Can Behavioral Economics Help Energy Efficiency?

March 26, 2015 | Amy Jewel

People are irrational. We don’t always make the best choices. For example, sometimes we get overwhelmed if there are too many options and we end up choosing nothing, or we decide it’s easier to stick with what we’ve got, rather than risk our chances on something new and unknown.

Welcome to the field of behavioral economics, a discipline that combines insights from psychology, neuroscience, and microeconomics to help explain how people make decisions. Unlike other economic theories, which assume people are rational decision-makers, behavioral economics assumes that people and organizations are often irrational and finds different ways to understand and harness human feelings and motivations.

Behavioral economics is growing in popularity, as evidenced by recent publications such as this news article in Forbes that explains how behavioral economics can be applied to a new app that helps people lose weight. There’s also this one in the New York Times about “how cheap changes can produce big effects,” such as providing a small lockable box to families to encourage them to save money. There’s now an annual Becon (Behavioral Economics Oscar) award for movies that best demonstrate theories from the field, as discussed in this blog post from BloombergView, and even a new TV show that puts behavioral economics to use in everyday situations. The field has also sparked two bestseller books: Nudge and Thinking, Fast and Slow.

Here’s one example of a behavioral economic theory. One reason that people make irrational decisions is a bias called the endowment effect. In a nutshell, people attach extra value to the goods that they own as opposed to goods that they do not yet own. As a result, consumers might be willing to pay $10 for an item they do not own, but then are not willing to part with this item for less than $20 after it is in their possession. Another bias is based on the status quo; people don’t like change, and they often don’t choose to change a current choice, even if the options available are better than the status quo.

For motivating energy efficient behavior change, the applications abound. Due to the endowment effect, people may not be willing to sell or get rid of an old, inefficient appliance such as a hot water heater, simply because they own it and place a higher value on it than it is truly worth. Or, due to the status quo bias, they may not opt into a better rate plan from their electric utility, even though the new rate plan would save them money.

Researchers in the energy efficiency and energy policy fields have started to take notice of how these concepts might be used to better understand consumer behavior when it comes to energy use. Dylan Sullivan from the Natural Resources Defense Council (NRDC), who provides technical support to the City Energy Project (a partnership of IMT and NRDC) co-authored a paper exploring how psychology, design, and behavioral economics could be incorporated into utility energy efficiency programs. Also, in 2011 researchers at the University of Cambridge published The Role of Behavioural Economics in Energy and Climate Policy, which explains how the basic concepts of behavioral economics can be used to understand why there are untapped opportunities to reduce energy costs through increased energy efficiency. 

There’s also numerous firms and nonprofits that are applying insights from behavioral economics to everyday situations to improve the social good. For example, there’s the UK-based Behavioral Insights Team, whose mission is to help organizations in the UK and overseas to apply behavioral insights in support of social purpose goals. In the U.S. a nonprofit organization called ideas42 has a similar mission of using behavioral economics to do social good and have impact at scale.

Perhaps the most famous example of putting behavioral economics to use in the energy field is OPower, a company that works with utilities to provide personalized energy “report cards” to consumers. These reports are based on one simple idea: social pressure. People are motivated by knowing that their peers are doing better than they are. Instead of focusing on messages around cost savings, doing the “right” thing, or improving the environment, the OPower reports simply tell people that they are using more energy than their neighbors. And it works. On average, households receiving OPower reports reduce their energy use about 2% per year, according to a summary of results published by OPower. While this reduction may not sound like much, the savings add up when applied at scale to thousands or even millions of households. OPower recently announced in a blog post that their clients, consisting of 95 utilities, have collectively saved 6 billion kWh of electricity, equal to $700 million in cost savings for customers.

Other applications could be as simple as providing fewer choices to consumers when it comes to energy efficiency opportunities, or providing a “safer” way to switch from the status quo or get rid of that old appliance.

Leave a comment below if you have additional ideas on how this burgeoning field can help us motivate energy-saving behavior.

Meet the Author

City Energy Project City Advisor, City of Chicago

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