Overwhelmed by Choice (2/2): Prosumers and Green Energy
As we explored in the previous article, the individual’s behavioral tendency to settle for the first acceptable option might lead to sub-optimal decisions when it comes to choosing energy providers. This tendency of “satisficing” [1] also has a detrimental effect on “prosumers” – households generating their own energy. Generating your own energy requires complex decisions involving the type of technology (e.g. solar, wind, hydro power etc.), financing method, desired capacity, etc.
Satisficing in Prosumers
There are many options available on the market regarding energy production technologies. This makes it a choice that requires a lot of time and effort, and the amount of information people need to consider is tremendous. As discussed in the last article, the more options there are, the more time and effort an individual has to invest in discerning which one best suits their needs and those of the environment.
Considering the mind’s tendency to take shortcuts, in the presence of overwhelming amounts of information prosumers are just as likely to rely on cues and heuristics to bypass the decision making process. This makes them prone to relying on the most prominent technology or provider, or the first ones they happen to come across. Doing so is not always guaranteed to encourage energy choices that have the interest of the environment at heart, especially if the first or most prominent providers are not using green energy sources.
Furthermore, if people have a natural tendency to simplify their choices, this increased complexity itself can divert them from generating their own energy altogether and instead rely on prominent non-green providers like everyone else. Moreover, in such a complex decision, it is not only the satisficing that is holding potential prosumers back.
It is important to understand the main reservations and behavioral biases they have, as well as to present the available options in a way that enables better decision-making and mitigates the biases consumers might have. 57% globally are already considering going off the grid and there are a few techniques to make it easier for them to make this choice.
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Loss Aversion
One of the most common behavioral biases – loss aversion – manifests itself here as well. According to Accenture, 89% want to address the risk of power outage when becoming energy self-sufficient, and this is where the traditional utility companies have an important role to play. Since energy is considered a basic good for every household in developed countries, balancing out the intermittent nature of renewables becomes essential. This is a chance for the traditional utility companies to take action. They could offer the “back-up” energy supply, thus both addressing the risk of outage and adjusting their business models to the new energy markets.
Another bias that hinders private investment in renewables is hyperbolic discounting: most people put too much emphasis on the immediate benefits rather than future gains, as the future seems “too far away”. Setting up solar panels or a wind turbine at home requires a significant upfront investment, while the payback period can range from 6 to 30 years. Therefore, for many households spending several thousand dollars today hoping to get it back in 10 years might not seem justified.
The Importance of Payback Periods
Luckily, there is an easy solution: “by segregating later time periods into separate categories and integrating earlier time periods into a single category, one can induce greater patience in consumption” [2]. In practice, the companies offering solar panels and wind turbines for households can leverage this by adjusting the way they advertise the expected cash flows from their products. For renewable energy generation, we can think of dividing the years following the purchase of PV or a wind turbine into several periods, for instance, first 5 years when a government subsidy is available, followed by the next period after it expires. It could look somewhat like this:
Depending on the arrangement, different categories can be shown: e.g. the payback period vs. the time beyond it. Another set of categories could be seasonal fluctuations of the amount of energy produced (summer months vs. winter months).
One more bias that stands in the way of prompt decision-making is procrastination. Most people tend to defer making choices or completing tasks if they feel that there is plenty of time to do so in the future. Setting a limited window of opportunity is a way to encourage faster decision-making [2]. In practice this can be done via limiting the amount of time certain incentives (discounts, tax credits) are available in order to create the sense of urgency. Thus, people will be encouraged to start generating their own energy sooner rather than later.
A Call for Action
Encouraging people to generate green energy is even more difficult than helping them switch to greener and more beneficial providers. As the complexity of the decision increases, the number of various behavioral biases affecting it also goes up. However, behavioral science suggests several simple steps that traditional utility companies and providers of the home energy generation solutions can employ in order to turn more of us into prosumers.
The AI Governance Challenge
Traditional utility companies should adjust their business models and offer energy back-up options to prosumers to address their loss-aversive behavior. This will allow utility companies to survive in the changing markets as well as support green energy solutions. There are simple marketing strategies for the companies offering home energy generation solutions that they could use to incentivize customers:
- Visualizing the long-lasting nature of benefits from home energy generation to avoid hyperbolic discounting
- Mitigating the effects of procrastination by offering limited-time discounts and other incentives
This would not only boost the revenues of the company, but also increase the share of sustainable energy. Currently only around 10% of all energy and about 22% of all electricity comes from the renewable sources worldwide. Using the simple strategies described above, each market player can help increase these percentages considerably.
References
[1] Simon H. A. (1956). Rational choice and the structure of the environment. Psychological Review, 63(2), 129-138
[2] Johnson, E. et al (2012). Beyond nudges: Tools of a choice architecture. Marketing Letters, 23(2), 487-504
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.
