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.

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.

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.

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.

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.

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.