Addressing self-disconnection among prepayment energy consumers: A behavioural approach
Introduction
Research in economics and psychology suggests that many important choices involve inter-temporal trade-offs between immediate and delayed costs or benefits. In order to evaluate such trade-offs, decision-makers compare the costs and the benefits of outcomes occurring at different times. However, people can be impatient in the sense that they tend to prefer to enjoy immediate rewards and to defer costs.1
Prepayment metering is an interesting case to study these inter-temporal trade-offs. This type of metering requires the energy payment to be made before actual consumption takes place; that is, households have to pay for electricity and/or gas (immediate costs) before they consume it (the benefits are delayed). This allows for self-disconnection, which happens when a household exhausts all available credit, is unable to top up and so is left without supply of energy, but without the energy utility actively disconnecting them for failure to pay their bills.
For some UK consumers, prepayment meters are combined with an emergency credit facility, so that vulnerable households can be protected from energy cuts at least for short periods of time e.g. a weekend. Nonetheless, self-disconnection can have serious consequences for the well-being of households. Lack of heating and associated health risks, especially for the vulnerable and elderly, are a significant threat. In addition, there will be nutritional consequences if interrupted energy supply impairs food preparation, exposing the fuel poor to vulnerability from food poisoning. There will also be leisure and psychological impacts, associated with shame or loss of self-esteem (see ConsumerFocus, 2010).2 Likewise, self-disconnection generates costs for the energy suppliers since it may contribute to lower energy consumption and higher costs associated with reconnecting of energy supply after self-disconnection.
Our paper explores two issues related to self-disconnection. First, we examine whether behavioural characteristics are associated with a propensity towards self-disconnection. Second, we propose energy savings plans designed to help households minimise their incidence of self-disconnection throughout the year. We then test empirically consumers' preferences for these plans. We explore whether households are willing to accept one of the designed saving plans and correlate these preferences with the households' behavioural characteristics.
Our empirical analysis is based around a survey conducted in collaboration with British Gas, designed and implemented across a sample of British Gas customers using gas prepayment meters. The survey includes several questions related to behavioural characteristics. In particular, we have designed a question to assess the level of goal achievement by the household member in charge of topping-up the gas meter. We used this measure of goal achievement as a proxy for self-control, as discussed in more detail below.
Our results show that stated self-disconnection is positively associated with lower levels of our measure of goal achievement. We also show that a self-determined regular top up seems to be an effective solution in reducing self-disconnection, however it does not completely offset it. In addition, we show that households which have already experienced self-disconnection are more likely to accept a savings plan. The most popular type of savings plan chosen by the households, in our sample, was a commitment to a regular payment schedule through the year, via mutual agreement with the energy supplier. This suggests that households have a level of insight into their vulnerability to self-disconnection, because this plan is also the plan most likely to minimise the likelihood of self-disconnection.
Our research contributes to the empirical literature on behavioural economics and energy economics. There are a small number of research studies on self-disconnection, see for example Brutscher (2012), Doble (2000), O’Sullivan et al. (2013) and O’Sullivan et al. (2016). These studies do not, however, explore whether goal achievement (and other behavioural characteristics) can explain self-disconnection. Furthermore, our paper suggests novel policy instruments that can help reduce the negative impact of self-disconnection and tests whether households would be willing to accept such saving plans.
The rest of the paper is structured as follows. The next section lays out the background on prepayment metering and the drivers of self-disconnection. It explores, using an illustrative example, how time inconsistency can lead to self-disconnection and presents the different saving plans as potential solutions. Section 3 presents our survey and describes the data. Section 4 describes the methods we use in our empirical analysis and Section 5 presents our results. Section 6 concludes with a summary of findings and a discussion of policy implications.
Section snippets
Prepayment meters and self-disconnection
Prepayment meters (PPMs) emerged as a means of offering indebted domestic consumers the ability to pay their energy bills. For the British Gas gas prepayment customers participating in this survey, they all used physical keys or cards to activate their meters following top up at a convenient PayPoint or Post Office.3
Sample summary statistics and stated self-disconnection
The data source was responses to a survey developed and conducted in collaboration with British Gas, specifically targeted at British Gas gas prepayment customers. The survey was implemented online between January and February 2013 and was sent via email to 20,000 customers, with 11% of surveys not delivered because of incorrect or out-of-date contact details. The customers contacted were those identified as being most likely to be responsible for paying the gas bills within the household.
Estimation strategy
To unravel some of the associations between propensity to use emergency credit and vulnerability to self-disconnection, in this section we estimate a range of econometric models to capture these phenomena as a function of behavioural characteristics and other conditioning variables. Given potential endogeneity of the behavioural characteristics, we needed a range of estimation methods, as explained below. In addition, we estimate a model designed to capture the types of households which might
Emergency credit and self-disconnection
As explained in Section 4, estimation results for emergency credit and self-disconnection are obtained by estimating Eqs. (1) and (2) through a seemingly unrelated bivariate probit model. Table 5 reports the average marginal effects and conditional probabilities. The two equations are statistically significantly correlated (ρ = 0.278). This result implies that the error terms of both equations are correlated and we gain a more efficient estimator by estimating the two equations jointly compared
Conclusion
This paper presented empirical evidence on the role of behavioural characteristics in explaining self-disconnection. We designed and implemented a survey specifically for prepayment gas households in the UK. Our results showed that, in our sample, stated self-disconnection is positively associated with lower levels of goal achievement. A self-setting regular top up could be effective in reducing self-disconnection, however it would not completely offset it. In addition, we designed different
Acknowledgments
Marta Rocha acknowledges the financial support provided by the FCT Fundação para a Ciência e a Tecnologia, Portugal. The authors wish to thank British Gas for enabling the implementation of the survey and for their collaboration and support. In particular, we wish to thank Louise Rhodes, Patrick Wilson, and Matthew Pearson. We also thank Steffen Hoernig, Thomas Greve, and Philip Doran for their thoughtful comments. The opinions in this paper reflect those of the authors alone and do not
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