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Battle of the Buildings Addresses Split Energy Incentives

Noah Goldstein — February 18, 2014

Among the hottest topics in city-scale energy is the use of building energy benchmarking and disclosure data.  As explained in this blog by my colleague, Eric Bloom, benchmarking is the process of comparing a building’s energy use to others in its sector or class.  Disclosure refers to the reporting of energy data when a building is sold or refinanced.  Many of these practices fall under smart cities programs.  The cities, states, and, in the case of Australia, the country employing these metrics aim to make visible the energy being used by commercial buildings in order to provide carrots and sticks to encourage building owners and operators to reduce energy demand.  The adoption of these programs is now global (see buildingrating.org for the breadth of these programs).  This movement could enable a process of market transformation where energy efficiency and sustainability become the norm, not the exception.  The Institute of Market Transformation has been a leader in promoting and tracking these programs, identifying the additional benefits to cities, including jobs and greenhouse gas reductions.

(Source: Buildingrating.org)

In the United States, many of the city-based benchmarking programs efforts are leveraging the ENERGY STAR Portfolio Manager program, administered by the U.S. Environmental Protection Agency.  Using ENERGY STAR has helped cities with the heavy lifting of capturing and standardizing building energy data.  Using ENERGY STAR has also helped open the conversation around improved building energy performance.  The ENERGY STAR site spotlights individual buildings that are making significant steps toward improved efficiency.  We may not see the realized savings of benchmarking programs for a few years, given the challenges of measuring and attributing energy savings.  But a series of case studies reported by the Institute for Market Transformation shows that an average of 7% energy savings have been demonstrated in cities across the country.

ENERGY STAR is also running its fourth annual Battle of the Buildings competition, pitting buildings against each other to achieve the greatest percentage-based reduction in energy use intensity over the course of the year.  This year’s competition (drawing on 2013 data) includes commercial tenants.  This is a novel change, addressing the classic split incentive issue.  The split incentive refers to the nature of the tenant-owner relationship; in most cases, the building owner pays for the capital upgrades to a building, while the tenant reaps the benefit in smaller electric bills.  A different, but similarly challenging, situation arises when tenants’ leases are not tied to energy use in any way, potentially negating the building’s energy efficiency improvements through naive behavior changes, like leaving the lights on over the weekend, or installing a server near a thermostat.  One approach is a green lease, under which the tenant and owner are aligned on energy savings goals, with financial incentives built in.  Of course, the tenant can pursue energy savings individually and try to win the ENERGY STAR tenant competition.  The results of the competition will be released in April.  Stay tuned for an assessment of the results.

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