January 2020
We all have to make thousands of decisions each day. Our 'automatic' systems help us navigate the world with ease, however we need to recognise the biases that influence our decisionmaking processes. With millions of households still paying more than is necessary for the energy they use what other barriers do we and energysuppliers need to overcome?
In 2012, whilst working on a joint venture Solar PV project I uncovered a concerning problem effecting properties that had a solar PV array and a prepayment meter. If the prepayment meter runs out of credit, the property and array, are effectively disconnected from the grid and the array is unable to generate any electricity. For that project this was of particular concern because that meant not only were the arrays unable to generate any free electricity for tenants to use, they were also unable to generate revenue to finance themselves. This was just one performance issues I identified, and was subsequently tasked with resolving, in what turned out to be a much more complex project.
There were multiple technical considerations around metering, communication and administration which were successfully overcome, however the biggest challenge turned out to be something entirely different. Energy supplier switching.
It would have been simple if all of the prepayment meters in these properties could have been replaced with credit meters, however payment type is the choice of the resident and in the majority of cases they were uncomfortable, unwilling, or unable to change it.
In the end, the only sensible and reliable solution for these properties and residents was to ‘switch’ to an energy supplier with a different tariff structure. Having found a supplier whose tariff had no standing charge, we were able to dramatically decrease the likelihood of the properties and arrays being disconnected from the grid.
And so began my relationship with ‘switching’ in the domestic energy market. It has been an insightful, occasionally frustrating, journey from which I have gained unique perspective, knowledge, experience, and understanding, whilst also helping to facilitate somewhere in the region of 50,000 switches. Here is some of the things I have learnt along the way.
The barriers to energy switching
Earlier this week I wrote an article on why households don't switch energy suppliers and the ‘role of price comparison websites’ (PCW’s). The article suggested a couple of areas where price comparison tools could make changes to increase their effectiveness.
However, actually getting a consumer to a PCW in the first place presents a huge challenge in itself and demonstrates a level of engagement that the majority do not reach. What other barriers need to be acknowledged and overcome?
The challenge of misplaced loyalty.
The domestic energy market is structured as such that ‘loyalty’, or ‘inaction’ is rarely rewarded. We can consider then that not changing your energy supplier, (or actively seeking out new competitive tariffs) represents ‘misplaced loyalty’, for in doing so we accept a status quo which has no benefit to us.
"Misplaced loyalty (or mistaken loyalty, misguided loyalty or misplaced trust) is loyalty placed in other persons or organisations where that loyalty is not acknowledged or respected; is betrayed or taken advantage of"
In behavioural economic terms we would say that the ‘choice architecture’ in the domestic energy market is designed to benefit the incumbent, not the consumer. That is because in the UK energy market consumers default onto standard variable tariffs (SVT’s) as soon as they move into a new property, or at the end of a ‘fixed’ term tariff. The default ‘standard’ whilst on the surface sounding reasonable, is the most expensive way to pay for energy and the most profitable for the supplier.
Therefore when we do nothing, we pay the most.
As we have already seen with the most recent Ofgem data, over half (56%) of all households with a'Big Six', or incumbent supplier are on a SVT. Furthermore the results from a 2016 Competitions and Market Authority domestic customer survey show that “customers supplied by one of the regional incumbents, or British Gas” are significantly less engaged than those with independent suppliers" (exert below from appendix 9.1)
Respondents with regional electricity incumbents or British Gas 51. We find that 55% of respondents are with an incumbent supplier (for at least one fuel). These respondents are: (a) less likely to have been active and engaged, and in particular less likely to: (i) have considered switching (43% have never considered switching compared with 22% of those not with an incumbent); (ii) have shopped around (68% have never shopped around compared with 48% of those not with an incumbent); (iii) have ever switched energy supplier (69% have never switched supplier compared with 41% of those not with an incumbent); and (iv) have switched in other markets or consider switching in the next three years (50% are unlikely to consider switching in the next three years compared with 32%); and (b) more likely not to pay by direct debit (54% pay by direct debit compared with 70% of those not with an incumbent); to be on an SVT; to have been with their supplier(s) for ten years or more; to have higher gas tariff comparison rates (TCR).
In addition many will have encountered the following scenario. It is one I am familiar with from my work at Placefirst, Community Switch and Energy Angels and an example of a conversation I (and many others) have encountered repeatedly;
Energy advisor; Have you ever considered switching your energy
supplier?
Consumer; No thank you, I am quite happy with my current
supplier.
Energy advisor; That is great to hear. Can I ask, who is your current
energy supplier?
Consumer; My current supplier is [insert big six supplier name
here…]
Energy advisor; And may I ask, what made you choose [insert big six
supplier name here…]?
Consumer; Oh, I didn’t choose them, they were here when I got
here…
Considering the above, why do the majority of households choose to remain on high cost, standard variable tariffs, when there are clearly a range of more suitable and cost effective solutions? One obvious explanation can be found in our approach to decision making.
Emotional bias in decision making
The evidence above supports the conclusion that the majority of UK households make broadly subjective, rather than objective decisions about their energy supply. The circumstances described strongly correlate with examples of both (1) ‘status quo bias’ and (2) ‘the endowment effect’.
These two well recognised and researched emotional biases can negatively affect our decision making capabilities. This then leads to cases of the aforementioned ‘misplaced loyalty’ resulting in a reluctance to engage with the energy market and make positive changes.
(1) Status quo bias is an emotional bias; a preference for the current state of affairs. The current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss. (2) In psychology and behavioural economics, the endowment effect is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it.
In short, and in the majority of cases, we attribute greater value to that which we already have, reject changes to our established reference point (the status quo) and naturally therefore demonstrate often unfounded and misplaced loyalties, especially to incumbents.
Overcoming biases
The first step to overcoming any bias is to recognise and acknowledge it. Being aware of, and willing to accept that, the drivers for many of the day to day decisions we make are entirely subjective is key. It is important to stop and ask yourself in the moment why you hold a particular opinion, or are making a particular decision. Try to appreciate that we often apply ‘post-rationalisation’ to our decision making and find ways to justify the status quo. Of course this all applies to our own personal decisions.
What does recognising these biases mean for the energy market, and especially for energy suppliers themselves? Understanding why consumers are slow to change is one thing, knowing how to act on that information is something entirely different.
If you are interested in exploring how to overcome these barriers, wish to discuss approaches that will work for your business, or are interested in further insights into consumer and supplier behaviour, then please do get in touch.
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