If you work outside your home, chances are you don’t pay (directly) for the energy you use at work. At my place of work, the UC Berkeley campus, most employees never see – let alone pay – their energy bills.
Of course, there are plenty of pro-social reasons to be conscientious about my energy consumption at work (climate change and tight university budgets, to name a few). But these “split incentives” (i.e., the fact that I bear none of the costs when I increase campus energy use) beg the question: How much less energy would we use at work if we were all responsible for paying our own energy bills?
This seems like an important question when you consider the quantity of energy consumed each year by commercial buildings (which include office buildings, retail space, restaurants, hotels, hospitals, schools, and universities). The commercial sector now accounts for over 18 percent of total U.S. energy and close to 40 percent of U.S. electricity use.
Do split incentives cause energy waste at work?
A recent paper by Matt Kahn, Nils Kok, and the late John Quigley sheds some light on this question. These authors track the electricity consumption of a large sample of commercial buildings in the Western U.S. In particular, they examine the association between lease incentive terms, occupant characteristics, and electricity consumption in commercial buildings.
They find that commercial tenants whose utilities are bundled into the rent consume significantly more electricity than tenants who pay their own bills. They also find an increase in occupancy by government (versus private sector) tenants is associated with a significant increase in the energy consumption. The authors suggest this correlation could possibly be explained by the fact that government tenants face relatively soft budget constraints.
We can’t be sure that these correlations indicate a causal relationship. But if split incentives in the commercial building sector are associated with higher energy consumption, could an un-splitting of these incentives lead to cost-effective efficiency gains? An amazingly dedicated team of energy efficiency enthusiasts here on campus set to find out.
Un-splitting incentives on the UC Berkeley campus
Back in 2012, energy costs were rising and there was a general sense that energy was being used inefficiently across campus. Campus electricity bills – on the order of $20 million annually – are managed by central campus. How can you motivate individual employees to focus on energy efficiency when they have no direct financial incentive to do so?
The Energy Incentive Program (EIP) was introduced in April 2012 to provide individual departments and units with the information – and the financial incentive – to make cost effective changes to their energy consumption. Each operating unit was assigned a baseline for each building based on electricity use in academic year 2010-2011. Units are rewarded (or charged) 10 cents per kWh for consuming below (or above) their baseline. Importantly, this financial incentive is (approximately) equal to the price the university currently pays for electricity. Units were also provided with real time feedback and improved support for building managers.
The figure below plots electricity consumption on the Berkeley central campus (in blue). The figure shows a notable drop in campus electricity consumption in the first two years of the program (FY 2012-2013). To put these trends into some sort of context, the red line plots student enrollment over the same time period. Electricity consumption has dropped below 2007 levels while student enrollment has increased. Building square footage has also increased since 2011.
(Huge thanks to Kevin Ng and Lisa McNeilly for providing UC Berkeley central campus electricity consumption data.)
This simple graph does not prove that the Energy Incentive Program caused the coincident drop in energy consumption. To credibly estimate a causal impact of the program, we would need to take much more care in constructing an estimate of what UC Berkeley electricity consumption would have looked like absent the program.
A comprehensive program evaluation is well beyond the scope of this blog, but I can offer some anecdata. Although many faculty and staff are oblivious to the incentive change, the program is on the radar screen of the people who manage department budgets and buildings. Every manager I spoke with could point to multiple projects – ranging from email reminders about phantom loads to major lighting retrofits – implemented to keep energy consumption below baseline. Office managers who had been uninterested in building maintenance before the program now closely monitor their daily energy consumption and alert facilities managers when something looks amiss. Much of the $1,869,200 paid out in incentives to date has been re-invested in energy or water efficiency improvements.
Funding for the Energy Incentive Program is scheduled to decrease this year. I hope the incentive/charge per kWh does not. The program budget could instead be balanced by reducing energy consumption baselines in a way that does not disproportionately penalize departments that have made major efficiency investments. Given tight university budgets and ambitious environmental goals, it is as important as ever to get campus energy prices right.