When the federal Liberals announced the Greener Homes deep retrofit program, back in the 2021 budget, we decided to take the plunge and enroll, hoping to tap some of the $5,000 in grants available to homeowners.

About a year and a half later, we crossed the retrofit finish line, with a range of moves, from stopping up some of the leaks in the walls to the purchase of a pair of big-ticket items: a high-efficiency electric water heater and a hybrid air-source heat pump, including the electrical upgrades required to handle them. From a climate perspective, the investments are worth every penny as our home’s carbon emissions will be about 80% lower than they were previously. From a money-saving perspective, we’re already seeing lower gas bills, and a $2,200 rebate cheque (16% of our capital cost) should arrive, well, eventually.

The Canada Greener Homes Grant, and the accompanying low-interest loan, belong to the smorgasbord of incentives that aim to nudge Canadians’ dwellings in the direction of our Paris Agreement targets. Some provinces – B.C. and Quebec, for instance – offer generous inducements alongside Greener Homes, while others – notably Ontario – do very little. By contrast, Italian homeowners can get 110% of their retrofit costs covered, meaning they’re not out of pocket when they decide to cut their residential carbon.

Italy’s program (more about which in a moment) raises a critical philosophical question: if society agrees that it needs to slash building-related carbon, which accounts for up to 40% of global emissions, should individuals shoulder the financial burden?

“The retrofit industry that we have, with its emphasis on do-it-yourself, finance-it-yourself, manage-it-yourself, is not the retrofit industry we need,” says Corporate Knights director of research Ralph Torrie. “The homeowner should not have to finance retrofits any more than they are asked to finance the next power plant.”

Climate retrofit mission

Consider the statistics: there are almost eight million detached homes in Canada, and the Greener Homes inducements won’t touch the vast majority. The program has attracted about 170,000 applications (as of June 2022), with almost $40 million in grants distributed so far to approximately 10,300 households, for an average of $3,750.

The five-year program has a $2.6-billion budget, with a target of 700,000 homes. That figure is less than 10% of Canada’s housing stock and doesn’t include condos or rental apartments. “The retrofit imperative is so huge,” says Monte Paulsen, a Passive House specialist at RDH Building Science in Vancouver. “We can’t decarbonize without a massive scale-up. We’re going nowhere near fast enough.”

Canada is not the only country to grapple with the question of how to accelerate its pace of housing retrofits sufficiently to significantly bend the building emissions curve.

The United States has about 65 million homes that were built prior to the advent of more energy-efficient construction standards in the 1980s, according to federal data. A study released last year by the American Council for an Energy-Efficient Economy (ACEEE) pointed out that “deep retrofits that include a robust package of such upgrades can cut a home’s energy use by 58% to 79% and its emissions by 32% to 56%, depending on the home’s age and regional climate.”

“I don’t think any jurisdiction has found the magic formula for retrofitting at the scale required by climate change,” says Brendan Haley, director of research and policy at Efficiency Canada, a Carleton University think tank which has estimated that, at the current pace, it will take about 142 years to retrofit all the low-rise residential buildings in the country.

The group last year called for a national effort on turnkey project delivery and the aggregating of similar building retrofit projects into portfolios of contracts to drive economies of scale. The animating idea, argue Haley and co-author Ralph Torrie, is to put in place market structures that make retrofits simple to carry out, which, at present, they are most assuredly not.

The Italian job

Some jurisdictions have sought to crack this riddle with extremely generous incentives. Italy, in 2020, launched a residential retrofit program, dubbed “Superbonus,” that offers owners 110% of the cost of the retrofit, to be recouped via reduced future utility bills – an inducement that takes all the homeowner concerns about the upfront costs off the table in one gesture. For my own home, such a program would have allowed me to add a layer of insulation on the exterior walls, a very costly fix that would have gotten us pretty close to net-zero.

Italy’s green Five Star Movement, which was in power in 2020, set up the plan in part to revive an economy flattened by the pandemic and also to encourage homeowners to fix up dwellings that were shattered by a 2010 earthquake in the Abruzzo region. The take-up has been enormous: as of July, 220,000 applications had been approved, totalling €44 billion. While the program is meant to run until 2025, with a sliding-scale incentive structure, it is already vastly oversubscribed.

According to Michele Russo, a financial consultant based in Rome, the Superbonus program will reduce carbon from dwellings with the highest emissions by about 50%.

