Understanding Energy Consumption Behavior in a Landlord-Tenant Context: What do the numbers tell us?
Presenter: Maya Papineau of the Department of Economics at Carleton University

March 31, 2015

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About the Presenter

Maya Papineau holds a PhD in Agricultural and Resource Economics at University of California Berkeley, an M.Sc. with distinction from University College London, and a B.A. in Economics at Carleton University (with Highest Honors). She has research interests in environmental economics, energy economics and applied econometrics. Beside working on the split-incentive barrier to energy efficiency, she also works on energy performance codes, standards and labels, the interplay between business cycles and carbon emissions, and on studying the adoption trajectory of renewable technologies.

The Presentation

Split incentives, lease contract structure and electricity consumption in commercial buildings are closely interconnected. A split incentive arises when, for example, energy costs are included in the lease of a tenant as a flat fee, or else when building occupants pay the energy bills but have limited authority to invest in the building to improve its efficiency. Split incentives can be barriers to energy conservation and are very challenging to overcome. Maya Papineau is carrying out cutting-edge research on the split incentive barrier using sophisticated econometric techniques to gain a deep understanding of the issue. As she presents her research, she will share insights on: How widespread is the landlord-tenant dilemma? How large is the effect on energy consumption? Can we work around it when designing energy policies? How could we establish stronger incentives for energy conservation in the commercial and institutional sector?

Maya’s presentation focused on the issue between building tenants and owners where a flat rental fee was paid by tenants (regardless of energy consumption), there would be no incentive for them to reduce energy consumption or to improve energy efficiency around the building. This situation is also referred as the “split incentives” or the “principal– agent” problem. It is mainly due to the asymmetric of information between different stakeholders, and the widespread of this phenomenon would result in a larger reduction in overall wellbeing of the economy.

Maya’s study has focused on the commercial sector. This particular sector interests her because of two primary reasons, one being the commercial sector has a much higher rate of multi-tenanted leasing situation comparing to residential sector (50-70% vs. 25%), which means the same situation in the commercial leasing area has a much larger impact on the energy consumption of the society. Another reason is “Green Lease” in the commercial sector has gained popularity that might be a future path to solving the problem.

The three studies showed by Maya were using data from the U.S. market with the focus on office buildings. Some of the interesting findings in her analysis are: the owner that used energy efficiency as selling point of the buildings usually rent at a better rate and sell at a higher premium; one percentage increase in the net contract rate is associated with 1% decrease in per capita electricity consumption; tenants who pay for their own utilities tend to shift their consumption from peak hours but does not reduce overall electricity consumption; contracts only make a difference when property managements characteristic is being controlled. Explicit “green” management expertise does not significantly affect electricity consumption.

The study concluded with several insights: firstly, contract structure does affect electricity consumptions in the principal-tenant situation; and secondly, tenants are willing to pay a premium for energy efficiency improvement for commercial leasing. Maya thinks this “split incentive” issue differentiates between commercial and residential sector. Since the magnitude of inefficiency is different in these two sectors, future policy should be tailored differently among heterogeneous sectors.

The Discussion

The discussion begins with looking at the source of the analyzed data, how they were used and what are the other factors that were considered. Since most of the data were from the U.S. with the focus on office buildings, there were questions on how well it approximates the Canadian context. With the research carried out so far, Maya finds that in Canada the availability and confidentiality issues are the main constraints right now. In the analysis, many other factors were also considered, such as similar building characteristics, price of the energy, averaged building operation cost, and providing rebate to consumers as financial incentive of the Demand Side Management instrument was considered as a control variable. Other factors that also play a role in the context include ownership structure of commercial buildings, so for example high frequency of ownership change of a building would reduce the property owner’s incentives in putting in or adopting energy efficient equipment or standards.

Another part of the discussion was about the conclusion drawn from the studies and about what possible policies that have been implemented elsewhere could be considered. Maya mentioned that in the U.K., there is a benchmarking system in the government policy which provides a way to advertise the energy efficiency of the building that helps tenants to make informed decisions. It is also believed to be good policy to have much higher rate sub-metering that would benefit the tenants and reduce overall energy consumption.

This précis was drafted by Yinyan Zhang, Master Degree Student in the Sustainable Energy Policy and Engineering Program at the School of Public Policy and Administration