Renting Inefficiency

(This blog post co-authored by David I. Levine)

When people own a home or condominium, they have incentives to think about the efficiency of their appliances.  Thus, more than a third of homeowners’ major appliances such as fridges, dishwashers and clothes washers have the EPA Energy Star rating for efficiency (see Figure 1).

The story is considerably different for renters. In most rental units tenants pay their own electricity bills, so landlords don’t have much incentive to invest in energy-efficient appliances.  Landlords would only benefit from buying more costly energy-efficient appliances if enough tenants were willing to pay slightly higher rents in exchange for the lower utility bills.  Unfortunately,  tenants typically have no way to learn the energy efficiency of each appliance in each potential apartment and translate that efficiency into projected utility bills. Thus, tenants are rarely willing to pay higher rent for more energy-efficient apartments.

As a consequence, rental units tend not to be very energy-efficient. In fact, rental units have fewer than half as many Energy Star appliances as homeowners. And a recent EI@Haas working paper shows that these differences remain after controlling for household income, demographics, energy prices, and weather (click here).

This rate is too low. The efficient level of Energy Star appliances in apartments is probably at least as high as the levels currently observed among homeowners, and perhaps even higher. For example, one of us (Davis, 2008) found that energy-efficient clothes washers are a good investment for 83% of U.S. households which is double the rate even of today’s homeowners.

To help potential tenants make decisions that benefit themselves, landlords and the environment, they need clear and credible information.  Energy Guide labels have helped improve information on future energy savings from efficient appliances (see Figure 2).  We need similar “report cards” on the energy use of apartment units. Like an Energy Guide label for apartments, this report card could provide a forecast of annual operating cost based on the characteristics of an apartment’s appliances and its heating and cooling equipment.

With that standardized report card, consumers could better incorporate energy-efficiency considerations when comparing apartments. Just like the Energy Guide labels, it would make sense to include information about how each apartment unit compares to similar units. A typical report card might read:

“This apartment unit has expected gas and electricity costs of $123 per month, assuming average usage. That utility bill is higher than 67 percent of apartments this size, meaning most apartments this size have lower expected energy costs.”

The Energy Guide labels for appliances are administered by the Federal Trade Commission. However, there is no need to wait for the FTC to impose federal requirements for energy-efficiency labels for apartments. Any state or city can start a rating system based on these principles.

About Lucas Davis

Lucas Davis is an Associate Professor of Economic Analysis and Policy at the Haas School of Business at the University of California, Berkeley. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.
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15 Responses to Renting Inefficiency

  1. Jardinero1 says:

    Where I live, Metro Houston, you can obtain the actual monthly and annualized energy use of your home or apartment from Centerpoint, the powerline servicer, before you move in.

  2. Aaron Daly says:

    This is a wonderful idea. One pretty serious challenge in translating energy information into action in this space is the ability of perspective renters (and landlords) to understand, appreciate and value the savings. A number of recent demonstations (such as completed at Oberlin College, or as operated by OPower) show that comparative and competitive systems return the best savings. If a State or Municipal Government is going to require labeling, a simple ‘green, amber, red’ scale with access to additional data online might be the best approach. I know that if I were a landlord, I wouldn’t want my property labeled ‘red’. Such a strategy also eliminates the language barrier issues that are often prevelent in conveying information in the rental markets.

  3. Jardinero1 says:

    Aaron,

    Why such a complicated scheme. If you are going to mandate something, why not just mandate that landlords provide a monthly summary of the electric bill for the prior twelve months on the subject rental. Tenants could select knowing the full cost of rent and utilities and would gravitate to more efficient units. If all landlords did that, landlords with more efficient units could charge higher rent than landlords with less efficient units. It could create a virtuous cycle where landlords would improve the efficiency of their units in order to grab more rent.

    • Aaron Daly says:

      I think your idea is a good one but I’d still suggest the addition of the ‘green, amber, red’ option for two reasons. 1) Everyone, regardless of their background, understands what the 3 colors mean and nobody wants to see RED. This would trigger a landlords emotional response better than the profit motive alone. And, 2) It’s challenging to compare apples to apples across varying real estate and without a benchmark (color scheme based on energy use per square foot for example), a buyer could easily disregard the information. The ‘green, amber, red’ info, in addition to a years utility data would make comparisons easy.

      I do agree that it would require more from a landlord to calculate their property’s color rating, and likely many landowners would resist – but the requirement would also lead to business opportunities to engage with these folks, offer assistance in rating their property AND use the touchpoint to offer efficiency, renewables and other services. It’s a perfect ‘in’ for service companies who would otherwise be ignored.

    • Anna Tary says:

      I own a three-family, and live in one unit. I pay for the two tenants’ water use, and for common area electricity. Tenants pay for their own heat (gas), water heating, and electricity. You can’t simply use one year’s costs or some such to compare efficiency. I have had marvelously frugal, environmentally conscientious tenants (who even had water-saving rules for how often they flushed toilets – no details needed!), and I have had incredibly wasteful, non-caring tenants (water use increased by a third with one who washed his ‘that day’s clothing’ alone). Every one of us has a set of appliances (that I own) that I have been replacing with energy-efficient models as they break down or wear out. Everyone now has high-efficiency washers, moisture-sensing dryers, energy star dishwashers and refrigerators, and fairly new stoves (no Energy Star rating for those). I start any tenancy with CFL bulbs in place; I point out that I have jacketed their hot water heaters and steam pipes with insulation. All I can do is tell prospective tenants about what I do to try to reduce costs and environmental impact in their units. What they do with those appliances and lights I cannot regulate. I try my best to gauge prospective tenants in part by their appreciation of that focus and select accordingly. I agree that it would be a nice idea to have some rating system that would highlight the efficiency , conservation and environmental impacts of apartment utilities, but I think you cannot use the actual numbers of kilowatts or dollars or cubic feet of gas used, as that remains highly individual. Rating an apartment based on in-place conservation efforts would be an interesting way to at least start.

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  11. Appliances for Rental is a very good option. it is very convenient for people who don’t have fixed property or job or we can say students who stay for their education purpose can’t buy appliances, so renting appliances is really a nice service.

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