Uptake and usage of cost-reflective electricity pricing: Insights from psychology and behavioural economics

Abstract

The Australian electricity industry – like many other countries globally – is currently facing the complex challenge of reforming electricity tariffs. Momentum is growing for transitioning residential consumers toward more ‘cost-reflective’ pricing that better reflects the true costs of generation and supply, and sends a ‘price signal’ that presumably incentivises reduced consumption during peak periods. Under such tariffs, customers pay more for electricity used during times of peak demand – unlike traditional ‘flat-rate’ tariffs where the price remains stable regardless of time or demand. Pilot trials indicate that cost-reflective tariffs might succeed in reducing peak demand, but often only for a small minority of customers, such that population-wide demand response is minimal or insignificant. In this paper, we apply insights from psychology and behavioural economics to identify how cost-reflective pricing can be designed, depicted and delivered to enhance customer uptake and optimal usage –thereby facilitating ‘appropriate’ demand response – for a larger cross-section of the population. By carefully considering the likely impact of relevant cognitive biases and psychological factors –which routinely shape human decision making and behaviour – we are able to propose practical strategies that industry can adopt to maximise the prospect of cost-reflective pricing achieving significant population-level peak demand reductions, while providing shared benefits for customers, retailers, networks and regulators alike.