Overwhelmed by Choice (1/2): Consumers and Green Energy
Over the last few decades, growing liberalization and the emergence of new technologies has allowed for the production of cheaper and easily scalable renewable energy. This has radically changed the rules of the game in the global energy market, where consumers are now free to choose any provider they like, or even produce and sell their own energy as “prosumers”. As a result, every one of us must consider an overwhelming number of options when it comes to decisions about energy providers.
Whilst the companies in the energy sector could always benefit on a commercial level from learning more about how people choose their providers amongst all available options, the growing pressures of climate change present a new avenue that could benefit from analysis. If we want to enable the transition to cleaner energy on a wider basis, we need to understand what drives people’s energy choices, and subsequently learn to create conditions that would make consumers more likely to opt for greener energy providers over all other active competitors, green or not.
The Dangers of Satisficing
To this end, what can behavioral science tell us about how people choose from a wide sample of energy providers? Studies show that when choosing amongst a wide variety of options, people can be prone to what is known as “satisficing”, where consumers choose the first satisfactory option they have, rather than the best one for themselves and for society [1].
From the point of view of evolutionary psychology, this manner of thinking is a good survival strategy, and an economically efficient way of assessing available courses of action. Rather than spending a lot of time and brain power on “optimizing” between these considerations (by choosing the very best option and closely considering all option’s benefits and pitfalls), choosing the first satisfactory one instead saves a lot of cognitive resources. Behavioral science tells us that the brain is wired to take short-cuts, and prioritizes quick and efficient decision making over fully considered and conscious choices.
Unfortunately, in the modern world this often leads to individual decisions that may be harmful on a global scale. For example, consider the leverage that consumers have in their hands to enable energy transition. If the majority of people decide to switch to the energy providers specialized on the sustainable energy (and in many countries this option is widely available), this would immediately bring a lot of resources to cleaner energy sources. However, most consumers prefer to stick to their current provider or choose the first acceptable option without researching comparable green alternatives to minimize the time and effort spent on this decision [2].
The world’s richest and largest providers therefore receive the largest subscriptions, by merit of their prominence and primacy in the eyes of potential consumers, rather than out of any inherent benefits for the consumers themselves, the wider community, or the planet. However, the good news is there are other ways to compensate for the ill-effects of satisficing and use it to the advantage of greener energy providers.
In this article we will explore how the effects of satisficing can be minimized when it comes to consumers choosing their energy provider and how greener options can be promoted. In the next article we will look at the issues facing prosumers, specifically problem of satisficing in decisions about household own energy generation and suggest the behavioral research-based solutions that can help tackle it.
Behavioral Science, Democratized
We make 35,000 decisions each day, often in environments that aren’t conducive to making sound choices.
At TDL, we work with organizations in the public and private sectors—from new startups, to governments, to established players like the Gates Foundation—to debias decision-making and create better outcomes for everyone.
The “Bandwagon” Effect
The tendency to rely on heuristics and short-cuts when making complex decisions doesn’t just explain the behavior of satisficing. The bandwagon effect, where “the extent to which the demand for a commodity is increased due to the fact that others are also consuming the same commodity”, also arises from the individual’s reliance on external cues when assessing the suitability of a course of action. In a similar manner to relying on the first option when assessing something, the bandwagon effect demonstrates how the individual can avoid making complex decisions by simply going for the same option as most of his/her peers.
In light of this, the green energy sector can utilize the bandwagon effect on a local level, targeting communities and galvanizing small-scale switching to green sources. By shifting attention onto the bandwagon effect, policy makers in the sector also open themselves up to a variety of other factors that they can address to increase the likelihood of green switching relevant to the cognitive heuristics of majority influence, such as credibility and trust, which we will return to later.
Bandwagon based strategies are more approachable for the green energy sector due to pre-existing norms and structures that have already put in place community based energy initiatives, which can be leveraged. Electricity market liberalization in the 1990s separated the competitive parts of the industry (energy producers) from non-competitive parts (natural monopolies like electrical grids). This resulted in more competition among energy producers and electricity prices did go down overall. These benefits, though, were mostly reaped by the large industrial users, because they have more market power and tend to switch suppliers in the search of a lower tariff more often than residential customers do [3].
Collective Switching
In order to help households achieve lower tariffs, an initiative called “collective switching” came about. Collective switching is usually administered by an NGO that encourages residents of a specific area to register as participants and then negotiates electricity, gas or heating tariffs for all those households with the suppliers. It goes without saying that the more participants they manage to get, the lower the tariff achieved will be.
Surprisingly, it not only helps consumers save money, but can also be used as a means of helping more people switch to green energy. A good example is the Cornwall Together project that helped more than a thousand UK households achieve a saving of £112 per year. More importantly, it also offered an option of a green tariff and led to 35% of the participants switching to it. But people wanted more.
