This article summarizes the legal framework backing the Smart Cities concept in Europe and provides the readers with some insights concerning the availability of public funds for this initiative.
Introduction
The Europe 2020 strategy, as of June 2011, is supposed to be the European roadmap for our industry to remain or become a world leader, with innovation and research as the engines to capturing the growth potential of low carbon technologies, boosting its economy and creating jobs. By doing so, EU hopes to contribute to tackle the major societal challenges faced by Europe, such as sustainable mobility, climate change, energy security or our ageing population.
Cities have a role to play in such a new scenery, as well as companies. In the following paragraphs I introduce the EU legal framework backing public support for the Smart Cities, discuss obstacles for the implementation of the initiative and I bring into the light some suggestions on how to analyze “smart projects” and where to ask for funds.
In preparing this article I have extensively consulted research reports from Accenture, HSBC Global Climate, Cities In Motion Think Tank, official documents from EU Commission, EIB and Think (linked to the 7th EU Platform). There is an abundant supply of blogs dealing with the Smart Cities issues and they have also helped me in organizing and structuring this article.
Energy: a problem and a solution
The well-being of people, industry and economy depends on safe, secure, and sustainable and affordable energy, while at the same time, energy related emissions account for almost 80% of the EU’s total greenhouse gas emissions. Thus, energy is one top priority: EU must meet the 20/20/20 climate and energy targets, reducing greenhouse gas emissions by 20%, rising to 30% if the conditions are right 1 , to increase the share of renewable energy to 20% and to make a 20% improvement in energy efficiency (Oettinger, 2011).
It has been estimated that energy investments in the order of € 1 trillion are needed until 2020, both to diversify existing resources and replace equipment and to cater for challenging and changing energy requirements. EU´s energy and climate goals have been incorporated into the Europe 2020 Strategy for smart, sustainable and inclusive growth 2, adopted by the European Council in June 2010, and into its flagship initiative ‘Resource Efficient Europe’. One of itscommitmentsis the launching of the Smart Cities and Communities Initiative.
Smart Cities
Cities are the key to addressing societal challenges since they have the critical mass of different communities, people and influences that come together to spark innovation and new ideas (Boulanger et al. 2012). At the same time, cities have to be seriously considered because they can be really dangerous for the environment, as Table 1 depicts.
The smart city concept is a framework for a specific vision of modern urban development that recognizes the growing importance of information and communication technologies (ICTs) as drivers of economic competitiveness, environmental sustainability, and general livability.
Cities offer an ideal platform for ICTs and other industries to integrate and test new concepts to serve Europe’s sustainable future delivering energy saving (Kroes, 2011). To work together, all these technologies and services cities require common open platforms and an underlying ubiquitous ICTs infrastructure and wireless networks. They also need aICTs application and service enablement suite, which includes smart media service enablers and citywide open access to sensors and actuators.
Obstacles that limit the potential of innovative smart technologies
Smart cities may offer a major market opportunity that can be easily exploited by ITCs providers and their telecom equipment partners(Giles, 2011). However, although the opportunity exits, capitalizing on it is not as straightforward as it seems: several obstacles limit the potential of innovative smart technologies, like high technological risk, difficulties over uncertain returns on investment or regulatory difficulties (Johnson and Suskewicz, 2009).This is why, on 10 July 2012, the European Commission launched the Smart Cities and Communities (SCC) European Innovation Partnership. It proposes to pool resources to support the demonstration of energy, transport and ICT in urban areas, concentrating them on a small number of demonstration projects. The funding will be awarded through yearly calls for proposals and the underlying idea is to ease that industry tests technology in a given city/community; it will show that the developed technology works on the ground, can be implemented for reasonable costs and has advantages for citizens and the whole community. The projects therefore bring competent industrial consortia together with one or two cities to demonstrate their advantages – so that other cities may follow to implement the same technologies.
The Smart Cities and Communities Initiative earmarked in 2012 € 81Million, covering the transport and/other energy sectors. From 2013, the budget has been increased to €365Million, covering three areas instead of two: energy, transport and ICTs; every demonstration project financed under this scheme must combine all these three sectors.(Goldmann, 2011). The main aims of the Smart Cities & Communities Initiative include:
MAIN AIMS OF THE SMART CITIES & COMMUNITIES INITIATIVE (De Lounis and Bertrand, 2012)
• Engaging with the business sector and public authorities to realise ambitious technological demonstration programmes which will promote innovative integrated applications of low carbon technologies in cities;
• Achieving significant impact and high replication across the European Union for these programmes in the areas of energy efficiency; production of renewable energy, smart distribution grids, urban mobility and information and communication technologies;
• Proposing innovative organisational and economic solutions;
• Accelerating the large scale deployment of the abovementioned low carbon technologies and its measures at local level;
• Demonstrating concrete technological and economic solutions to practically support the measures as proposed in the area of energy efficiency.
