Energy transition without subsidies: Why local authorities struggle with innovative financing and how to overcome it

The PROSPECT+ report engaged stakeholders at municipal, regional, and national levels, including municipal energy agencies, to assess their readiness and barriers to utilising financing mechanisms such as energy performance contracting, green bonds, guarantee funds, blended finance, third-party financing, and citizen finance.

Systemic Barriers to Innovation

Public authorities acknowledge the potential of innovative financing but face significant obstacles in moving away from traditional subsidies. Key challenges include restrictive national regulations, inadequate local capacity, and uncertainty in attracting private investors. Despite a growing openness to alternative financing, disparities among EU member states hinder a uniform transition, with some countries adapting legislation to support such mechanisms while others lag behind.

Many public authorities feel unsupported in navigating legal and regulatory hurdles. The persistent reliance on subsidies is not only a cultural norm but also a necessity due to insufficient advisory support, legal ambiguities, and limited expertise in negotiating financing agreements. Furthermore, political concerns and resistance from local communities slow down efforts to implement innovative financial models.

Signs of Progress and Recommendations

Despite these challenges, early momentum has been observed in areas such as energy performance contracting and energy cooperatives, with cities initiating pilot projects. However, these efforts require stable regulatory frameworks and expert guidance to be effectively scaled up.

To accelerate progress, the report puts forward key recommendations for EU institutions, national governments, and stakeholders:

• Legal and Regulatory Reforms: National and EU institutions must prioritise the adaptation of legal frameworks to create a more enabling environment for innovative financing.
• Practical and Technical Assistance: Public authorities need clearer guidelines, ready-to-use templates, and targeted technical support to successfully implement these financial instruments.
• Localised, Action-Oriented Support: The prevailing sentiment from public authorities is a demand for concrete, practical solutions rather than theoretical guidance.

Moving forward

The transition to innovative financing is essential for accelerating climate action, but public authorities cannot navigate this shift alone. Addressing legal bottlenecks, enhancing capacity-building initiatives, and providing dedicated support will be crucial in ensuring equitable access to sustainable financing solutions across Europe. Without these critical interventions, the pace of climate action risks being significantly delayed.