Some of those participants who eventually decided not to switch mentioned that “the green tariff is not green enough” which demonstrates that collective green switching has the potential to help whole communities opt for more sustainable energy. In fact, it looks like there are already players on the market who are determined to leverage that. A few months ago Ikea announced its participation in the Big Clean Switch joint venture that aims to help thousands of households switch to the 100% renewable and cheaper tariff (savings are estimated to be around £300 per year per household).
From the behavioral perspective, collective switching is a good concept. It relieves people from the burden of making a complex choice, thus not allowing any room for the “satisficing”, where “some people have been [previously] reluctant to switch suppliers because they’re not sure how to, or they don’t have time to compare the different tariffs” [4]. At the same time, the Bandwagon effect motivates more people to join: “everyone wanted to save money but around three quarters were motivated to be part of something bigger” [5]. Hence, we should use our behavioral tendency to join others as a way to switch more households to green tariffs.
The Importance of Trust
Another important behavioral concept in decision-making is trust [2]. When presented with various choices, people prefer the ones that are associated with the parties whom they believe they can trust: the more credible the provider, the less cognitive effort the individual has to invest to discern the suitability of the energy source. Again, in a way it is similar to satisficing. Instead of analyzing each and every piece of information and researching the source it came from, which requires too much effort, it is easier to rely on our existing perceptions of how trustworthy these sources are as a signal of the information’s credibility.
On these lines, Accenture found that the most trusted players in the energy market are Consumer Associations, Scientific Institutions and Environmental Associations (about 50% of the respondents expressed their trust in these). Energy providers and Government, on the other hand, gained trust of only about a third of the group. This might be because the latter two are perceived to have more incentives (commercial or political) to provide false information, and therefore seem to be less reliable when advocating for particular providers.
If we look at how this works in practice, we find that trust plays an essential role in initiatives like Cornwall Together: “It was important to respondents that the partners were trusted, were local and that they had a social purpose; 69% said that it was important that the Eden Project [an NGO] was involved and 60% that Cornwall Council was involved” [5]. Given that most of the collective switching projects are administered by NGOs (similar to Consumer Associations, they generally have people’s trust) as well as local councils, they tend to gain more trust than government campaigns alone or the advertisements of the energy providers.
Governments and NGOs need to ensure that they focus on the most effective initiatives and deliver their messages via the organizations that people trust. In this respect, collective switching can be an effective method of enabling energy transition and works best when administered by NGOs. In practice, the awareness about collective switching can be created via B2C type of businesses: for instance, advertisements in the retail stores. On these lines, participation of Ikea in the Big Clean Switch project is a great way to use their chain of stores to reach out to customers and inform them about collective switching.
The government can also help here, leveraging the natural monopolies that are often largely under their control: e.g. using the advertising space on the screens and posters in public transport. Apart from promoting clean energy, collective switching is also one of the instruments of supporting poor communities, since lower energy tariffs are a big saving for low-income households. Thus, it is a win-win situation for the people, the environment and the country’s economy.
A Call for Action
We cannot expect that with more green energy options in the market the sustainable energy generation will start to prevail on its own. Rather, it is a chance for each market player to take action and make this change happen creating a win-win situation for everyone. NGOs should focus their efforts on more collective switching programs to leverage the Bandwagon effect as well as trust and help more households switch to cleaner energy providers. It is also a good idea for the governments to support these initiatives wherever possible to reap benefits from better environment as well as increasing the welfare of people.
The AI Governance Challenge
NGOs, businesses and governments should work together to create greater awareness of the switching projects via the B2C businesses as well as government channels like advertisements in public transport. This way our natural tendency to avoid complex decisions when leveraged in the form of bandwagon effect and trust heuristics, will lead to greater amount of resources being devoted to the green energy rather than making consumers stick to the status quo forever.
In the next article we will look at why satisficing hinders household green energy generation and what actions businesses can take to mitigate its ill-effects and increase the number of energy prosumers.
References
[1] Simon H. A. (1956). Rational choice and the structure of the environment. Psychological Review, 63(2), 129-138
[2] Frederiks E., Stenner K., Hobman E. (2015). Household energy use: Applying behavioral economics to understand consumer decision-making and behavior. Renewable and Sustainable Energy Reviews 41, 1385-1394
[3] Jamasb T., Pollitt M. (2005). Electricity Market Reform in the European Union: Review of Progress toward Liberalization & Integration. The Energy Journal 26, pp. 11-41
[4] Leibenstein H. (1950). Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’ Demand. The Quarterly Journal of Economics, 64 (2), 183-207
[5] Cornwall together phase 2 research report, 2013
About the Author
Anastasia Gavrilova
Anastasia is currently working as a Finance Analyst in the energy sector. She focuses on improving process efficiency and reducing costs. Her previous experience includes working as a management consultant, where she delivered various strategy and process improvement projects in the energy industry in Russia and Kazakhstan. Anastasia holds the BSc degree in Economics from the Higher School of Economics, Moscow, and an MSc in Business Strategy from the University of Amsterdam. She strives to combine her industry experience with behavioral economics insights to analyze how governments, companies, and consumers can enable the transition to sustainable energy.
