Classical economics was built around the notion that people’s behaviour responds to prices in a way that makes markets work. While price does influence behaviour, the picture is more nuanced – a body of research shows that how information on price is transmitted has a key role to play in how consumers respond to prices.

A series of studies has been undertaken over the last few years into how people react to changes in electricity prices in Ireland. A large sample of households took part in an experiment, organised by the Commission for Energy Regulation (CER), involving the installation of smart electricity meters combined with very different electricity prices depending on the time of day.

The results of this experiment threw up some very interesting results about how people behave in real life, rather than in theory, results that have a much wider application.*

A friend, who was an enthusiast for action on climate change, participated in an earlier experiment in Northern Ireland in which electricity users were charged the true very high cost of electricity at peak time – between 5pm and 7pm. He responded to this trial by persuading his very tolerant wife to work with him in the garden between five and seven on December evenings, avoiding peak-time household electricity consumption. However, this behaviour is not usual and could be stressful for some households.

Savings Nonetheless, the experiment with smart meters

does show that charging households the high cost of electricity at peak time can result in savings in electricity usage and in greenhouse gas emissions.

But the experiment also showed that, more important than price, was how the information was conveyed to consumers. As in the case of my gardening friend, firing up the interest and enthusiasm of consumers may be at least as effective as charging them an appropriate price. The question is: how to do it?

First, the CER experiment showed there was some reduction in peak electricity demand as a result of charging a high price, though less than might have been expected on the basis of other international studies.

Second, the experiment showed changes in behaviour depended on how the information was communicated to households. The provision of real-time information on both the quantity and cost of electricity consumed, via a suitable household display, seemed to result in more consistent behaviour among households in the peak period and a monthly usage statement worked better than the normal two-monthly bill. (The National Disability Authority has developed specifications for in-home displays designed so that customers of any age or with a disability would find them easy to read and understand.)

Waste disposal

Another Economic and Social Research Institute study looked into the effect of charging households for waste disposal. Initially this involved a colleague travelling around on a bin lorry for a day in Cork watching the survey data being collected. (Subsequent research took place in the more salubrious environs of the institute.)

The study showed charges by weight are a strong incentive to reduce one’s weight of rubbish.**

“The move from a flat-rate charge to the pay-by-weight charge resulted in a 45 per cent reduction in waste collected in the Clonakilty sample.”

It also showed that the availability of recycling was important and that “an overwhelming majority say they would prefer the new pay-by-weight system to having to pay through other means, such as through increased income taxes”.

However, one concern with such a pay- by-weight scheme, as now operates in many locations, is that if the price is too high, some households may resort to burning waste or to illegal dumping, with serious consequences for the environment: beware unintended consequences.

These studies suggest price matters: charging for electricity, gas, phones, household waste and water according to usage will produce a reduction in demand. This reduction may not be very large, because these services are crucial to everyday living.

The benefits to society of such a reduction in demand will depend on the cost of supplying the service. If a major investment programme were needed to meet increasing demand, and that investment programme could be postponed (as with water in Dublin), the savings could be important.

At least as important as charging the right price is how the price signals are communicated to consumers. As shown by the research on electricity, just because the price is high does not mean consumers recognise it or take appropriate action.

However, if we are told in a suitable format that we could save money by running a washing machine at 10pm rather than at 6pm, this may have a bigger impact.

Water usage

In the case of water, if we are to achieve savings in household usage, we will need both to charge according to water used and also to communicate this information to consumers in a suitable manner.

As we will not be charged by water usage for the next few years, but we will have meters, it would be useful to see if just telling consumers they are using much more water than their neighbours could achieve a change in behaviour, without even charging for usage.

Finally, regulation is needed to make many utility markets work. The complexity of electricity tariffs, phone tariffs, etc bamboozles me and, I think, many other consumers. Regulators need to help to create a transparent market where consumers can see the price they face without days of research and modelling. * http://iti.ms/1AXO5X5 and http://iti.ms/1AXO99o ** http://iti.ms/1AXOb0Y