades, eroding project economics.

Fragmented Decision-Making in Multi-Owner Buildings creates significant barriers for the approximately 40% of EU citizens living in apartments. Achieving consensus among multiple owners on renovation scope, cost allocation, and contractor selection often proves impossible under existing condominium governance frameworks. Even where individual apartment owners are willing to invest, shared building elements (facades, roofs, heating systems) require collective action that current legal and financial frameworks inadequately support.

Key Players

Established Leaders

Saint-Gobain (France) is a global leader in sustainable construction materials, with €47 billion in 2024 revenues and a product portfolio spanning insulation, glazing, and building envelope solutions. Their "Grow & Impact" strategy targets carbon neutrality by 2050, with 2024 emissions intensity 25% below 2017 levels.

Schneider Electric (France) provides building management systems, energy management software, and electrical infrastructure. Their EcoStruxure platform manages energy in over 500,000 buildings globally, with 2024 revenues of €36 billion and demonstrated 30-50% energy savings in customer deployments.

Siemens Smart Infrastructure (Germany) offers comprehensive building technology solutions including automation, HVAC controls, and fire safety systems. Their digital building platform integrates across 500+ device types, with revenues of €18 billion in fiscal 2024.

Kingspan Group (Ireland) specializes in high-performance insulation and building envelope solutions, with 2024 revenues of €8.1 billion. Their QuadCore insulation technology achieves thermal performance 20% superior to traditional alternatives at equivalent thickness.

Daikin Europe (Belgium/Japan) is the leading heat pump manufacturer in Europe, with 25% market share and 2024 European revenues exceeding €6 billion. Their production capacity expansion in Poland and Czech Republic added 500,000 units annually to address surging demand.

Emerging Startups

Heimdall Power (Norway) provides grid sensor technology enabling utilities to increase transmission capacity by 25-40%, addressing grid constraints that limit building electrification. Series B funding of €38 million in 2024.

Aira (Sweden) offers vertically integrated heat pump solutions combining manufacturing, installation, and financing. Founded in 2022, they raised €150 million in 2024 and deployed over 20,000 systems across Sweden and Germany.

Effy (France) operates a digital platform connecting homeowners with vetted contractors and financing for energy renovations. Facilitated €800 million in renovation projects in 2024, with 500,000 completed interventions since founding.

Nrlyze (Denmark) provides AI-powered building energy optimization software achieving 20-30% savings without hardware investment. Series A funding of €12 million in 2024, with deployments across 2,000+ buildings.

Greenomy (Belgium) offers ESG reporting software specifically addressing EU Taxonomy compliance for real estate portfolios. Series B of €52 million in 2024, serving institutional investors managing €300 billion in real estate assets.

Key Investors & Funders

European Investment Bank (EIB) is the world's largest multilateral lender for climate action, with €5.8 billion deployed for building renovation in 2024 and a stated target to support €180 billion in Renovation Wave investments through 2030.

Breakthrough Energy Ventures (Global) has invested significantly in building decarbonization technologies, with portfolio companies including BlocPower, Dandelion Energy, and Gradient Comfort. European investments accelerating since 2023.

SET Ventures (Netherlands) is a leading European climate tech VC with specific focus on the built environment. Fund IV closed at €150 million in 2024, with investments including Nrlyze, Sympower, and Gradyent.

European Climate Foundation (Netherlands) provides philanthropic funding for building decarbonization policy research and advocacy, with approximately €25 million annually directed to buildings-related initiatives.

Green Investment Group (Macquarie) (UK) manages €6 billion in green infrastructure assets including significant building decarbonization investments across European social housing portfolios.

Examples

Amsterdam Social Housing Deep Retrofit Program demonstrates scalable industrialized renovation. Since 2020, housing associations Eigen Haard and Rochdale have retrofitted 3,200 social housing units using Energiesprong methodology. Average energy consumption dropped from 180 kWh/m²/year to under 40 kWh/m²/year—a 78% reduction. Tenant energy bills decreased by €1,200 annually on average, while the standardized approach reduced per-unit costs from €85,000 to €65,000 by 2024. Importantly, renovations included rooftop solar PV, enabling buildings to achieve net-zero energy on an annual basis.

Italian Superbonus 110% Experience offers lessons in incentive design. Between 2020 and 2024, the program catalyzed €105 billion in building renovations through 110% tax credits for energy efficiency and seismic improvements. Over 450,000 buildings received interventions, with average energy performance improvements of two EPC classes. However, the program's fiscal cost (€89 billion in foregone tax revenue) and fraud concerns led to significant modifications in 2024. Key learnings include the importance of performance verification, caps on eligible costs, and graduated incentives rather than uncapped credits.

Paris Commercial Building Decarbonization showcases municipal regulatory leadership. Under the Décret Tertiaire, commercial buildings exceeding 1,000m² must reduce energy consumption 40% by 2030, 50% by 2040, and 60% by 2050 versus 2010 baselines. By end of 2024, 85% of covered buildings had submitted energy data to the national platform, with early movers achieving 25-35% reductions through operational optimization and targeted retrofits. Fines of €1,500-7,500 per building for non-compliance, combined with public disclosure of performance data, have proven effective in driving action.

