Incentives for energy efficiency measures while renovating apartment blocks Lovisa Högberg Div of Building & Real Estate Economics

Project background Energy efficiency is a hot topic -National and international goals -High energy consumption in the building sector – potential for saving The ’Million Program’ is in need of extensive renovation Few real estate owners have undertaken energy efficiency measures when renovating – why? 1) Means to reduce climate effect 1a) 20 % until 2020, 50 % until 2050, compared to 1995 in Sweden, and compared to1990 in the Europan Union (=a reduction of 14 % compared to 2005) 1b) 40 % 2) 65 000 apartments per year (Boverket/The National Board of Housing) to avoid damage by damp, compared to apr. 20 000 apartments a year now.

The Million Program Then: Political decision due to housing shortage 1965-74 Industrial approach Pre oil crises Today: Energy inefficient – consume up to twice as much as new building regulation Private and public ownership 1) 1965: 1 million dwellings in 10 years, they managed to build appr. 1 006 000 dwellings of different kinds (condominium attached houses) 2) Somewhat fuzzy boundaries 3) Techniques and regulations 4) i.e. energy efficiency was not a concern Today: about 650 000 apartments Because of the building technique and the non-awareness of energy efficiency at time of construction, problems with draughts etc. Public owners often have a weaker economy but both private and public actors operate under the rent regulation.

Paper 1: Energy efficiency while renovating – why so little? Research in renovation methods – good examples climate shell, installations, settings Cost estimates Institutional framework – what are the real estate owners’ incentives? Profitability It is not a question of whether you can build (or renovate to a standard of) energy efficient buildings 1a) Climate shell e.g. insulation, balconies on the outside, windows 1b) Installations e.g. ventilation, recycling of heat 1c) adjustment of settings, e.g. temperature 2) Cost benefit analyses – no consensus although marginal cost assumed to be low when renovating anyway 3) No regulation so what incentives are there for the real estate owner? Why are non-profitable measures undertaken? Private owners will not do it, should the public companies finance the whole of the energy savings needed (according to political goals)?

Paper 1: Method Litterature & project review Interviews to get better understanding Formulate hypotheses to be tested Web-based questionnaire to test hypotheses Basis for conclusions about real estate owners’ thoughts and acts Recommendations based on findings Interviews with real estate companies: What has been done/is planned the reasoning behind this, the attitude... How the investment is seen – the risk, payback time, a package of measure vs each measure... How it´s being financed: loan, raising rent, the companies’ result What actors influence the decision making process: tenants, political board, eldsjälar... The energy rate system Individual Measuring and Charging IMC Early indications: The companies DO take the opportunity to undertake efficiency measures – IF it is profitable So far no clear differences between how private and public companies

Paper 1: Possible hypotheses Financial problems Uncertainty Split incentives Organizational inertia Ignorance Inadequate cost estimates High investment cost means higher risk (especially since so many buildings are on the line) Future energy prices, rent negotiations, who will bear the energy cost (split incentives) ALSO awaiting new technology, subsidies, regulations which may or may not be rational Lower operation costs have too little effect on market value of property The companies renovate the same way they always have done, without taking e.g. LCC into account The companies don´t know they can save money on energy efficiency – transaction costs E.g. too long pay back time, too high cost of capital (kalkylränta) including too high risk estimates, too low expected energy prices... The energy costs savings don´t weigh up for investment cost Someone else profits from the investment made by real estate owner The Not profitable point will also be a question of what the cost estimates are set to.

Paper 2: Individual measuring and charging IMC a recent trend Energy saving Who bears energy costs? How does it affect incentives for energy efficiency? Optimal solution – Pareto improvement possible 1) In Sweden that is, well established in parts of Europe, e.g. Germany 2) Save energy through changed consumer behaviour, i.e. lowering energy need by not using rather than making more efficient 3) When cost liability is moved from owner to tenant incentives change 4) Less incentives for real estate owner to make an effort, how can one create incentives for more energy efficiency? 5) Compare to green leases – give both parts incentives to save energy Example

Paper 2: Method Investigate the Swedish market for IMC Conditions Existing incentives Show numerically that a Pareto optimal solution is possible What conditions IMC is introduced under: To find out who choose to introduce IMC, what motives they have had to do so, and what effect it has had on the undertaking of efficiency measures (do they neglect to undertake them IF they introduce IMC, or have they already undertaken measures before introducing it? There are indications that it is even a condition for introducing it?) Incentives for MORE energy saving/efficiency Pareto example – show in a way similar to the previous example.

Paper 3: Energy markets and monopoly pricing District heating – monopoloy market High fixed costs Lower consumption = lower revenues The majority of the buildings investigated are supported by district heating If the lower revenues don´t cover the energy company’s fixed costs (or if it just feels like it because it is operating under monopoly conditions) the energy company can raise the price per unit (variable cost), thereby offsetting the energy and cost saving made by the real estate owner when undertaking energy efficiency measures.

Paper 3: Method Literature review Theoretical review Empirical support if possible Not yet begun, not yet decided but will probably have an approach similar to the other papers. Lit review – extensive literature on district heating/energy markets Theoretical review – e.g. uncertainty about the not transparent future energy prices Empirical support may hopefully be found in other areas where energy efficiency has been a bigger concern (given that the energy was distributed under a monopolistic system)

Thank you!

Example The price per energy unit is assumed to be constant. No IMC: The rent is 100, of which 20 is the included energy cost With IMC: When IMC is introduced, the energy cost is excluded from the rent and paid separately according to the tenant’s own consumption. As a consequence consumption decreases and the tenant pays only 16, or a total of 96. In the last example IMC is introduced but the real estate owner lowers the rent not by the whole energy cost. The rent will be 85 which includes 5 that is used to invest in energy efficiency measures. The tenant, in turn, will reduce its’ consumption BOTH because of the new incentives AND because the energy efficiency measures further reduces consumption (e.g. through water efficient shower nozzles). The tenant will pay 85 in rent (includes energy efficiency investment) and only 13 in energy costs, the excluded energy cost. The total cost for the tenant will be 98, which is higher than the case of only IMC but still lower than the original case with no IMC. The energy consumption will be lower than in both the previous cases and the real estate owner can increase rent with as much is needed to cover investment and the demanded rate of return.