In 2014, a High Level Group will formulate a technological agenda with the most important aspects/issues to be addressed. Based on it, the European Commission will make calls for proposals. Industry-consortia can apply, submitting their project ideas. The “High Level Group for Smart Cities & Communities” will advise on the strategic orientation of the initiative identifying bottlenecks that are blocking the transformation of our cities and necessary action. This will help to identify the main issues to be addressed by the lighthouse projects and it will be fully operational under “Horizon 2020”, the new research and innovation funding framework under the next Multiannual Financing Framework (MFF 2014-2020). Among the eligible projects to co-finance we may mention the following ones):
A SHORT LIST OF ThE ELIGIBLE PROJECTS TO CO-FINANCE
• Smart buildings and neighbourhood projects. They could expand the use of high efficiency heating and cooling (using biomass, solar thermal, ambient thermal and geothermal heat storage, co-generation and district heating). They could also support the construction of nearly zero-energy buildings and positive energy buildings and neighbourhoods.
• Smart supply and demand service projects. Funding could be available for schemes which provide data and information to citizens and end-users on energy consumption/production and multimodal transport and mobility services; to develop smart metering and related services for energy, water, waste; monitoring and balancing the grid; or energy storage (including virtual energy storage)
• Urban mobility projects. These could be electric public transport vehicles (for example trolley buses, trams, metro vehicles) that are able to exchange surplus energy (braking and accelerating energy) with the energy system. They could be using ICT to manage energy flows or using hydrogen as an energy carrier for storing energy and balancing demand at city level for energy and stationary power – controlled by ICT using forecasts for demand patterns based on weather forecasts, event planning, vehicle route patterns, etc.
• Smart and sustainable digital infrastructures. By reducing the carbon footprint of the Internet, in particular data centres and telecoms equipment, including broadband; intelligent heating, cooling and lighting solutions.
Managing an urban center’s energy use is critical to providing a sustainable high quality of life for its citizens and municipalities seek to improve across 5 main sectors: energy; mobility; water; public services; buildings and homes (Lompscher, 2010).
The actual elements used to create a smart city vary from one city to another: Greenfield cities require larger ICT projects, while Brownfield ones demand a transformation of existing ICT capabilities. And, of course, beyond product capabilities, smart cities need as well a variety of service firms providing design activities, planning, monitoring, maintenance, consulting and so on.In Giles (2011) report for Accenture, devoted to financing smart cities, it is said that smart cities would only survive if they diversify their capital base and generate cash-flow for reinvestment. These cities need public funding besides private and philanthropic capital. Whenever it happens that they are not chosen for a demonstration project under the SSC initiative and then, they need to find alternative and complementary ways of financing their smart initiatives.
How will technology project son an urban scale be funded?
Froman investment perspective, what is the incentive to finance public infrastructure?. These projects require large funding volumes, as it has already be mentioned in previous paragraphs: the Strategic Energy Technology Plan (SET-Plan) foresees in 20-25 model cities investments of approx. €11 billion and these numbers do not refer to the roll-out of energy and other “low-carbon”-technologies, but to the implementation of the initial demonstration projects!!!!
Cities get their money fromthe taxes of citizens. Weare in a time of austerity and money does not flow easily, so EU cities and companies have to manage their infrastructure in an economically efficient way (http://reports. weforum.org/global-risks-2013/). The challenge at the moment is to find a way that a city doesn’t have to pay the money up front. From an investor stand point, there are long-term benefits from managing a city efficiently and it is crystal clear that eliminating waste in the existing infrastructure is extremely important. The possibility of recovering the amount of money invested within the lifetime of the technologies involved in the projects is one of the most relevant factors when deciding whether to invest or not. People in cities live longer, they look to save funds and you can observe a huge flow going into pensions and life insurance. That money needs to be invested somewhere and there can be a natural balance between the requirement for long-stated steady return products in which to invest your pension and public infrastructure projects. The long-term, stable returns that can be generated by the infrastructure projects will be necessary to build up new cities and retrofit existing ones. These are exactly the types of assets that are of interest to sovereign wealth funds, insurance companies, and pension funds. However, these are investments with high-risks involved, which are usually related with measures that involve extremely variable costs/prices, or with technologies that are not sufficiently tested to have predictable performances, and generally imply high upfront costs. Most actors are not willing to cover that risk, requiring that, in order to invest, some other entity covers the risk. In other cases, even if some measures are clearly costeffective and there are nothigh upfront costs, investors still need incentives tobe deployed at a wide-scale. The time of full recovery of the investment can strongly influence the decision whether or not to invest, especially in the presence of high uncertainties with respect to future energy and carbon price trajectories and/or regulation. Nowadays numerous firms and individuals have only a short to mid-term vision of their businesses or lives. Therefore, if they are not able to recover their investment within such or even shorter periods, they do not invest (Spedding, 2013).
