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Aligning Incentives to Create Change in Energy Efficiency


energy efficiency

A consistently frustrating aspect of trying to change the energy landscape is that most people basically agree on the solution. In short, we need to use less energy, and do more to invest in clean energy. If we can get aligned on the outcome, why is it so hard to get aligned on a path forward? One major obstacle is that incentives for critical players often stand in opposition to one another. Recognizing these situations, and finding creative solutions, can create win-win outcomes for everyone.

Take for example energy efficiency. A classic case of misaligned incentives is the landlord-tenant problem. In rental buildings where tenants pay their utility bills, landlords have little incentive to make energy efficiency improvements. Landlords who fronted money for insulation, for example, wouldn’t see any savings, while tenants would see lower bills. Alternately, landlords who pick up the utility bill for their tenants can unleash a whole other world of moral hazard, such as tenants who run their air conditioners all day long.

The good news is that mismatched incentives are not typically intractable problems. In fact, we are seeing many solutions to the issue of mismatched incentives. Shorenstein Properties, which owns and manages 23 million square feet of commercial office space, tackled the landlord-tenant problem head on, working with EDF to improve the energy performance of its portfolio. Through the development of “green leases,” landlords were able to recover energy efficiency improvement costs through energy savings, as well as tenant engagement in energy efficiency.

The payback?

A 5.1 percent energy reduction across the portfolio, resulting in savings of $1.7 million and payback periods of around six months!

On a broader scale, policymakers have long recognized that utilities which are compensated based on how much energy they deliver have a disincentive to encourage energy efficiency. Decoupling policies, which unlink utility compensation from the amount of energy delivered, have now been adopted across 25 states — a major increase from 2009 when just 17 states had such policies. These policies often open the door for better utility-run energy efficiency programs.

Even if you don’t have 23 million square feet of commercial real estate, or the rule-making authority of a public commission, you do have many opportunities to realign incentives to create change. While most popular in the commercial sector, residential green leases are gaining traction. You can also work with your office management staff to explore green lease options: the green lease library has some resources to get you started. This lesson of incentives can apply to a wide range of challenges, from recycling to water. While the specific tactics can vary, two of the key elements for success are persistence and creativity. In the comments, share some ideas for how tackling incentives can create change on a small and large scale.


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