Split Incentives for Owners and Tenants

Energy efficiency projects face the problem of split incentives, also known as principal-agent problems, which can be observed when two parties involved in an economic relationship pursue different goals. The landlord–tenant relationship is a common barrier, as energy efficiency measures are generally the responsibility of the landlord, including the provision of appliances, while the utility bills are the responsibility of the tenants. The landlord’s incentive is to install the cheapest technologies, which are often inefficient, as he/she does not incur the costs of the energy consumed.

Even when the tenant can have an influence on the choice of energy efficiency appliances, the long payback periods of many of these investments are a disincentive, as the tenant will be reluctant to invest in changes where the investment will only pay back with a future tenant.

For the construction sector, the benefits for the owners of the property in terms of energy efficiency savings are not interesting unless the costs of achieving high energy efficiency can be fully transferred to the buyer. Price competition and rent seeking in the housing market may induce the building sector to neglect energy efficient solutions. Without a strong awareness of - and thus demand for - energy efficiency by buyers, the housing market will be undersupplying energy efficient installations.