Pricing principles and incentives for energy efficiency investments in multi-family rental housing: The case of Sweden

Improving the energy efficiency of the existing housing stock is a high priority in Sweden. The focus of this viewpoint is on how incentives for improving energy efficiency are affected by pricing principles in two specific areas: housing rents and district heating fees. Many countries have regulations that affect how housing rent is determined. It has been shown that cost‐based rents reduce incentives for energy efficiency. The same may occur if rent is related to qualities of the apartment, if these qualities do not include the indoor climate. There have been concerns that district heating companies might respond to lower sales by increasing prices, thus reducing any incentive to reduce energy consumption. It is argued that this will not happen if fixed and variable fees correctly reflect the cost structure. Empirical studies show that it is common to have a variable fee that is higher than the marginal cost, partly because of monopoly elements in the market. This type of pricing will actually strengthen the incentives for energy efficiency investments compared to theoretically correct pricing principles.