Multiple benefits of renovation in buildings - PU Europe

Multiple benefits of investing in energy
efficient renovation of buildings
Externalities
The costs of adverse effects on health and worker productivity from buildings with outdated
energy efficiency management will often be born not by the owner of the building
but potentially the society at large. This is certainly the case for reduced health from air
pollution linked to energy production both from electricity production and heating. These
costs to society are not included in the building-owner’s decision to invest in renovations.
Consequently, there will be invested too little in energy efficient renovation of buildings
from society’s point of view.
Households have too short term perspective
A number of studies suggest that some barriers are particularly predominant in the residential
sector. One finding is that households tend to value present and short-term events
much higher than future events. In the economic literature this is known as having a high
implicit discount rate. This implies that households typically like to see early pay back on
investments, and may be reluctant to make too high up-front investments. 48
One reason for this is that households are typically more risk averse than e.g. companies.
The actual realised energy savings will be uncertain, and households may be unwilling to
invest an amount of money which may make up a large share of the household budgets
and/or savings. In addition, households may not be sure that they will continue to live in
the same building for a sufficiently long period of time in order to reap enough of the benefits
from the investment to make it financially attractive. 49 In addition, they may not expect
to be able to fully capitalise the benefits into the property’s market value.
Energy efficient renovation of buildings – especially “deep renovations” – typically come
with a significant inconvenience cost for households. This includes costs of preparing a
project, obtaining permits and financing, finding contractors, supervising their work,
possibly moving out during the renovation etc. 50 As these costs are contained in the upfront
investment costs, it is given high value in the households’ decision.
These inconvenience costs are typically compounded for multi-family homes. An issue
such as coordination may turn out to have large transaction costs. In addition, in multifamily
homes, the number of households that expect to find new homes within a foreseeable
future may be significant. These households may try to block otherwise profitable
renovations, as the up-front inconvenience costs outweigh the expected longer term benefits
from reduced energy costs. We expect such coordination problems to be greatest in
the Baltics and Italy, but also in several of the EU-12 countries as the share of multifamily
homes is especially high in these countries, cf. Figure 23.
48 Economic research has also suggested that households may have so called hyperbolic discount functions, meaning that they
will place a higher value on the near future than on the more distant future. See e.g. Frederick, Loewenstein and
O’Donoghue (2002).
49 In the UK e.g., households move every seven years on average. See UK government Energy Bill, Green Deal Impact Assessment
(2010)
50 European Commission (2012)
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