How Behavioral Economics Can Help Utility Customers Save Money
While energy generation and markets continue to evolve quickly, efficiency will remain an important part of providing reliable and least cost energy to customers. However, customers can show persistent resistance to energy efficiency, even when it is in their personal best interest. Behavioral economics has become a bit of a hot topic when it comes to encouraging socially desirable change in individuals, and a number of the discipline’s insights can be applied to energy efficiency.
The central tenants of behavioral economics are well known to anyone that has read bestsellers such as Nudge, Thinking Fast and Slow, and Freakonomics. As humans we are all predictably irrational. We make choices that aren’t in our personal best interest. Our decisions are strongly influenced by emotion and context, including the way in which choices are presented to us. Decisions are less the result of deliberative, linear, and controlled processes than gut reactions.
These insights have been applied by public policy makers to change a range of behaviors from increasing the rate of organ donation, enrollment in pensions, and voter turnout. When it comes to energy efficiency here are 8 key principles to keep in mind:
- Change is hard: People have a strong aversion to change (Status Quo Bias). Change involves uncertainty and risk and humans don’t like that. Added to that is the endowment effect which means we place an irrationally high value on the things we own, like that 30 year old second deep freeze. It can be hard to get people moving and inertia can be a big factor.
- Loss hurts more than gain feels great: The pain of loss is 2x stronger than the joy of gain (Loss Aversion Theory). That’s good news for promoting efficiency. Energy efficiency upgrades are typically framed as possible future gains. However it is much more effective to frame them as a real and current loss. As an example, instead of saying ‘If you upgrade you’ll save $20 every month’, rephrase to ‘Every month you don’t upgrade you’re losing $20’. You can add a positive hook of rebates and advice to create an overall positive tone to the message.
- We’re afraid of making mistakes: Our Regret Bias means our anticipation of possible future regret weighs heavily on us during decision making, especially in situations with uncertain outcomes. With efficiency consumers do not feel they can be certain about how much they will save and if the upfront investment in time and money is worth it. This can push us towards the safe option of inaction.
- There is such a thing as too much information and too many choices: Energy efficiency is complex and there is no escaping that. But it doesn’t mean consumer facing information has to be. If consumers are faced with either too many choices, or too much information on one choice, they will defer to a future time that never comes, and conversion rates will drop significantly (Choice & Information Overload). So give customers just enough to understand the benefit and provide further optional information for the keen ones.
- We want to conform to norms: We have a strong psychological need to belong and are hardwired to conform to social norms (Social Conformity). That insight has been the driving force behind adoption of benchmarking by utilities. This tactic mobilizes aggregated customer data to provide customers with their energy use compared to similar households. This has proven to be effective and is a great example of a ‘Nudge’ without economic incentives. This same principle can be used to encourage participation in direct load control programs, by letting homeowners know that most of their neighbors have signed up.
- Context matters: The manner in which options are presented impacts our decision making process. As choice architects we can set a default option, frame the options, or even insert decoys, which The Economist is famous for. We tend to pick the middle option when presented with extremes. We also tend to go for the recommended option or option marked ‘Best Value’. In this example, Google uses the $25 decoy to shift buyers up from the $5 option to the $10 Best Value. This is known as Choice Architecture. This can be used to guide customers to preferred program options or appliance and equipment models.
- We have nothing to compare the cost of efficiency to: We all know how much new glasses or winter tires should cost. But consumers really have no idea what efficiency should cost. So they have no basis to determine if an assessment or rebate is a good value. They need a reference point to anchor their value judgment off of. This cognitive bias explains why we all have basements full of things that were ‘on sale’ but we didn’t really need. The original price acts as an anchor increasing the perceived value of the sale price. Case studies with sample project costs, rebates and savings over time can help provide a reference point for consumers and reduce perceived uncertainty and risk.
- There is a pain to paying: Ever notice the difference you feel paying for groceries in cash versus using your card? The card is automatic and we may not even listen to the total. We experience the pain of paying differently based on our level of involvement and immediacy of the cost. This supports the use of low interest on bill financing for efficiency upgrades. And for utilities, encouraging customers’ use of equal payment programs and auto payment options will decrease the pain of paying and be less of a drag on corporate reputation. The bill becomes normalized, similar to a telecom, and the monthly surprise and exercise of paying is removed.