One of the most innovative aspects of the Superbonus program has to do with the fact that the incentives are provided not in the form of cash (rebates), but rather as credits against future energy bills for the homeowners.

This mechanism is designed to prevent huge outlays from government coffers, and also acknowledges, in its structure, that the work is paid off through long-term reductions in energy costs. “No exotic finance is part of this story,” Russo said in an Efficiency Canada online panel earlier this year. He likens the form of the financing to government bonds – low cost, low risk and liquid. “Most likely, there will be no financial bubble.”

It was a welcome shot in the arm for Italy’s construction sector. By the end of 2021, the program was credited with creating 153,000 jobs and generating more than €12 billion in GDP, according to a study by the Consiglio Nazionale degli Ingegneri, Italy’s national engineering association.

However, the Superbonus has generated controversy, with reports of corruption and inflated construction prices. “We do not agree on the validity of this measure,” outgoing prime minister Mario Draghi said in a speech to the European Parliament this past May. “The cost of improving efficiency has more than tripled due to the 110% scheme. The prices of the investments needed to perform the renovations have more than tripled because the 110% eliminates the incentive to negotiate on price.” The government has continued to tweak the popular program to plug loopholes in order to prevent fraud.

Going Dutch – and New York – style

Haley cites more modestly scaled retrofit programs in countries like Germany, France and the Netherlands, which pioneered the concept of the “energiesprong,” a means of grouping similar dwellings or apartments all requiring retrofits into a bundle that can achieve economies of scale for equipment and labour. These projects, he says, are carried out by market development teams instead of individual owners.

The ACEEE rates and ranks national energy-efficiency programs and this year awarded France’s overall approach to energy efficiency with top honours, although the Netherlands received the highest ranking for its “robust” approach to building-related policies. “The Dutch government has also implemented mandatory building rating systems, as well as appliance performance standards and labeling programs,” the report noted, adding that all buildings must be rated on an A to G energy-efficiency scale, meaning that owners and contractors have baseline data when doing retrofits.

In the U.S., meanwhile, New York City’s Local Law 97 uses sticks instead of carrots, driving retrofits in large buildings using the threat of substantial fines for those that fail to cut their emissions. Haley says the U.S. also has a highly effective federal energy-efficiency program targeting low-income homeowners, which has no real parallel in Canada.

But retrofit experts point out that incentives and penalties on their own go only so far; what’s missing, in many cases, are market mechanisms – in effect, a kind of concierge service – that streamlines and demystifies a process that can be technically daunting, as well as front-end loaded, in terms of cost.

Paulsen adds that Canada’s retrofit sector is problematically under-developed; there’s a lack of skilled trades contractors specializing in retrofits, as well as chronic competition with the new-home construction industry. He muses that one potential solution would be the creation of a specialized contractor designation – a skilled tradesperson who is trained to deal with all the various elements of retrofits, from HVAC installation to insulation to the various electrical work required to knit it all together. The industry, Paulsen says, “would benefit from a contractor who could do all those things” – a kind of one-stop shop that delivers a turnkey fix.

Certainly, as I reflect on the retrofit journey my wife and I took, it strikes me that there’s a lot of insight about this last point, which speaks to the difficulty of such undertakings. Meaningful financial incentives for homeowners as well as landlords are necessary, as are efforts by policy-makers to clear away the underbrush of regulatory obstacles, such as zoning laws that penalize building owners who want to add exterior insulation panels and end up running afoul of municipal density regulations. And we have to acknowledge that any system that depends on homeowners to front five-figure upfront costs or take out similarly scaled loans seems destined not to get out of first gear.

What’s more, grants and loans on their own aren’t sufficient to transform a trickle of early-adopter retrofitters into a mass movement. The lessons of my own retrofit experience seem relevant, and not atypical: that 16-month journey involved an online application, two visits from an energy auditor, a search for firms that could seal leaks and add insulation, a complicated dance with three separate electricians, a search for contractors who could install the big-ticket items at a cost that didn’t make my eyes water, and various financial obstacles imposed by my gas services company for attempting to switch to electric heat.

By contrast, if something goes sideways with my gas furnace, the fix is a one-call/one-visit operation. There’s something wrong with this picture.

