Changing user behavior by individually metering and charging tenants for their use of heating and hot water has been put forward as a means to reduce energy consumption in the building sector. This would give the tenant incentives to save energy, but at the same time weakens the landlord’s incentives for improving energy efficiency in the building, since she is no longer responsible for energy costs. These split incentives problems should be possible to avoid if there is a net gain from improving energy efficiency and/or installing individual metering that could be shared between the parties.
The aim of this article is to problematize the concept of individual metering, to show through simulations that there are ways to avoid the split incentives problem involved, and to show that it should be possible to design contracts that give both landlord and tenant incentives to save energy.
The results indicate that few energy efficiency investments will manage to bear their own investment costs, given how low the present value of the energy savings is at given energy prices. The results also show how split incentives may hinder the energy efficiency investments, but that there are conditions under which such investments and/or individual metering may increase welfare for landlord, tenant or both. Without negotiations this gain will not be reached, but through co-operation this welfare gain could be split which would benefit both landlord and tenant and this should be considered when designing contracts. Finally the findings highlight the importance to take into account the interaction of different means to save energy to avoid over-investment.
2011. , 26 p.
split incentives, individual metering, incentives for energy efficiency, energy savings, principal-agent problem