In addition to the barriers presented above, we might find as well difficulties associated with an informational deficit that can include the lack of customized information and the lack of public a war en esson climate change issues, but also the insufficient qualification of staff for complex integrated tasks at the public entities and service providers levels. When aiming for a wide-scale implementation of measures, barriers related to information problems might be crucial. If information is not available, is expensive to be collected, or is not provided in a clear way, decisions based on incomplete information cannot be avoided and, consequently, the selected measures, techniques, materials, technologies, etc. will hardly be the most suitable.
Funding Instruments for financing Smart Cities
Financing Smart Cities requires a mix of different funding instruments and models, including private players. Financing Smart Cities-measures mainly through classic municipal funding or through funds of the municipal households seem not feasible. The possibilities of utilizing European funding instruments in the new period of structural funds, like ELENA3 and/or JESSICA4 (2014-2020) have to be identified. (de Oliviera Fernandes et al., 2011).
Since there are various activities that require the coordination of different actors from different sectors or with different functions within the same sector, the divergence of interests is a frequent obstacle to the sustainability in a city. This coordination is complex, and usually requires some effort from all parties, which the regulatory mechanisms shall make sure to be sufficiently compensated by benefits to motivate all groups of stakeholders.There are three types of policy instruments that can directly mobilize public funds to support innovation: public loans/loan guarantees, public investment in the equity of innovating companies (Public-Private- Equity-Partnerships, or PPEPs), and subsidies.
There are numerous types of innovation processes in the SET Plan; a rigorous cost-benefit analysis to determine the size of the existing financing gap and the choice of financing instruments should be guided by the stage of development of the technology and its characteristics. These include its cost (size of investments required for the development of this technology), the interdependence between this technology and other new technologies, the radical vs. incremental nature of knowledge involved in the development of this technology and the status of the innovating entity (regulated vs. non-regulated). Following the classification provided by the EC (EC, 2009c), it is possible to distinguish between a) closeto-be-mature technologies, which are, therefore, close to the market and whose deployment within the period 2011-2020 seems feasible; b) those technologies that could be deployed within the period 2020-2035; and c) those that are still farther from the market and are therefore highly immature. The type of financial support required will then depend on: (I) the size of the financing gap to be covered by public funds; (II) the project’s ability to compete for public funds against other clean technologies; (III) the likelihood that support to this technology will need to be cut off because it fails to deliver according to authorities’ expectations and (IV) the type of entity that is best suited to carry out this innovation (Newbery et al. 2011).
Funding low-risk projects requires providing strong efficiency incentives. One option is to make the releaseof funds and their amount conditional on the achievement of some minimum objectives. Given the high probability of success in these projects, linking support to project performance should encourage the innovator to carry out his function efficiently and reduce the public cost of support, while not prejudicing his willingness to undertake the project. A lack of innovators ’liquidity or their concern about the credibility of the funding may indicate releasing some or all the funds up front or at stages during project execution on condition that they are returned if the project is not undertaken as agreed or the innovator, the most attractive contract is upfront funding unconditional on project performance. However, since this is the most expensive option from a public point of view, it should be reserved for highrisk projects, and only use dif other approaches will not deliver. Providing assured funding to centres of excellence (contingent on continued performance) attracts researchers and keeps research groups alive. Up-front unconditional funds may be provided as a fixed amount. However, providing ginstead funds covering a certain fraction of project costs might allow the public investor to benefit from below-budget delivery (successful projects that meet objectives at a cost lower than expected) (Newbery et al., 2011)
How to support a portfolio of smart cities
Supporting the portfolio of smart cities can be about supporting the city authorities asactors, and supporting city authorities as institutions. Still, it cannot be excluded that the implementation of certain smart city concepts will require private actor support that is not yet covered by the abovementioned sector initiatives and partnerships. Furthermore, these initiatives and partnerships focus onprivate actors so that support for a city authority as a public actor is not necessarily available, which couldthen also be provided in the context of the Smart Cities Initiative.