As Canadian policy-makers search for a retrofit strategy that will meaningfully reduce the massive amount of carbon emitted by our existing buildings, they’d be wise to remember that financial inducements, which are crucial for priming the retrofit pump, are only half the story. Making it as easy as possible is the other.

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Iberdrola of Spain, Enel of Italy, Ørsted of Denmark and America’s NextEra Energy all have market values that are moving into, and sometimes beyond, the oil majors’ territory and have shareholder returns that are absolutely blowing them away. Enel, Europe’s largest utility, had a stock market value equivalent to US$110 billion in the late autumn after a 23% rise in the past year. BP’s value was US$83 billion, after losing about 40% of its value.

Italy’s ERG is also catching the new-energy wave, proving that high growth and value creation are not limited to the biggest names in the industry. Like some of its big-name rivals, the Italian company embarked on a black-to-green transformation out of necessity, not out of the goodness of its heart, but soon learned that cleaning up its act could produce compelling shareholder returns.

ERG began life as an oil refining and oil products company just before the Second World War and stayed that way until 2008, when it started to push its carbon assets out the door and moved into wind power, as Ørsted did when it shed its oil and coal businesses on its way to becoming the world’s top offshore wind-power company. Since then, ERG’s shares have gone from €7 to €25. “Now I’m fighting against climate change, and it’s paying off well,” says Luca Bettonte, the dapper accountant and auditor who became ERG’s chief executive officer in 2012.

ERG knows it will never be a “new energy major.” Its market value is €3.8 billion and it has only a small following on the Italian stock exchange in Milan because the Garrone family – the “G” in ERG – owns almost two-thirds of the shares and is giving no signs that it would relinquish control. But the company is ambitious. It’s already the top wind-power company in Italy and recently broke into the top 10 in Europe, where its expansion plans are focused.

Reaching the top five is not out of the question, and if President Joe Biden makes good on his commitment to propel the United States into clean energy, trans-Atlantic investments “might be an opportunity,” Bettonte says.
Until 2017, ERG and the French oil giant Total jointly owned TotalErg, the fourth-largest fuel marketer in Italy, with some 2,600 service stations. The collection had made ERG a brand name among motorists. Today, ERG has no retail presence – it’s a B2B company – and most Italians have no idea what it does to make money.

ERG was one of the family-owned companies that helped Italy get back into business after the Second World War, and it thrived when the country’s “economic miracle” was in full swing in the 1950s and 1960s, the era when Italy scrambled up the value chain to become an industrial and design powerhouse that would produce some of the world’s best-known brands, including Ferrari, Vespa, Alfa Romeo and Maserati.

Edoardo Garrone, ERG’s founder, was an industrialist at heart and a product of his home city, Genoa, the gritty seaport, oil terminal and transportation hub on Italy’s northwest coast. Best-known as the birthplace of Christopher Columbus, Genoa would emerge as a key player in Italy’s industrial revolution. Garrone realized that petroleum was necessary to lubricate Italy’s wealth-creation machine and launched a small oil, tar and chemicals business in 1938 but made little progress before the war started a year later. After the war, which left much of Genoa in ruins, he opened a brick factory to help Italy’s reconstruction effort. In 1947, when demand for oil products was taking off, he built the San Quirico refinery in Genoa.

In the early 1950s, he created a fuel distribution and retail business under the ERG name, which stood for Edoardo Raffinerie Garrone – “raffinerie” is Italian for refinery. BP, then British Petroleum, became the refinery’s main oil supplier in 1958 and would become a minority investor in ERG. Five years later, Edoardo died of a heart attack on a fishing trip in Norway at age 57. His son Riccardo was pushed into action, becoming chairman at age 27. The young man expanded the company, and ERG joined an investment group, called ISAB, that built an enormous refinery in southeast Sicily in the early 1970s (ERG would take control of the refinery in 1985).

When the ISAB refinery opened in 1975, the energy markets were in crisis. The 1973/74 Arab oil embargo had sent crude oil prices up fourfold, and oil-importing countries went into recession. Demand for oil products sank, and price volatility became the norm – a fatal recipe for low-margin European refineries. In Italy, a dozen refineries, including ERG’s original plant in Genoa, closed between 1975 and 1989, by which time the Garrone family had realized there was no future in being a one-trick company; ERG had to diversify to survive.

