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What utility companies have learned about increasing our energy usage

[By Rohini Venkatraman, Product Manager & Kristen Berman, Irrational Labs cofounder]

Utility companies, like many companies, split their energy between mixed incentives. Imagine an angel and a devil sitting on each shoulder sending contradicting messages.

The angel is reminding the utility company about global warming and its role to save the earth. The devil is reminding the utility company that if more people in the Midwest turn up their heat (especially at specific times), they make more money.

With the help of recent national energy conservation policy programs1, the angel has been busy coming up with many different tactics to drive down personal household energy consumption.

But she has to place her bets somewhere.

What option do you think she should recommend to utility companies as the most cost effective way to decrease household energy consumption?

  • Leverage social norms: “Most of your neighbors are using less energy than you are. You are in the minority.”
  • Extend daylight savings. More daylight means less energy.
  • Encourage Energy Star labeling. This label informs people which appliances are energy efficient.
  • Increase the steps needed to make your utility bill payment each month.
  • Provide transparency through monthly usage reports.

Please choose one, before scrolling.

 

 

Most of these seem like reasonable options:

Social proof plays on the idea that we prefer being within the social norm than outside it.
Energy labeling provides a positive brand that allows us to lean in to a socially conscious identity. Maybe we actually are socially conscious and want to display this or maybe we just want people to think we are.

Daylight savings appears cleverly genius because it simply reduces the underlying need to use electricity in the first place.

But why is elongating the utility bill payment process on this list?

Making it difficult to complete important tasks seems counter to everything we know about behavioral sciences and product development.

In fact, if we gathered designers at IDEO, students and professors from the Stanford Design school and behavioral economics experts from around the world, the one thing everyone would agree on is that to change behavior we should design products that are easy to use. If we make something harder, less people will do what we want. In the game of set and forget, most times ‘forgetting’ is a good thing.

Not only is “elongating the utility bill payment process” on the list for a reason, but it’s also the best answer.

In the case of paying our energy bill, ‘forgetting’ is not a good thing. Removing the pain of paying and making the payment process super easy causes us to consume more, not less energy2…. exactly what the angel does not want.

Researcher Steven Sexon looked at over 14.4 million observations from more than 684,000 residential accounts from one utility company3. Of these accounts, 13% were enrolled in household automatic bill payments. Automatic bill payments make payment very easy by withdrawing the bill amount on a monthly basis without any action required from the customer.

Sexon was able to look at the before and after picture of enrolling in automatic billing. What happened when things became very easy? Enrollment in automatic billing resulted in a 4%-6% increase in electricity among residential consumers and 7% for low income ones.

This 4-6% increase is estimated to have induced the equivalent of 1.5 million typical American homes’ annual energy consumption of and adds up to an aggregate private cost of $1.82 billion and 8.6 million metric tons of carbon dioxide emissions. The social costs are $181 million.

Why does automatic billing have such a profound negative effect on our energy consumption?

Most of us have automatic payment set up for monthly subscriptions to gyms, magazines and entertainment products like Hulu or Netflix. Do we sit down and review the bills each month? Likely not. If we did sit down and evaluate our need and our usage of these programs every single month, would we cancel any? Would we change our usage pattern? This research infers that before automatic billing people were reviewing their bill and therefore consuming less.

More attention on the payment moment (read: more pain of paying, more friction, and less ease of use) drives us to decrease usage. Less attention on the payment moment makes it more likely we will increase usage.

To clarify, we’re not proposing that the automatic payment feature for utilities be removed. Convenience is a good thing. Automatic payment, (or ‘forgetting’) helps decrease the stress of payment and likely even decrease the late payment fees that manual billing often falls victim to.

What we are proposing is that utility companies nudge us to give just enough attention to the bill when it arrives.

As Sexon proposes, perhaps just requiring people to open their utility bill notification emails is a first step. To prove this point, we may only have to look at our inbox and think about how many times we open and click through on our regular bill notifications.

Utility_Companies_1

These small changes are estimated to be exponentially more cost effective than the other options our angel is deciding between.

Set and forget is great for the company’s bottom line, but we should be careful not to forget the angel on our shoulder who is looking out for our wallets — and the greater good.

 

 

Still curious about the Angels options? Below are some fun facts:

Daylight savings: Kotchen and Grant (2011) estimated that daylight saving time increases electricity consumption 1% on average.

Social Proof: In the United States, at least 47 utilities in 21 states, including each of the 10 largest utilities, rely on social norms to achieve demand reductions. The reports are estimated to reduce electricity consumption by 2% (Allcott, 2011), though the impact is heterogeneous.

Home energy reports: These cost approximately $1 per household per report and deliver demand reductions at a cost of $0.033 per kWh.

Device Monitoring: Relatedly, a review of pilot programs that introduce energy monitoring devices to households in order to boost price signals suggests such programs can induce 7% demand reductions among active users of the devices (Faruqui, Sergici, & Sharif, 2010).

Utilities_2

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Sources:

1Since at least the 1970s, energy conservation has been a priority of federal energy policy. By 2012, it took on greater urgency amid heightened concern about global climate change and other environmental and human health consequences of energy production and consumption(Sexton)

2Dan Ariely, Pain of Paying

3AUTOMATIC BILL PAYMENT AND SALIENCE EFFECTS: EVIDENCE FROM ELECTRICITY CONSUMPTION Steven Sexton, 2015

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