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Aligning Incentives: Financial Models for Promoting Energy Efficiency Renovations in American Apartment Buildings

Burr, Mimosa LU (2013) In IIIEE Master thesis IMEN41 20132
The International Institute for Industrial Environmental Economics
Abstract
Buildings account for a significant portion of energy consumption and carbon dioxide production in the United States. Renovations could improve the energy efficiency of these buildings. However, a number of market barriers, e.g. high upfront costs, are resulting in a low adoption rate of energy efficiency (EE) technologies in the building sector. Apartment buildings face an additional challenge of overcoming the split incentive, or landlord-tenant dilemma. This study assesses public and private financial models that could address the split incentive in EE renovations in public and/or private apartment buildings. This thesis uses principal-agent (P-A) theory as a framework for understanding the contractual relationships in which a principal... (More)
Buildings account for a significant portion of energy consumption and carbon dioxide production in the United States. Renovations could improve the energy efficiency of these buildings. However, a number of market barriers, e.g. high upfront costs, are resulting in a low adoption rate of energy efficiency (EE) technologies in the building sector. Apartment buildings face an additional challenge of overcoming the split incentive, or landlord-tenant dilemma. This study assesses public and private financial models that could address the split incentive in EE renovations in public and/or private apartment buildings. This thesis uses principal-agent (P-A) theory as a framework for understanding the contractual relationships in which a principal pays an agent to act on the principal’s behalf or to provide a service to the principal. The objective of this thesis is three-fold. Firstly, financial models that address split incentives in apartment buildings were identified through a literature search. Analysis showed that most of the financial models do not suffiently address the problematic principal-agent relationship. Secondly, two models that did address the split incentive—green leases and on-bill programs—were examined further to explore how they alter the principal-agent relationship and to investigate the effects of these models. Data was collected primarily via literature analysis and supplemented with interviews. While both address the split incentive, only on-bill programs showed promise in contributing significantly to increasing energy efficiency renovation rates in American apartments. High transaction costs are preventing green leases from adoption in the residential market. Thirdly, a case study was conducted on How$mart, an on-bill program based in Kansas. This program has successfully overcome the split incentive barrier. The How$mart program packages EE renovations as a utility service that is financially attractive to landlords, tenants, contractors, and the utility company. This thesis concludes with a compilation of aspects that are key to a financial models success at addressing the split incentive and achieving a high participation rate. The thesis also found that, despite the success and promise of on-bill programs, EE financing programs tend to underserve non-low-income tenants in medium- and large-scale apartment buildings. Suggestions are provided on how to close this gap. Furthermore, developing on-bill programs in coordination with complementary policies would strengthen efforts to address EE renovation needs in American apartment buildings. Suggestions include minimum energy standards as a part of rental licensing, energy efficiency disclosures for apartments, and removing fossil fuel subsidies. (Less)
Please use this url to cite or link to this publication:
author
Burr, Mimosa LU
supervisor
organization
course
IMEN41 20132
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Energy efficiency, buildings, renovation, split incentive, financial model
publication/series
IIIEE Master thesis
report number
2013:12
ISSN
1401-9191
language
English
id
4091578
date added to LUP
2013-10-14 11:18:29
date last changed
2013-10-14 11:18:29
@misc{4091578,
  abstract     = {Buildings account for a significant portion of energy consumption and carbon dioxide production in the United States. Renovations could improve the energy efficiency of these buildings. However, a number of market barriers, e.g. high upfront costs, are resulting in a low adoption rate of energy efficiency (EE) technologies in the building sector. Apartment buildings face an additional challenge of overcoming the split incentive, or landlord-tenant dilemma. This study assesses public and private financial models that could address the split incentive in EE renovations in public and/or private apartment buildings. This thesis uses principal-agent (P-A) theory as a framework for understanding the contractual relationships in which a principal pays an agent to act on the principal’s behalf or to provide a service to the principal. The objective of this thesis is three-fold. Firstly, financial models that address split incentives in apartment buildings were identified through a literature search. Analysis showed that most of the financial models do not suffiently address the problematic principal-agent relationship. Secondly, two models that did address the split incentive—green leases and on-bill programs—were examined further to explore how they alter the principal-agent relationship and to investigate the effects of these models. Data was collected primarily via literature analysis and supplemented with interviews. While both address the split incentive, only on-bill programs showed promise in contributing significantly to increasing energy efficiency renovation rates in American apartments. High transaction costs are preventing green leases from adoption in the residential market. Thirdly, a case study was conducted on How$mart, an on-bill program based in Kansas. This program has successfully overcome the split incentive barrier. The How$mart program packages EE renovations as a utility service that is financially attractive to landlords, tenants, contractors, and the utility company. This thesis concludes with a compilation of aspects that are key to a financial models success at addressing the split incentive and achieving a high participation rate. The thesis also found that, despite the success and promise of on-bill programs, EE financing programs tend to underserve non-low-income tenants in medium- and large-scale apartment buildings. Suggestions are provided on how to close this gap. Furthermore, developing on-bill programs in coordination with complementary policies would strengthen efforts to address EE renovation needs in American apartment buildings. Suggestions include minimum energy standards as a part of rental licensing, energy efficiency disclosures for apartments, and removing fossil fuel subsidies.},
  author       = {Burr, Mimosa},
  issn         = {1401-9191},
  keyword      = {Energy efficiency,buildings,renovation,split incentive,financial model},
  language     = {eng},
  note         = {Student Paper},
  series       = {IIIEE Master thesis},
  title        = {Aligning Incentives: Financial Models for Promoting Energy Efficiency Renovations in American Apartment Buildings},
  year         = {2013},
}