A warm and dry place to live: Energy efficiency and rental accommodation

Abstract

In residential tenancies, it is usual for the landlord to be responsible for the fabric of the building and the main appliances, and for the tenant to be responsible for paying for electricity, gas and other fuel. It is also the tenant who is affected by the building’s heating and ventilation performance – whether it can be kept warm and dry without undue expense. A landlord has no financial incentive to invest in extra insulation or better appliances, because the benefits will be reaped by the tenant in lower energy bills and higher levels of comfort, and because the improvements do not have a direct influence on the rent that the landlord can charge. The result is that energy efficiency investments tend not to get made. In policy terms, the interests of the landlord and tenant are not aligned; the incentives are split. It is a classic example of a principal-agent gap, and as the “landlord-tenant problem” is one of the market failures that affects efficiency in markets for energy and energy products.1 The energy use affected by the principal-agent problem in the United States residential sector for refrigerators, space heating, water heating and lighting has been estimated as 31.4 per cent of the total sectoral energy use;2 so the issue is a substantial one. The problem of energy efficiency in rental accommodation is therefore the subject of this article.