Using psychology and behavioural economics, we're researching consumers' likely response to more dynamic types of electricity pricing.
Impending introduction of cost-reflective tariffs
There is growing momentum to transition electricity consumers toward more 'cost-reflective' tariffs, where the price paid for electricity more accurately reflects the true costs of generation and supply at time of use. Yet there has been little large-scale, systematic research to examine likely uptake rates of cost-reflective pricing among everyday Australian consumers, and the factors influencing their response to these kinds of tariffs.
A nationwide survey-experiment
To better understand the relative appeal of different tariff offers, we conducted a nationwide survey-experiment with a large sample of Australian households. We drew on key principles from psychology and behavioural economics to examine what kinds of cost-reflective tariffs might be preferred, and what features of the 'offer' might be more or less appealing to consumers.
We sought to answer questions such as:
- What are the likely rates of consumer uptake of various cost-reflective tariffs?
- What are the psychological and behavioural barriers to uptake?
- Do 'risk relievers' like a money-back guarantee or free automated device increase the appeal of cost-reflective tariffs?
- Does acceptance of cost-reflective tariffs depend upon certain socio-demographic characteristics of the consumer/household?
Answering these questions, and particularly understanding the behavioural elements – how consumers think, feel and act, and why – will play an important role in designing Australia’s future electricity systems.
Better understanding of how consumers will respond to future electricity tariffs
We found that survey respondents generally preferred traditional 'flat rate' tariffs to all forms of cost-reflective pricing. Simpler, more familiar and seemingly lower-risk tariff offers appeared to be more appealing. Broadly speaking, 'risk relievers' like a money-back guarantee or free automation device increased the appeal of cost-reflective tariffs, but consumers still favoured flat rate tariffs offered on the same terms.
In the end, however, the greatest barrier to uptake of cost-reflective pricing appears to be consumers' aversion to making any kind of choice, i.e. the status quo bias. Indeed, in our study we found that the vast majority (approximately 93 per cent) of households did not even respond to the survey.
Overall, our results suggest that active consideration of a new electricity tariff is likely to be limited to a very small proportion of the population; and among the still smaller proportion who accept a new tariff, it seems that consumers prefer simpler, less dynamic and more familiar schemes that offer risk relief.
Our study focused on likely uptake of cost-reflective pricing. What still remains is the challenge of ensuring optimal usage (i.e. appropriate demand response) among those who do accept cost-reflective tariffs. Indeed, in all policymaking around electricity pricing, it is important to distinguish between what might promote customer uptake as opposed to optimal usage – both are essential requirements to yield the desired benefits of cost-reflective pricing.
The future of electricity tariffs is a huge topic with far-reaching social, economic and political implications – and a decisive factor to its successful reform is widespread consumer acceptance and optimal usage. We hope that this research on consumer response to cost-reflective tariffs encourages an increased sophistication in thinking about new tariff design while also stimulating further work on this important topic.
This project was co-funded by Energy Consumers Australia as part of its grants process for consumer advocacy projects and research projects for the benefit of consumers of electricity and natural gas.
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