Blame it on the owner: ownership and energy performance of multi-dwelling buildings

Tenant-owned buildings show better energy performance than rental apartment buildings. The difference in energy performance between private and municipal rental company buildings is small. These differences highlight the potential for improvements in energy performance in all types of multi-dwelling buildings.

If it is profitable to improve the energy efficiency of buildings, why is the full potential unexploited? The difference between the current level of energy efficiency and the level that would be cost-effective is known as the energy efficiency gap. Misaligned incentives among stakeholders may partially explain the energy efficiency gap in the residential sector. The research article “Blame it on the owner – ownership and energy performance of multi-dwelling buildings” contribute to a better understanding of the energy efficiency gap in the residential sector. We investigated the energy efficiency of multi-dwelling buildings in Sweden to find out whether the ownership type matters. More specifically, we investigated if rental apartment buildings are less energy efficient than cooperative apartment buildings and whether public ownership has a negative impact on energy efficiency. The empirical analysis was based on a unique dataset that combines data from energy performance certificates with ownership data on residential units.

Differences between public and private landlords

About 40% of the total number of apartments in Sweden are owner-occupied (owned by cooperative apartment associations) and 60% are rental apartments, whereof 50% are owned and managed by municipal companies. It is argued that different incentive structures—such as split incentives between tenants and landlords, and differences in profit maximization interests between public and private rental companies—affect the energy performance of multi-dwelling buildings.

In Sweden, rental costs usually include the tenant’s heating bill, which is therefore paid by the landlord. So, while landlords may have incentives to invest in the building’s energy efficiency, the tenant may not have incentives to use energy efficiently. In this context, the split incentives mainly concern the problem of energy use. From the landlord’s perspective, and especially in the case of profit-maximizing private landlords, cost-based rent settings may discourage energy efficiency investments if they serve to lower the operating costs. In this case, landlords may have to share the return on their investments with the tenants. In Sweden, rents are based on usage values, which to some degree may consider the landlord’s costs.

Better energy performance in owned apartments

The differences in energy performance between rental multi-dwelling buildings and owner-occupied cooperative apartment association buildings, offer an estimate of the energy efficiency gap due to split incentives concerning energy use and other regulatory aspects such as cost-based rent setting. In addition, the effects of public and private management were quantified by estimating the differences in energy performance between public and private rental multi-dwelling buildings.

Our results show that owner-occupied cooperative apartment buildings have better energy performance than rental apartment buildings and that the difference in energy performance is relatively small between multi-dwelling buildings owned by private and municipal rental companies, after controlling for the buildings’ characteristics. The difference in energy performance between public and private rental multi-dwelling buildings is 1.4–1.5 kWh per m2. Considering the energy performance of owner-occupied cooperative apartment buildings as the benchmark, public rental multi-dwelling buildings could reduce their energy use, on average, by 6.5–8 kWh per m2 (4.3–5.2%) and private rental multi-dwelling buildings by 5–6.7 kWh per m2 (3.4–4.8%).

In total, this potential inefficiency amounts to 0.3–0.4 TWh annually for public rental multi-dwelling buildings, implying a potential reduction in annual energy costs of approximately € 30–40 million. The saving potential for private rental companies represents € 14–20 million per year (0.14–0.2 TWh). If we also consider that the heating system in the long run perspective can be changed and improved, the potential for a reduction in energy use increases by around 40%. However, this potential should be interpreted as conservative, since owner-occupied cooperative apartment buildings may also have opportunities to conduct profitable energy efficiency investments.

Energy contra social objectives

From a strict energy perspective, transforming rental apartments to owner-occupied cooperative apartments may alleviate some principal-agent-related problems and would perhaps lead to higher energy performance. In cooperative apartments, members are the beneficiaries of their actions towards more efficient use of energy and making cost-effective energy efficiency investments. However, the energy-related benefits of transforming rental apartments into owner-occupied cooperatives, or privatizing rental companies, are limited and may conflict with the objectives of municipal ownership (and rent regulation) that form part of broader social policies, e.g., the alleviation of residential segregation. The energy efficiency gap only concerns cost-effective energy efficiency improvements, so a priori there is potential to harmonize energy and social objectives, but further discussion is required among the stakeholders.

As previously mentioned, in Sweden, the heating bill is usually included in a tenant’s rent and is thus paid by the landlord. Individual metering and debiting of the tenant’s heat, as well as water usage, could provide economic incentives to the tenant for more efficient energy use. However, this would create another split incentive problem because landlords would have fewer incentives to invest in the energy efficiency of the building and its appliances. As an alternative, information-based instruments such as peer comparisons that allude to social norms or other nudging mechanisms may have an effect on energy use. These effects should be addressed in further discussions and research.

Text by: Alejandro Egüez,
Centre for Environmental and Resource Economics (CERE), Umeå University

Centre for Environmental and Resource Economics (CERE)

• Energy savings
• Reduced costs
• Reduced climate impact

References

Here you find the doctoral thesis by Alejandro Egüez which the above article is based on Energy efficiency, district heating and waste management: essays on environmental economics