Anyone who has attempted to design a program for a market that includes landlords and tenants has probably run into the issue of “split incentives.”
Split incentives occur when the tenant, and not the property owner, is responsible for paying a property’s utility bill. While this contractual setup keeps daily energy use in check, it often hinders long-term investment in energy-efficiency. The reasons for this are two-fold:
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In most circumstances, a building owner would be expected to pay for building improvements, including any associated with energy efficiency. However, if owners do not pay the utility bill, they would not reap the benefits of the lower utility bill resulting from the energy improvements. Because of this, a building owner has little incentive to invest in energy efficiency.
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The opposite is true for the tenant. While tenants would see the benefit of the improvements reflected in their energy bill, they have little incentive to invest in permanent improvements to a building they do not own.
What’s the Solution?
There is no one-size-fits-all solution to the split incentives problem, but one of the best is on-bill repayment through a tenant’s utility bill. On-bill repayment, which puts both the payments and the savings on the same bill, is the only financing mechanism that readily addresses the problem of split incentives. An even better option is a form of on-bill repayment called an “on-bill tariff,” which transfers the responsibility of paying for the improvements from one tenant to the next. Midwest Energy’s How$mart program uses this type of financing mechanism, enabling its customers to make energy efficiency improvements without an up-front capital investment.
Please refer to the financial products section of the Solution Center for more information regarding on-bill repayment programs in addition to other relevant resources.
Content for this Blog post courtesy of The Cadmus Group