The Investor Confidence Project's recent rollout of new Energy Performance Protocols for multifamily (MF) projects brings us an important step closer to our long-term goal of standardizing finance models and project performance underwriting for a full range of energy efficiency (EE) investments.
While MF projects resemble most other commercial projects from a purely technical standpoint, there are two principal factors that present unique challenges for multifamily properties. These involve tenant privacy laws and split incentives. Understanding and addressing these factors is essential for successful deployment of the new MF Protocols.
Tenant Privacy and Baseline Development
Establishing a performance baseline is a crucial first step in the development of any Energy Efficiency project, and it is the first project development component covered by the multifamily Protocols. Yet in many cases, tenant privacy laws prevent MF building owners from accessing utility data for their own properties. When baseline data are not readily available, project designers are faced with a significant hurdle right out of the gate.
Acquisition of baseline utility data for multifamily properties typically falls into four categories, with associated ramifications that need to be considered and addressed:
While MF projects resemble most other commercial projects from a purely technical standpoint, there are two principal factors that present unique challenges for multifamily properties. These involve tenant privacy laws and split incentives. Understanding and addressing these factors is essential for successful deployment of the new MF Protocols.
Tenant Privacy and Baseline Development
Establishing a performance baseline is a crucial first step in the development of any Energy Efficiency project, and it is the first project development component covered by the multifamily Protocols. Yet in many cases, tenant privacy laws prevent MF building owners from accessing utility data for their own properties. When baseline data are not readily available, project designers are faced with a significant hurdle right out of the gate.
Acquisition of baseline utility data for multifamily properties typically falls into four categories, with associated ramifications that need to be considered and addressed:
Category 4 above represents a particularly promising strategy for overcoming the data access problem. This relatively new approach allows utilities to provide anonymous, aggregate consumption data to building owners on a monthly or yearly basis without compromising tenant privacy. Widespread adoption of this approach would significantly bolster the effectiveness of the Multifamily Protocols, but only a handful of utilities are currently able to provide anonymous data to multifamily property owners.
Other current methods typically involve the arduous process of securing releases individually from tenants that authorize utilities to release data to building owners (Category 3 above). Specific programs that target the MF market have also compiled “average” consumption data for various tenant property types. These data sets can be used to develop a representative baseline when actual data are not available.
While the MF Protocols recognize these challenges to baseline development, they also concede that tenant privacy laws and utility data accessibility are topics beyond the scope of the protocols, and do not offer specific solutions at this time. These are issues that the industry is currently working to address.
Split Incentives and Return on Investment
The second major component that differentiates Multifamily projects from other commercial energy efficiency projects involves split incentives, which can potentially inhibit a building owner’s incentive to invest in energy improvements.
The term "split incentive" (or "misaligned incentive") refers to a transaction where the benefits do not accrue to the person who pays for the transaction. This typically occurs in situations involving tenant-paid utility bills: the building owner pays for the improvements, but does not recover savings from reduced energy costs that accrue to the tenant. In many cases, the split incentive problem can be addressed through Green Leasing or other savings recovery methods that incentivize the building owner to invest in the EE project, but these considerations are beyond the scope of the current Multifamily Protocols.
The Multifamily Protocols recommend that baselines and projected savings be developed separately for improvements that will be paid for by the owner and improvements that will be paid for by tenants, so appropriate savings recovery efforts can be developed and employed to incentivize the project. Similarly, proposed investment costs should be calculated separately for measures applicable to owner-paid and tenant-paid utilities, so methods can be developed to pass on capital expenses directly to tenants who will accrue savings from the improvements.
In summary, the issues of data access and split incentives are important considerations that need to be recognized when developing energy efficiency projects for multifamily properties. The guidelines in the current multifamily Protocols recognize these issues, but do not offer specific recommendations about how the industry should address them. Even so, the Multifamily Protocols provide guidance regarding baseline development, savings calculations, and implementation cost development, so that methods can be employed to handle the financial aspects of EE projects accurately and effectively between owners and tenants.
Other current methods typically involve the arduous process of securing releases individually from tenants that authorize utilities to release data to building owners (Category 3 above). Specific programs that target the MF market have also compiled “average” consumption data for various tenant property types. These data sets can be used to develop a representative baseline when actual data are not available.
While the MF Protocols recognize these challenges to baseline development, they also concede that tenant privacy laws and utility data accessibility are topics beyond the scope of the protocols, and do not offer specific solutions at this time. These are issues that the industry is currently working to address.
Split Incentives and Return on Investment
The second major component that differentiates Multifamily projects from other commercial energy efficiency projects involves split incentives, which can potentially inhibit a building owner’s incentive to invest in energy improvements.
The term "split incentive" (or "misaligned incentive") refers to a transaction where the benefits do not accrue to the person who pays for the transaction. This typically occurs in situations involving tenant-paid utility bills: the building owner pays for the improvements, but does not recover savings from reduced energy costs that accrue to the tenant. In many cases, the split incentive problem can be addressed through Green Leasing or other savings recovery methods that incentivize the building owner to invest in the EE project, but these considerations are beyond the scope of the current Multifamily Protocols.
The Multifamily Protocols recommend that baselines and projected savings be developed separately for improvements that will be paid for by the owner and improvements that will be paid for by tenants, so appropriate savings recovery efforts can be developed and employed to incentivize the project. Similarly, proposed investment costs should be calculated separately for measures applicable to owner-paid and tenant-paid utilities, so methods can be developed to pass on capital expenses directly to tenants who will accrue savings from the improvements.
In summary, the issues of data access and split incentives are important considerations that need to be recognized when developing energy efficiency projects for multifamily properties. The guidelines in the current multifamily Protocols recognize these issues, but do not offer specific recommendations about how the industry should address them. Even so, the Multifamily Protocols provide guidance regarding baseline development, savings calculations, and implementation cost development, so that methods can be employed to handle the financial aspects of EE projects accurately and effectively between owners and tenants.
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