In the European Union, buildings independently are considered to be the largest consumer, accounting for 40% of energy consumption and 36% of the generated carbon emissions.
SmartSPIN and the Split Incentive Issue
SmartSPIN will develop, test, validate and exploit a new business model for Energy Service Companies (ESCOs) that leads to greater uptake of Smart Energy Services (SES) deployed via performance-based contracting in the commercial rented sector.
Lawler Sustainability is a consortium member, work package leader, and Irish demo site leader for this international innovation project.
The commercial rented sector has great potential for energy savings but has traditionally avoided the use of performance-based approaches such as Energy Performance Contracting (EPC) due to significant barriers such as the long contract duration of EPCs and the split incentive issue.
SmartSPIN aims to address and provide solutions to these barriers.
What is the Split Incentive Issue?
The implementation of energy-saving solutions in buildings is severely hindered by split incentives. This is due to the distinction between those who make investment decisions and those who pay the energy bills.
The split incentive issue, in which the benefits of investing in energy efficiency do not accrue to the actor who pays for the project, is one of the major market barriers to energy efficient building renovations that is being addressed by the SmartSPIN consortium.
Recommendations to Address the Split Incentive Issue
Our team here at Lawler Sustainability, supported by fellow members of the SmartSPIN consortium, carried out a study to evaluate the recommendations to address the split incentive issue such as green leasing, energy performance contracting, on-bill financing, and other related measures.
We have spent time gathering the thoughts and concerns of relevant project stakeholders in relation to the different potential applications of smart energy services, as well as exploring relevant case studies of similar projects across the world.
Following this extensive research, the Lawler Sustainability team has drafted a set of guidelines and recommendations of how to address the split incentive problem and create more impactful conditions for energy projects in the commercial rented sector where the needs of every stakeholder can be met.
1. Optimise the integrated building design for construction
2. Follow the EU and local legislation around minimum energy ratings
3. Better understand the energy efficiency opportunities
To better understand the energy efficiency opportunities available, tap into local educational and professional networks, lean on experienced property managers, and start benchmarking building energy data.
4. Prioritse actions that do not require much staff effort or investment
For example, retro commission to fine-tune equipment, engage an energy audit to identify cost-effective upgrades, and focus on a range of fast payback measures.
5. Review tenancy agreements
Review tenancy agreements and introduce:
- Mechanisms for collaboration between landlord and tenant
- Move from solely commercial agreements to ones that facilitate building upgrade works
- Pay for use and incentivise efficiency among tenants
- Introduce collaborative environmental targets, science-based targets, and operational energy/carbon targets
- Track usage and savings
- Agree on a methodology and/or a tool to monitor, verify, track, and calculate investments, savings, and billing
- In terms of the fit-out of tenancies, environmental considerations such as passive cooling and embodied carbon should be mentioned in agreements
6. Create greater awareness
Create greater awareness amongst landlords of asset/value risk to their property through a lack of investment in engineering and fabric upgrades.
7. Develop transparent business models
Create transparent business models that facilitate deep renovation beyond lease contractual timelines that will be attractive to tenants as they will get proportional accrual of benefits for their tenancy duration.
8. Develop a matrix of business models
A matrix of business models to be developed for different building typographies and landlord/tenant scenarios. These will build off the SmartSPIN concept and look at scenarios that may differ somewhat such as;
- Landlords who operate funds that may form sharing funding model for upgrades
- Tenants who are independent of the landlord in terms of engineering and utility services
- Cost recovery clause on a green lease for sharing the cost of capital expenses
9. Capital-intensive projects
For more capital-intensive projects, first, offset up-front costs through utility incentives, then spread the balance through options like on-bill financing, C-PACE, or energy performance contracts. Lastly, where possible, try to bundle efficiency into broader renovations.
10. Modernise standard lease forms
Improve the economics of efficiency projects and engage tenants by adding three key provisions to lease forms and renewal amendments;
- Documenting efficient operations practices
- Efficiency standards for tenant fitouts
- Efficiency cost recovery mechanisms
Read the full report here.
We hope you enjoyed this insight into how SmartSPIN is tackling the split incentive issue. You can read more about SmartSPIN here.
Together with our sister company, Lawler Consulting, Our mission at Lawler Sustainability is to make our buildings more energy-efficient, cost-effective to operate, and sustainable.
If you are interested in our energy reduction solutions, please contact us here.
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