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4 solutions to high utility bills: fixing the split incentive problem

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In my last post, “What your drafty house has in common with overpriced ballpark beer”, I wrote about how the split incentive problem means that if you rent your home, you’re probably paying way more for energy than you would if you owned. Since then, the weather has gotten a bit nicer, but the problem of split incentives between landlords and renters remains, ready to pop up again once the AC units come on. Fortunately, many different groups and governmental agencies have come up with some interesting ways of fixing the screwed up incentives for home energy costs.

There’s of course the traditional regulatory response – called “command and control” – which involves simply mandating that certain efficiency measures be adopted by any new building or retrofit, like requiring buildings to install heating systems that meet some efficiency standard. But beyond being generally opposed by economists as inefficient, many existing buildings are out of reach of these regulations, since most cities can only impact what happens when new buildings are constructed or significant changes are made to existing buildings, leaving the majority of buildings grandfathered in. With that in mind, here are a few promising ideas:

  1. Energy Aligned Lease – Misaligned incentives mean that money is being left on the table. Energy Aligned Leases are a way of divvying up the savings so that both the tenant and landlord are more or less guaranteed to come out ahead. The idea is that the tenant and landlord agree on an engineer’s estimate of the projected energy savings, which would end up paying back the capiteverybodywinsal cost of the improvement over a period of time. The tenant then pays back 80% of that figure each year,so that the tenant is protected from uncertainty about the savings estimate and gets to start pocketing savings right away. The payback period stretched out an extra 25% so that all the capital costs are paid back. (Watch this explained in more detail in a great video by a representative of the Urban Green Council.) The landlord ends up getting what amounts to a free upgrade to their building, increasing its value. It’s a true win-win.The Energy Aligned Lease was pioneered in part by the New York City government, which created model language. The first such lease in New York was signed in the spring of 2011, with Mayor Michael Bloomberg presiding, and now the city requires that all new leases in enters into have an energy aligned clause.
  2. Energy Report Cards – This is the response favored by Lucas Davis and David Levine, the researchers mentioned in the last post. The idea is to have something similar to the yellow sticker on Energy Star appliances that compare the expected energy usage compared to competing products. Davis and Levine imagine text along the lines of:“This apartment unit has expected gas and electricity costs of $123 per month, assuming average usage. That utility bill is higher than 67 percent of apartments this size, meaning most apartments this size have lower expected energy costs.”
    The downside is that the researchers only foresee a report card that would be able to predict energy costs associated with appliances and the home’s heating/cooling system, which have easily measurable efficiency. With quality of insulation as central as it is to home energy use, though, this would lose an important part of the picture. It wouldn’t be impossible to try to add in information about factors like insulation, but these would be much more difficult to measure and to get a baseline to compare against.
  3. Tax Incentives for Efficiency – This idea doesn’t really eliminate the split incentives problem as much as it just does an end run around it. Basically, the government is paying for the improvement through tax deductions rather than having the tenant pay for it out of energy savings like in the Energy Aligned Lease. President Obama proposed something similar in his 2011 State of the Union address with the Better Buildings Initiative.
  4. Share the Utility Costs – This last idea is certainly the simplest. Why not just cut the utility bill in two and have both the tenant and landlord pay half each month? This way both parties are getting a partial price signal to use energy more efficiently. I would imagine this option’s lack of popularity could be from logistical difficulties and resistance from energy providers at having to deal with double the number of clients. There probably also would be some inertial resistance to adoption based on the unorthodox nature of the agreement.

Written by rethoughtblog

March 25, 2013 at 2:56 pm

What your drafty house has in common with overpriced ballpark beer

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As I’m sitting paying my highest heating bill of the winter, next to the drafty window half-heartedly sealed with a layer of plastic, it’s easy to grouse about my landlord not springing for basic energy efficiency measures (Saran wrap on the windows — really?) that could cut our energy use dramatically. It turns out, though, that it’s not just my landlord.

A few months ago, Brad Plumer at the Washington Post and Matthew Wald at the New York Times both had posts looking at the problem of poor energy efficiency in rental units. Based on research by Lucas Davis at the Haas School of Business at UC Berkley, they show that like you might expect, homeowners are way more likely to make energy-saving investments that pay off in the long run. You really are paying way too much for energy at your rental apartment.

The problem isn’t that your landlord has it out for you. It’s called the “split incentive problem” (or the “landlord-tenant problem,” your choice), where who pays for energy is separate from the energy user. But that’s a really wonky term, so let’s put it in terms that are easier to relate to: alcohol.

You see, the typical rental house where the tenant pays for energy is sort of like buying beer at the ballpark. You end up paying way too much for low quality beer, so you try to make the drink last as long as possible, but what you end up with is a warm quarter cup of Bud Light by the fifth inning. Not a great experience. Similarly, you can turn your thermostat down to 66 degrees, but you’re still going to be paying way too much for energy when your house leaks like a sieve, has an outdated heating system, and a refrigerator from 1986.

On the other hand, when the landlord includes energy costs in the lease (common in commercial properties), you have a situation much closer to that producer of great decisions, the open bar. After you’ve paid your entrance fee — or gone in for free if you’ve really lucked out — every extra drink has a marginal cost of zero. With those terms even the most responsible drinker is likely to go back for just one more drink. Since they bear all the costs, in this scenario, your landlord is likely to act like frat houses do, those paragons of getting masses of people drunk cheaply, and serve you the energy efficiency equivalent of Natty Light or Keystone. The only difference here is that cheap is good.


More similar to your landlord than you’d think

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Written by rethoughtblog

February 28, 2013 at 8:12 am