The first diversification move came in 1993, when ISAB built an electricity plant next to its Sicilian refinery. The power was generated by burning the gases extracted from the refinery’s heavy-oil products. The plant opened in 2000, and the technology proved to be a great success. At that point, it was still unthinkable for the Garrones that ERG would be anything but a hydrocarbon company – old habits die hard. But the first decade of the 2000s rocked the company yet again, and new thinking emerged.

Bettonte, who joined the company in 2007 as chief financial officer, says the Garrones were slowly taking the view that their precious Sicilian refinery was becoming uncompetitive and that the industry’s rather violent price swings eliminated any hope of financial stability.

Demand growth for refined products was shifting to soaring Asian economies. The Saudis were building dazzling new refineries, as were Asian nations, with superior technology. At the same time, the world was realizing that the science behind climate change was real. In 2004, ERG made an opportunistic move into Italian wind energy, through a partnership with a Spanish company. Two years later, it made a big wind investment through the purchase of Milan-listed EnerTAD. A year after that, EnerTAD entered the French wind market. ERG’s black-to-green transformation was in full swing.

In one of the best-timed deals of the decade, ERG sold 49% of the Sicilian refinery to Russian oil giant Lukoil just before the 2008 financial crisis. Suddenly, ERG was swimming in cash and had to decide where to invest it. On cue, the investment bankers came knocking. One of them suggested that ERG pump its new fortune into healthcare; another suggested shipping. But ERG by then was smitten with clean energy. “We had a huge amount of money and had identified a fast-growing business – renewables,” Bettonte says.

The problem was selling the idea to ERG’s managers and employees, many of whom had spent decades building an oil company. “There was a lot of resistance from their side,” he says. “They were worried because they didn’t know about the renewable-energy business. They thought we would transform the company into a financial holding company that would invest in infrastructure. They thought we would cease being an industrial company.”
But the Garrone family – by then control had passed to Edoardo’s grandson and his older brother Edoardo, who is now chairman – backed the transformation, as did the other shareholders. ERG would be a renewable-energy company, dominated by wind power, with a strong presence in hydro and solar power too. And it would not act merely as passive investor in portfolios of clean energy – it would build. “I can’t say we made the decision because we wanted to save the world,” Bettonte says. “But the idea to go green played a part in it.”

ERG’s transformation has been remarkable. In 2013, the year it sold its final piece of equity in the refinery to Lukoil, the company emerged as Italy’s biggest wind-power player with the purchase of GDF Suez’s Italian wind farms. A rapid-fire series of acquisitions saw its onshore wind business blow across Europe, where it now has a presence in the U.K., Germany, France, Poland, Romania and Bulgaria. At last count, ERG had almost 2,000 megawatts of wind capacity in Italy and elsewhere in Europe, with another 280 megawatts under construction (as a rule of thumb, 1 megawatt can power 650 homes). It also had a big hydropower business in Italy, is pushing into solar power and has an enormous electricity plant in Sicily fuelled by natural gas. It’s the last vestige of its hydrocarbon heritage but one that, for now, is essential to ERG’s diversification strategy.

In 2008, only 3% of its earnings before interest, taxes, depreciation and amortization (EBITDA, essentially operating earnings) came from renewable power. By 2014, the figure was 73%. In 2019, 87% of its reported €496 million in EBITDA came from renewables. Investors have cheered the overhaul. From the end of 2007 through September 2020, ERG’s total shareholder return, including dividends, was 250%, greatly outpacing the FTSE Italia All-Share Index. Of the nine analysts who follow the company, there is only one “sell” rating, from Citigroup, which fears that the relatively high exposure to “short-lived” electricity subsidies makes ERG shares vulnerable.

Bettonte says ERG’s goal is to be the “bigger among the smallers.” More growth in Italy will be difficult, though the company is “repowering” its wind sites – replacing old turbines with much bigger and more efficient ones, an exercise that will produce four times as much electricity from half the number of machines. The growth will come elsewhere in Europe, and even that may be difficult, since overall electricity demand is not rising and coal-burning electricity plants are hanging on longer than expected in Germany, Poland and other countries. Getting permits for new renewable-energy projects is also a hassle. “Hydrocarbon plants are like car plants – they are hard to shut down,” he says.

But ERG knows it made the right decision to go green and also knows that renewable energy’s rise is irreversible as climate change is factored into every energy decision. “We are strongly committed to grow in this industry,” Bettonte says. “I am proud that we have become a climate-change fighter.”

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