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

2. 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) apartments per year (Boverket/The National Board of Housing) to avoid damage by damp, compared to apr apartments a year now.

3. The Million Program Then: Political decision due to housing shortage
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 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 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.

4. 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)?

5. 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

6. 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.

7. 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

8. 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.

9. 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.

10. 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)

11. Thank you!

12. 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.