Simulating retrofit incentives and distributional effects of four tenancy law policies A model analysis using concrete buildings and retrofit options within the German regulatory context

The primary landlord-tenant dilemma arising from rent control prevents landlords from recovering costs of energy-efficiency retrofits, which mainly benefit tenants if the landlord undertakes the retrofit. This requires tenancy law to allocate retrofit and energy costs adequately. Previous research discusses the dilemma generally or examines policy options without numeric estimations of their long-term effects. This paper addresses this research gap by conducting a thorough comparative quantitative analysis of several policy options. The study analyzes the impact of Germany’s current system and three reform options on landlords’ and tenants’ financial costs and benefits using simulations across various building sizes and retrofit ambitions. Investment costs exceed energy savings in 12 of the 15 retrofit projects examined. The discounted project payoff — the lifetime benefit of the retrofit compared to maintaining the status quo — ranges from −1.07 to 0.11 €2023/m2/month. The status quo system and one reform option almost always incentivize landlords to forego retrofits. Only two reform options consistently incentivize landlord investment, albeit at tenants’ expense. A sensitivity analysis shows these systems’ effectiveness is not affected by the details of German general tenancy law and local rent markets’ characteristics (rent levels and their inflation, valuation of energy efficiency). Designing landlords’ retrofit premia to depend on the technically estimated energy demand cost savings is especially promising as it incentivizes retrofits when profitable. Seven cases where a retrofit is profitable for the landlord but not from a project perspective are primarily due to the rebound effect. Under this system, landlords’ and tenants’ benefits from the retrofit, compared to continued maintenance, range from −0.28 to 0.42 and −1.10 to −0.02 €2023/m2/month, respectively.