Solar panels and the split incentive problem
More than 1.8 million Australians have chosen to install a solar photovoltaic system on their premises[i] – with good reason. The cost of installing a 5kw solar system has fallen by 58% over the last 6 years while energy prices have risen substantially. A standard residential solar system can now save a homeowner the entire cost of purchase and installation within just 2-6 years.[ii]
However, it is not all good news. The 30% of Australians who reside in rental properties are unable to use photovoltaics to reduce their electricity bill unless their landlord is willing to install a solar system. Unfortunately, landlords rarely choose to install solar systems on their investment properties because of the split incentive problem – which arises because the property owner is responsible for paying for the photovoltaics while the tenant sees the benefit on their electricity bill. Split incentives ultimately lead to an under investment in energy saving measures in residential rental properties.[iii]
There are several compelling reasons for policymakers to focus on overcoming the split incentive problem as it relates to the installation of solar panels. Research shows that utility stress is felt in 38% of residential rental properties in Australia; while electricity and gas bills are the most common cause of rental arrears in low income Victorian households. Increasing the proportion of rental properties with photovoltaics could reduce economic stress for low income households.[iv]
What can government do about it?
There are several ways governments could increase the number of rental properties with photovoltaic systems. One option would be for the government to mandate a minimum energy efficiency standard for residential rental properties. Another option would be to allow landlords to offset the cost of installing photovoltaics against their tax. Fortunately for policymakers, a 2015 study found that both the aforementioned proposals received strong support from Australian tenants and landlords.[v]
What can private individuals do about it?
There are several options that a tenant can pursue to convince their landlord to install a solar photovoltaic system on their property. Most of these options involve splitting energy savings between the landlord and tenant in recognition of the fact that a landlord won’t invest in solar unless there is a pecuniary incentive to do so.
One option for tenants seeking the installation of solar panels on their property is to offer to pay a small increase in rent in exchange for the installation of photovoltaics. However, tenants and landlords often struggle to agree on a fair increase in rent to compensate for the installation of the solar panels – partly because there’s uncertainty as to the amount of energy a system will produce until after it is installed.[vi]
Another option for tenants seeking the installation of solar panels on their property is to pay the landlord the upfront cost of installing a solar system. However, the payback period for a residential solar system often exceeds the duration of the standard residential lease – meaning the tenant risks the lease terminating before they have made a return on investment.[vii] There are several other bargaining strategies a tenant can use to convince their landlord to install photovoltaics, but they are generally as flawed as the strategies already discussed.
Action should be taken to enable more solar panel installations
The installation of photovoltaic systems on rental properties could
assist many low-income homes manage utility stress. With private negotiations
for solar installations hindered by risk and uncertainty, there is a strong
mandate for governments to incentivise solar installations in investment
properties. Allowing landlords to offset the cost of installing solar is one of
several viable policy options that could achieve this aim.
[i] Salleh, A. (2018, February). Solar boom: New schemes may help renters get solar panels on their roof. Australian Broadcasting Corporation.Retrieved fromhttps://www.abc.net.au/news/science/2018-02-18/how-can-renters-get-solar-panels/9409098
[ii] Potter, A. (2018, July). The cost of getting sun smart. Choice Magazine. Retrieved from https://www.choice.com.au/home-improvement/energy-saving/solar/articles/solar-panel-payback-times
[iii] Crawford R., & Stephan A (Eds.). (2015) Living and Learning: 49th International Conference of the Architectural Science Association. Australia: The Architectural Science Association and The University of Melbourne.
[iv] Ibid.
[v] Ibid.
[vi] Salleh, A. (2018, February). Solar boom: New schemes may help renters get solar panels on their roof. Australian Broadcasting Corporation.Retrieved fromhttps://www.abc.net.au/news/science/2018-02-18/how-can-renters-get-solar-panels/9409098
[vii] Ibid.