Utility billing: An underutilized tool to help solve the split incentive problem
Updated: May 9, 2022
Solving the split incentive problem that so deeply affects sustainability in the rental sector is no easy task. The basics of the problem are these: If tenants pay utility bills, they have an incentive to conserve but little incentive to invest in improved efficiency since they don't own the property. If landlords pay the bills, they have an incentive to make efficiency improvements, but then tenants have no incentive to conserve. It's a lose-win, or a win-lose situation, and it's hampering affordability and sustainability efforts everywhere.
While there are no neat fixes for this problem, one overlooked tool is utility billing, which can help align messy incentives.
Landlords have a lot of power to create solutions, keep their tenants happier, and keep their properties operating more smoothly, just by altering the way they manage utilities.
While the potential for impact on cost and usage needs more research, we do know that utility arrangements can affect incentives for improvement - it's why you're more likely to see solar panels on a building where the landlord pays the electric bill. For individually metered buildings, there are a number of options:
The gold standard (to the extent one exists in the world of split incentives): The landlord retains control of utility accounts, establishes a utility budget per bedroom for each unit, and charge tenants only when that budget is exceeded. This solution has a number of benefits: it enables landlords to track both energy behavior and building performance. It gives landlords an incentive to keep costs down through efficiency investments and operations improvements. And it gives tenants an incentive to conserve in order to avoid exceeding the budget. This arrangement is not common yet, but we hope it will become standard practice.
Next best: The landlord retains control of the utility accounts, and charges each unit for its bill each month as part of rent collection. Tenants still have an incentive to conserve because their fees depend on their usage, and landlords can monitor usage behavior and building performance. This arrangement also avoids repeated fees paid to utilities to stop/start utility service, simplifies the unit turnover process for both landlords and tenants, and avoids problematic stoppages in service (e.g. the gas being turned off in winter and resulting in frozen pipes) due to non-payment.
Next best option #2: Utilities are included in rent. In this scenario, tenants have virtually no incentive to conserve, so it's less than ideal. However, there is a much greater incentive for efficiency improvements, solar investments, etc. to keep costs down. Including utilities in rent also means tenants have predictable bills, which means no bill surprises that may compromise their ability to pay rent.
For properties with master meters (i.e. one meter serving all or multiple units), there are fewer options. From RentLab's perspective, including utilities in rent is the best option under this scenario, and splitting costs evenly among all units each month is the least-appealing option: neither tenants nor landlords have any incentive to try to reduce energy and water use in a situation where costs are split evenly.
Dialing in utility billing arrangements isn't a silver bullet for solving split incentives, but it's yet another tool in the toolbox, and one that RentLab recognizes in its Smart Living Score.
Further reading:
Why landlords should consider submetering their buildings (Institute for Market Transformation)
Valuing energy efficiency in multifamily housing (Institute for Market Transformation)