Sunday, August 16, 2015

Apartments, Energy and Bad Incentives

I am spending this academic year working in Washington working at HUD, so I am renting an apartment here.  When I signed the lease, I understood that I would pay utilities; what I didn't understand, because I did not read the lease carefully enough, is how I would be charged for utilities.

Even though I live in a professionally managed building that has something like 400 units, and even though each unit has its own circuit breaker the units are not metered individually.  Instead, utility costs are allocated on a pro rate basis based on unit square footage and number of residents in the unit.

Since moving into this place, I have been very conscientious about setting the air conditioner at 80 degrees F. before leaving the apartment for the day.  I will do my best to continue to do this, but the fact is, my principal motivation for doing so was thinking that I could reduce the very expensive cost of cooling an apartment in the hot DC summer.

Of course, as one of 400 units, my influence on electricity usage for the complex is small.   There is essentially no financial reason to avoid blasting the AC all day long.  It must be the case that how one consumes air conditioning has a large impact on how much one spends on air conditioning.  In fact, people who like Bikram Yoga could drive their air conditioning costs to nothing.

A Google search on the cost of individual metering implies that the cost of installing meters for electricity would be about $300-$500 per unit.  Summer electricity costs in my unit are about $100 per month, so if price incentives lead to a 10 percent saving, each unit could save about $60 per year on electricity (I am applying the savings to six months).  Beyond this, of course, energy use produces negative externalities, so the social benefit of metering would be greater than the private benefit. This implies the benefits of metering exceed the costs. [If I am completely wrong about either the cost of metering or the savings arising from it, I would be happy to hear about it].

So why don't landlords do this?  The answer might be that they can't get enough extra net rent from tenants to justify paying for metering.  The only private cost they bear is not being able to charge as much rent as they otherwise might.  It might be worth doing serious analysis to determine the social benefits of metering in the context of individual apartments, and whether such metering should consequently be subsidized.