The shocking reasons why rental homes are not getting energy upgrades

Around a third of Australians now live in rental accommodation, which means, a significant number of us risk being excluded from renewable energy initiatives and energy efficiency upgrades.

Energy efficiency upgrades can increase the value of a property, reduce emissions, make a home healthier and more liveable for tenants, and lower the cost of a tenant’s energy bills.

But landlords don’t personally benefit from installing energy efficient products – whether it’s heat pumps, solar panels, or insulation – until they raise the rent or sell the property.

And financial incentives alone have proven to be ineffective in incentivising landlords to undertake energy-efficiency upgrades.

“They’re disincentivised from doing it, and tenants are disincentivised from even raising it because they don’t want higher rent,” Alastair Matcott from Green Energy Trading told the SwitchedOn podcast.

This is commonly referred to as the split incentive where landlords lack motivation to improve energy efficiency because tenants pay the energy bills. Dealing with the split incentive is imperative if Australia’s rental sector is not left behind in the energy transition.

Matcott has recently spent a year working on an advocacy program for Green Energy Trading, an environmental certificate agency which helps businesses access government incentives for renewable energy upgrades.

The program investigated the split incentive problem for people in private rental accommodation in the Boroondara area of Melbourne, to determine how to help overcome it.

Launched in October 2023, the Better Homes and Carbon project offered free energy audits for 100 standalone rental houses using the National Residential Scorecard, valued at up to $450 each. They budgeted for up to 10 of those houses to receive free energy-efficiency upgrades, valued at $5000 – $10,000.

“We wanted to go through real estate and landlords because they’re the ones that have the decision-making power,” Matcott explains.

He thought they had an unbeatable pitch: “We’re just going to throw money at your rental homes. You don’t have to lift a finger.”

But the project largely failed because they couldn’t access real estate agents to partner with – only one single house received an energy upgrade.

That’s despite using a range of methods to target real estate agents, from using existing contacts, cold calling, emailing, in person meetings, and approaching the Real Estate Institute of Victoria.

“We were completely stonewalled by every real estate company and industry body we encountered,” Matcott says. “I’m not entirely sure how it is that it went so poorly, but it did.”

The experience has left Matcott thinking that the only way for investment properties to get energy upgrades is to mandate minimum energy standards for rental homes.

“Using financial incentives is not the most effective mechanism to overcome the split-incentive problem,” Matcott argues.

“You just have to mandate minimum efficiency standards, mandate disclosure of energy efficiency at time of sale or lease.”

Australia has long grappled with setting minimum energy efficiency standards for rental properties. Early policy proposals largely failed because of concerns about cost impacts for landlords and rental supply.

Federal and State Energy Ministers have committed to exploring nationwide minimum standards as part of the push for net-zero emissions by 2050, but achieving national uniformity remains a significant hurdle.

The ACT government is leading the way in setting high energy efficiency standards for rentals. Since last year rental properties in the ACT must meet minimum insulation standards or face penalties.

In 2021 Victoria became the first state to mandate minimum energy standards for rentals, however this only requires landlords to provide fixed heating in living rooms.

A recent discussion paper prepared by the Energy Efficiency Council and Better Renting argued that additional policies will be needed to support the effective implementation of mandatory minimum energy performance standards for rental homes.

These include mandatory ratings disclosure schemes, one-stop shop services for energy retrofits, supported home energy assessments, and training and support for the real estate industry.

“Property managers are key influencers for landlord decisions, but are not widely promoting energy efficiency,” the discussion paper says.

“Capacity building strategies to ensure the real estate industry engages with rental energy performance may provide opportunities to leverage the position of the sector.”

In addition to mandated minimum energy standards for rental properties, Alastair Matcott argues we also need to change our tax policy to ensure standards are complied with.

The Better Homes and Carbon final report recommends updates to capital gains and negative gearing, that tax deductions for landlords should be contingent on ensuring their investment property maintains minimum standards.

“Use tax to do it … just tie capital gains and negative gearing to a star energy rating of the house,” argues Matcott.

The report also recommends the government allow landlords to deduct the entire cost of an asset or upgrade immediately from their taxable income in the year the expense is incurred, rather than spreading it out over multiple years through depreciation.

Whilst Matcott and Green Energy have had to move on, their split incentive advocacy project is now being reinvented by a new partnership between Race for 2030, Merri-bek Council and Bank Australia.

You can hear the full interview with Alastair Matcott on the SwitchedOn Australia podcast.