REFERENCES
Boulanger, P.A., Campagna, C., Ellis J.M., and Wise, C. (2012) Masters of Finance, Finance & Enterprise Performance.Outlook The journal of high-performance business, No. 1, 3-10.
De Lounis, S., Bernard, F. (2012) New Trends in Innovation, TEDxBruslles meet the European Commission, Brussels, Nov. 2012, In collaboration with the Innovation Policy Unit of the Directorate General for Research and Innovation
De Oliviera Fernandes, E., Meeus, L., Leal, V., Azevedo, I., Delarue, E., Glachant, J.M., von Hirschhausen, C. and Capros, P. (2011) Smart Cities Initiative: How to Foster a Quick Transition towards Local Sustainable Energy Systems. http:// think.eui.eu, Final Report, January 2011. THINK is financially supported by the EU’s 7th framework program. Giles, S. (2011) Smart Cities, Breaking the Inertia. Report for Accenture Intelligent Cities Europe, 30thJune 2011
Goldmann, R. (2011) EIB support to the Smart Cities and Communities Initiative. Smart Cities and Communities Launch Event, 21 June 2011,Brussels Johnson, M. W., and Suskewicz, J. (2009) How to Jump-Start the Clean-Tech Economy, HBR Articles, 01-nov-2009.
Kroes, N. (2011) The role of ICT for Europe’s cities. Smart Cities and Communities Initiative Launch Conference Event, 21 June 2011, Brussels.
Lompscher, K. (2010) Sustainable and High Growth Cities: Balancing Development and Environment World Cities Summit 2010, Plenary Session 1. Newbery, D., Olmos, L., Rüster, S., Liong, S.J., Glachant, J.M., von Hirschhausen, C. and Capros, P. (2011) Public Support for the Financing of RD&D Activities in New Clean Energy Technologies, Final Report, http://think.eui.eTHINK is financially supported by the EU’s 7th framework program.
Oettinger G.H. (2011) The role of Smart Cities and Communities for the EU energy policy. Smart Cities and Communities Launch Event, 21 June 2011,Brussels
Spedding, P., Metha K., and Robbins, N. (2013) Oil & carbon revisited: Value at risk from ‘unburnable’ reserves. Oil & Gas/Climate Change Europe, HSBC Climate Change, 1-28.
ACKNOWLEDGMENTS
La elaboración de este artículo ha sido parcialmente financiada por los proyectos 2011/00033/001 (Ministerio de Ciencia e Innovación) y 2008/00059/004 (Dirección General de Universidades de la Comunidad de Madrid).
NOTES:
1 The European Council specified: “provided that other developed countries commit themselves to comparable emission reductions and economically more advanced developing countries to contributing adequately according to their responsibilities and respective capabilities”
2 Communication from the Commission (doc. 7110/10 of 5 March 2010).
3 ELENA (European Local Energy Assistance) is a technical assistance grant facility to help local and regional authorities to unlock their sustainable investment potential; its objective is to increase the investment in projects in the areas of energy efficiency, renewable energy sources and urban transport. ELENA support covers a share of the cost for technical support that is necessary to prepare, implement and finance the investment program; summarizing, they help cities top repare their projects funding.
4 JESSICA (Joint European Support for Sustainable Investment in City Areas) gives Member States the option to use some of the Structural Funds (as theERDF) to make repayable investment, such as loans and guarantees, in projects forming part of an integrated plan for sustainable urban development.
SOME OUTSTANDING INFORMATION TO TAKE INTO ACCOUNT
• Cities create some 80% of the EU’s gross domestic product with their concentration of trade, business and “people expertise”, but they are a driving force in generating Europe’s economic growth.
·• They will become even more important as the proportion of Europeans living in urban areas grows from just over twothirds today to a forecast 85% by 2050. · 68% of the EU population lives in urban areas, which consume 70% of energy. This accountsfor 75% of the EU’s total greenhouse gas emissions (GHG).
• The information and communications technology (ICT) sector will require more and more electricity by 2020.
• Urban transport is responsible for onequarter of all the emissions from road transport.
• Congestion costs Europe about 1% of GDP every year – most of if it from urban areas. • Each year, 16% of EU GDP, around € 1,500 billion, is spent by public authorities.
