“Split Incentives,” Lack of Price Transparency, Slow Pace of Debarbonization

A host of state laws have been adopted to reduce climate-modifying air emissions, accelerating the need to shift away from petroleum and natural gas and expand access to electrical appliances and vehicle charging facilities. Last year, the Bay Area Air Quality Management District adopted regulations that gradually ban the sale of new gas furnaces and water heaters, in 2027 for single-family residential water heaters, 2029 for residential furnaces, and 2031 for multifamily and commercial water heaters.  

California’s electrical grid is increasingly powered by renewables; more than 40 percent of supplies purveyed by Pacific Gas and Electric Company. Still, inefficient appliances induce carbon emissions that could be avoided by switching to newer models. Reliance on gas for heating and cooking creates emissions through leaks in the distribution system, and during combustion in the home. 

Yet, installing efficient appliances and rooftop solar and swapping natural gas for electricity is challenging in multiunit buildings, particularly in rent-controlled San Francisco. Established by the Rent Stabilization and Arbitration Ordinance in 1979, rent control muffles landlords’ incentive to invest in upgrades that mostly or entirely benefit their tenants, such as replacing an old refrigerator with an energy-efficient model, thereby reducing the occupant’s electricity bill.

It can be even more challenging to deploy electric vehicle (EV) chargers in multiunit buildings. If the property only has access to street parking or limited garage space, EV chargers may not be an option.

Debbie Findling, who co-owns a four-unit building near Dolores Park, is confronting this exact scenario. Although the property is a two-minute walk to a Muni stop, without a multi-car garage she can only point her tenants to curbside parking. When she recently attempted to rent an apartment several prospects passed on the space, opting for larger buildings that provided onsite electric vehicle charging. 

The HVAC and EV charging market also suffer from a severe lack of price transparency.

“I called five vendors and got five different prices for a new water heater,” said Findling. “They ranged from around $1,500 to almost $6,000. And when I asked one of the vendor’s, who have been recommended by an energy efficiency group, about replacing a gas heater with a heat pump, he basically said, don’t even think about it.”

Similarly, depending on the vendor installing EV charging can cost from $1,000 to $10,000 or more. 

Economists call the disconnect between improvement costs borne by landlords and benefits reaped by tenants a “split incentive.” While electrifying rental housing can lower energy bills and improve tenant comfort, property owners struggle to pay for upfront investments that provide them with little short-term returns. Although occupants might be willing to contribute higher rents to live in a more energy efficient apartment, with lower utility bills, rent control makes passing on capital costs complex.  And when comparing the ongoing costs of living in a unit, utility bill savings aren’t fully transparent, and may not translate into market demand.  

Under Section 37.7 of the San Francisco Rent Ordinance, if a property owner wants to raise rents to pay for decarbonizing costs she must obtain Rent Board approval. If the expense is endorsed, the Board creates a rent rise amortization schedule spanning up to 20 years, depending on the nature of the improvement. The Board evaluates capital requests on a case-by-case basis, accounting for the upgrade magnitude, impact on energy efficiency, and financial implications to tenants. 

Title 24 of the California Code of Regulations sets stringent energy efficiency standards, necessitating investments in energy-efficient appliances, lighting, and insulation in new construction. Compliance with the California Electrical and National Electrical codes – which dictate specifications and safety standards for electrical installations – further adds to the complexity and cost of electrification projects. 

Landlords also must ensure their properties comply with accessibility standards outlined in the Americans with Disabilities Act and the California Building Code. Modifications to existing infrastructure may be required to make electric charging stations and other electrification measures accessible to residents, another layer of expense and complexity.

As a result of these challenges, typically if an appliance isn’t broken, absent a regulation or incentive, property owners won’t invest in energy-related improvements.