Action Checklist

FAQ

Q: What is the typical payback period for deep building retrofits in the EU? A: Deep retrofit payback periods vary significantly based on building type, existing condition, energy prices, and available subsidies. For commercial buildings in high-energy-price markets (Germany, Italy, Netherlands), paybacks of 8-12 years are typical for comprehensive interventions without subsidies, reducing to 5-8 years with available incentives. Residential retrofits generally show longer paybacks of 15-25 years due to lower energy intensity, though subsidies can reduce this to 10-15 years. Importantly, pure energy savings often understate returns—when including asset value preservation, rental premiums, and avoided transition risk, risk-adjusted returns improve substantially. The European Commission estimates renovation investments generate €2 of benefits for every €1 invested when accounting for health, comfort, and macroeconomic effects.

Q: How should building owners approach the trade-off between shallow and deep retrofits? A: The choice depends critically on building-specific factors and strategic time horizons. Shallow retrofits (LED lighting, basic insulation, heating controls) offer quick paybacks of 2-5 years but may prove insufficient for MEPS compliance by 2030-2033, creating stranded investment risk if deeper measures are subsequently required. Deep retrofits achieve definitive performance levels but require larger upfront capital and longer payback periods. Building Renovation Passports provide a framework for staged approaches—implementing shallow measures immediately while planning deep interventions around natural trigger points (heating system end-of-life, facade maintenance cycles, tenant turnover). For buildings currently rated E-G facing near-term MEPS deadlines, staged approaches may prove insufficient, making comprehensive intervention the lower-risk strategy despite higher initial costs.

Q: What role does embodied carbon play in low-carbon building decisions? A: Embodied carbon—emissions from material extraction, manufacturing, transport, and construction—is receiving increasing regulatory and market attention. For new buildings, embodied carbon can represent 50-80% of lifecycle emissions when operational efficiency is high. For retrofits, the question becomes whether embodied carbon from new materials is offset by operational carbon savings. Research from the Royal Institute of British Architects suggests operational savings from deep retrofits typically offset embodied carbon within 5-10 years. The revised EPBD introduces whole-life carbon reporting requirements, while some Member States (France, Netherlands, Denmark) have implemented embodied carbon limits in building codes. Specifying low-carbon materials—recycled steel, bio-based insulation, low-clinker cements—can reduce embodied carbon 30-50% with modest cost implications.

Q: How will building electrification affect electricity grid constraints? A: Mass heat pump deployment presents significant grid challenges. The European Network of Transmission System Operators for Electricity (ENTSO-E) projects EU peak electricity demand could increase 40% by 2040 under high electrification scenarios, with winter heating driving the sharpest peaks. Many distribution networks require reinforcement to handle concentrated heat pump loads—the UK's National Grid estimates £48 billion in distribution upgrades. Buildings can mitigate grid impacts through thermal storage (pre-heating during off-peak periods), hybrid heat pump systems that reduce peak electrical demand, and active demand response participation. Increasingly, building-grid integration is becoming a value stream: utilities and aggregators pay €50-150/kW/year for flexible load provision in some markets. Smart building systems that optimize self-consumption, minimize demand charges, and provide grid services will capture these emerging value pools.

Q: What should decision-makers watch for regulatory developments? A: Several regulatory trajectories will shape building decarbonization economics through 2030. First, Member State transposition of the revised EPBD by mid-2026 will define specific MEPS thresholds, exemption criteria, and enforcement mechanisms—with significant variation expected across jurisdictions. Second, the EU Taxonomy's technical screening criteria for buildings are under review, with potential tightening of thresholds affecting green finance eligibility. Third, energy market reforms including the proposed revision to electricity market design may alter demand charge structures and flexibility remuneration. Fourth, carbon border adjustment mechanism (CBAM) extensions to construction materials would significantly impact building material costs. Finally, the ECB's climate stress test refinements will increase disclosure requirements and potentially capital implications for building-exposed lending. Decision-makers should build flexibility into renovation planning to adapt as regulatory details crystallize.

Sources

European Commission. "Energy Performance of Buildings Directive (Recast)." Official Journal of the European Union, 2024.
Buildings Performance Institute Europe (BPIE). "Building Renovation: A Kick-Start for the EU Recovery." BPIE Report, 2024.
International Energy Agency. "Global Status Report for Buildings and Construction 2025." IEA Publications, 2025.
European Central Bank. "Climate Risk Stress Test 2024: Results and Methodology." ECB Publications, 2024.
JLL Research. "European Office Market: Sustainability Premium Analysis." JLL Reports, 2024.
Fraunhofer Institute for Solar Energy Systems. "Building Energy Management Systems: Performance Assessment." Fraunhofer ISE Technical Report, 2024.
European Investment Bank. "Climate and Environment Lending 2024: Annual Report." EIB Publications, 2025.
Energiesprong International. "Market Development Report: Industrialized Deep Renovation in Europe." Energiesprong Foundation, 2024.