Breaking into the multi-family market for solar, weatherization, and efficiency upgrades

This is me thinking out loud a bit about energy upgrades for multi-family dwellings. I hope it sparks some questions for you.

Simply put: We need to put renewable energy and efficiency upgrades into apartments. A well-known problem for the transition to renewable energy and deployment of efficiency technologies like weatherization, heat pumps, and electric appliances is the simple fact that there are little to no incentives for landlords — owners of multi-family dwellings such as apartment buildings and townhouse complexes — to invest in these improvements. The savings for these improvements all go directly to the tenants while the liabilities remain with the property owners.

Historically, changes that rest solely on the goodness of people or appeal only to moral concepts like the common good have faltered because economic incentives are such powerful forces driving human decision-making. I, therefore, wouldn’t recommend relying on the goodness of landlords and property managers to implement much-needed changes. Instead, the incentives must be tweaked. Changing incentives is more-or-less the only reliable way to enact system-scale changes like those needed to mitigate climate change.

Government Intervention

My first instinct in changing incentive structures is to look toward government intervention. This is more plausible at the state or local levels, but will take far too long (in all likelihood) at the federal level. I, therefore, recommend putting some effort into lobbying local and state executive leadership and legislators to put into place programs to change the incentive structure surrounding multi-family dwelling energy efficiency upgrades and renewable energy adoption. Let’s discuss these options before moving onto private systems approaches.

What would we lobby for if we were to lobby government representatives at the local, state, and even federal levels? Here are two options to come to mind immediately: partnerships with private entities like public benefit corporations and direct public policies. Let’s discuss direct incentive shifts and then I’ll discuss public-private partnerships at the end.

Public Policies

The most direct way to implement changes in incentives is through subsidies and taxes/fines. If you fine or tax landowners who do not implement energy-saving and production improvements, then you directly incentivize them to invest in these improvements via a stick. If you subsidize the same, then you change incentive structures around adoption via a carrot.

The problem with the carrot in this case, though, is that there is little-to-no preexisting incentive for property owners to invest in these improvements unless they will increase rentability because tenants shoulder all of the burdens associated with energy use in most cases. So it would take a much larger subsidy (by percentage) to make these improvements worthwhile for landowners. One problem is with the discount rate of these improvements. Landowners only truly reap the benefits of the increased equity got through these improvements when the sell or refinance their properties. This happens presumably far in the future for many property owners and so the discount on the increase in equity is fairly large. Even with an extremely high subsidy, there still may be little incentive for busy landlords to sign on to adopting improvements for their properties (again, unless rentability is increased dramatically enough to make up for the time, energy, and capital associated with these improvements). In competitive “landlord’s markets”, rentability isn’t much of an incentive at all because full occupancy is all but guaranteed regardless of improvements to the property.

A combination of a subsidy and a mandate/fine may be the ticket to ensuring widespread adoption. The fine has to be large enough and potentially annually or quarterly recurring in order to shift incentive structures in favor of adoption. The subsidy has to be large enough to not be punishing for small private property owners. This would likely get the job done, but lacks the attractiveness of an “everybody wins” scenario like some of the system-based scenarios involving private entities.

Private-Private Systems

My second instinct is to consider whether a system can be devised which implements capital-bearing business like Sealed to change incentive structures to the benefit of all involved. A for-profit or preferably not-for-profit business could gain access to capital through loans, which it then uses to fund the installation of upgrades and improvements on multi-family dwellings with an agreement to reap a share of the energy-savings got as a result of the improvements.

Tenant-based model

So the tenants enter into a contract with Business X with the facilitation of the property manager, save money through the energy-saving improvements, and pay a portion of those energy savings to Business X, which Business X uses to both pay staff and pay off loans. The landowner also pays a fee of some kind because they will own the improvements which increase property value and rentability. All in all a quite good deal for landlords depending on the fee structure.

The result would be little liability for landowners, with Business X shouldering the burden of an energy-savings guarantee and tenants shouldering the burden of saving less money than they otherwise would have (with the benefit of no capital investment). The only bloat in the system is whatever overhead Business X has, which need not be too large with proper leveraging of technology in the style of Sealed.

Owner-base model

An alternative private-based system would be quite similar to the previous one, but with the entire contract occurring between property owners and Business Y. The property owner acts as an intermediary between all utilities and the tenants. This wouldn’t be a terribly difficult thing to do after initial set up, but the initial set-up may require some grandfathering and the like. Next, Business Y enters into a contract with the property owner such that a portion of any energy savings (according to advanced modeling based on software, again channeling Sealed as an example, here) is paid directly to Business Y.

The property owner then takes on no burden and gains improved property value. The tenant benefits in terms of a lower bill (even after adding a premium which is passed onto Business Y). Business Y shifts their capital burden to lenders, while using premiums from tenants and owners

Analysis

These models are very similar, but the owner-based model is cleaner for essentially everyone and the billing for the tenant can be more-or-less folded into rent collection practices with minimal additional labor. I find that one far more attractive. The prospect of entering into contracts with each successive tenant is not an attractive one, especially given the increased chance of even small-claims litigation. Business Y is better off in this regard and thus likely requires less overhead.

Is Business Y likely to be viable? Keeping overhead low enough through the use of modeling software and the like will be key to maintaining viability. There are enormous opportunities to energy savings and all dollars past the break even point for each investment can go straight towards overhead and growth (assuming a non-profit model). The market is big enough that this could be a viable business model if liabilities are managed responsibly and growth happens at the right rate.

Private-Public Partnerships

A combination of all of the above would likely be most effective if it could be implemented. We would have government policies shifting incentives some of the way, private entities like B Corps or the like taking capital burden off of property owners, and property owners taking the bulk of the administrative burden for billing while reaping the benefit of higher property values. In addition, I would propose government entities like DOE and the like partner with private entities like B Corps to provide policy support, guidance, and grant funding. With this arrangement, we would likely see the best win-win-win-win scenario and the fastest implementation.

This has been a fast and high-level trip through various options for tackling a sticky problem. In future posts, I might be able to consider the final model in more detail and get into the numbers a bit more.