High energy prices have sparked new interest in energy-related renovations and non-fossil heating systems. This post by Desislava Rusinova and Marco Weissler of the European Central Bank argues that such investments cushion the impact of energy shocks on the building and construction sector. The analysis shows that while energy shocks initially hurt the construction sector, they also spur investment in heat pumps, insulation, solar panels and other efficiency measures that reduce fossil fuel dependence and strengthen long-term resilience.
Building resilience: how energy prices boost home efficiency
When energy prices skyrocket, that often comes as a heavy blow to the real estate and construction sector. Construction and building maintenance costs rise, and mortgages often become harder to arrange and come with higher rates. But for many people, it’s also a moment to rethink, renovate and invest in energy efficiency. So while energy shocks may slow new construction, they can simultaneously drive a wave of renovation activity.
We argue that the energy price surges in 2022 and 2026 have been driving demand for investment in energy efficiency. The recent wave of renovation has also been supported by declining equipment costs and government subsidies. In the shorter term the additional renovation spending can cushion the negative impact of higher energy prices on housing investment. In the longer term it reduces the dependence of the building sector on fossil fuels, increasing its resilience to energy-driven price and confidence shocks.
Renovation wave drives building production
Investment in housing involves not only the construction of new buildings, but also finishing and installation work – so-called specialised construction activities (SCAs). In fact, SCAs represent 75% of construction activity. Energy-related renovations are a large part of SCAs.[1] Electrical, plumbing, heating and air conditioning installations alone accounted for 40% of value added in the five largest euro area countries in 2023. Recently, renovations of existing buildings have been a main driver of the recovery in construction activity. Meanwhile, the construction of new buildings continues to decline – potentially also due to the strong increase in prices for energy-intensive inputs like concrete (Chart 1).[2]
Household demand is fuelling an energy efficiency-related renovation wave
Efficiency-enhancing renovations comprise a wide range of activities, including the installation of heat pumps, photovoltaic (PV) panels and other heating systems with better energy efficiency, as well as installing or improving building insulation. These activities have become more widespread in recent years.
In 2022 PV imports to the euro area increased sharply after the spike in energy prices due to the war in Ukraine. PV imports from China nearly doubled after the energy price hike and have remained high since then (Chart 2, panel a).[3]The decline in their prices since 2023 has likely supported this development. The average price of an imported tonne of PV modules or panels fell by two-thirds – from nearly €5,000 in 2023 to only €1,700 in 2026.
More recently, since the beginning of the war in the Middle East, national subsidy programmes have seen additional demand for financing energy-saving measures, e.g. in the Netherlands or the United Kingdom. In Germany, 64,000 households and businesses sought funding between March and May 2026 to renovate their building envelope – 16% more than in the same period a year earlier. The building envelope includes, for instance, insulation and windows. Funding requests for heating investments increased by as much as 40% (Chart 2, panel b).
Who renovates more?
Households who have faced higher heating costs or are more exposed to fossil fuels renovate more. Utility costs are a likely driver of such renovations. Recent results of the ECB’s Consumer Expectations Survey (CES) show that when utility costs grew faster, more households opted for energy-efficiency renovations (Chart 3, panel a).[4] In 2024 and 2026, after reported utility costs in the preceding heating season had grown strongly, the share of energy-renovated dwellings increased notably as well. In the period closest to the Ukraine war, between February 2023 and 2024, this share jumped by 10 percentage points.
Households facing higher expenditure on utilities in recent heating periods are also more likely to plan energy-efficiency renovations of their property. CES data from February 2026 showed that, besides general repairs, energy-efficiency renovations were the most frequently mentioned type of renovation planned. Such plans were mentioned by 14.5% of CES respondents.[5] Households with high utility costs and relying on fossil fuel-based heating systems much more frequently reported that they plan an efficiency renovation (Chart 3, panel b). In contrast, the probability was lower for households with heating systems that rely on renewable energy sources (e.g. heat pumps or solar collectors), which were not affected by the recent price spikes.[6]
Investment increases resilience to energy-price shocks
Beyond cushioning the negative impact of energy price shocks on the building sector, energy-efficiency investments can also make the building sector more resilient to energy price shocks. Following the recent price surges, the share of fossil fuels used for space heating in the euro area declined by 3.5 percentage points between 2023 and 2026 to stand at 56% (Chart 4). Most countries have decreased their reliance on fossil fuels, and those with higher dependence have reduced it by more. Accordingly, households living in energy-renovated housing report lower growth in their utility costs in the subsequent heating season compared with those living in unrenovated homes.[7]
This suggests that energy-efficiency renovations allow households to become more resilient to future energy price shocks, simply because they consume less energy. EU policies are aiming to boost this trend. The European Green Deal aims to at least double the annual rate of energy renovations by 2030.[8] One element of this is the extension of the EU Emission Trading System (EU ETS). The EU ETS increases the costs of CO2 emissions and makes oil and gas more expensive. From 2028, the building sector will also be covered by the EU ETS. And that should further increase the incentives to move away from oil and gas-based heating systems. This has positive implications for monetary policy – both improved energy efficiency and lower reliance on oil and gas heating reduce the impact of oil price fluctuations on inflation.
The views expressed in this post are those of the authos) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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