This blog post is the third in a series that we are writing in the lead up to the 2018 Behavioural Exchange in Sydney. It outlines our recent work in energy markets, which is the focus of one of the breakout sessions.
As energy has been an area that we’ve worked in for a while, we wanted to talk about the work that we’ve done in this area in the UK and in our Sydney office. Lis Costa, Director of Consumers, Economic Growth and Energy, joins us to talk about this with Ravi Dutta-Powell, Senior Advisor at our Sydney Office.
Catch Lis at BX2018 at 11.00am and at 1.30pm on Tuesday 26 June to hear more about the work that BIT are doing in the UK and abroad. Lis will be covering the team’s work on energy usage at the 11.00am session and will be talking about the use of BI online at the afternoon session.
Ravi: In energy markets, like many essential services markets, consumers have a strong status quo bias. People will overwhelmingly tend to stick with their current energy retailer, even where they could get a much better deal elsewhere. Importantly, the cost of energy is rarely made salient – only when consumers see their (typically quarterly) bill do they consider the price. In comparison, regular purchases such as petrol or groceries are much more visible and salient, encouraging people to shop around in those contexts.
Lis: Both Australia and the UK face similar issues in this regard. Both countries have recognised that traditional market regulation has not been effective at delivering low prices and high quality service to consumers. Even though there are a large number of suppliers and consumers can (in theory) switch easily, significant barriers to competition remain. One of the biggest barriers is consumer inertia. We just aren’t particularly engaged or interested in who our energy supplier is, even if we could save a lot through switching.
Indeed, in the UK almost 10 million households could save £300 by switching, and yet a third of all households have never considered switching. And so regulators in both countries have been thinking more carefully about consumer behaviour, and trying to find new and smarter ways to encourage consumers to engage in the markets by shopping around and switching to better deals.
Ravi: What has already happened in the UK to encourage this consumer engagement?
Lis: In 2016, the Competition and Markets Authority (CMA) in the UK reported that customers have been paying £1.4 billion a year more than they would in a fully competitive market. In response to this, the CMA recommended a series of reforms to the energy regulator Office of Gas and Electricity Markets (Ofgem). The team in BIT’s London office has supported Ofgem in implementing several of these initiatives.
Firstly, the CMA recommended that Ofgem establish an ongoing programme to test and implement communications to improve customer engagement, including testing the effect of sending letters to consumers showing them the cheapest deals available to them. We found that these personalised ‘cheapest market offer’ letters increased switching from a baseline of 1% to an average of 2.9% over a period of 30 days.
Ravi: It’s really interesting that the baseline rate of switching is so low – and that a simple letter almost triples the rate of switching!
Lis: Yes, we’ve learned that timely prompts work – they significantly increase switching, are low cost, and scalable. But as you say, the total impact isn’t enough to shift the dynamic of the market. So we’ve also been investigating some more ambitious options that can be implemented alongside letters like these.
One of these more radical options is the database of disengaged consumers, which is targeted at shifting both consumer and energy supplier behaviour. Energy suppliers were required to give Ofgem details of all customers who have been on their (relatively expensive) default tariff for more than 3 years. That’s 10 million people across the UK. These details will be put on a secure database to allow rival suppliers to contact customers by letter and offer cheaper and easy-to-access deals based on their actual energy usage.
We’ve worked with Ofgem on a small scale pilot of the database, testing the effectiveness of multiple offers from rival suppliers and a single “best offer letter” from Ofgem. The CMA approach of multiple offers and the best offer letter resulted in around a two fold increase in switching to around 13% of consumers switching over 98 days (against a control group who received no letter). The effect of the best offer letter was particularly encouraging given it was a single communication and most customers in the CMA arm received multiple (up to six) communications.
We are encouraging Ofgem to test and innovate within the database. For example, Ofgem could allocate more of the database to the best performing suppliers (and also limit access for poor performing suppliers), or allocate more to suppliers who intend to organise large collective switches to save many consumers money.
Ravi: Those are exciting example of field trials with large groups of UK consumers. In Australia, the issue of power prices has been the subject of substantial media and political attention, with even the Prime Minister weighing in. As such, the pace of reform has meant that there has been less time for field trials.
Instead, we’ve been using BIT’s Predictiv platform to conduct trials, and have found some useful results that are helping to shape policy. Our first trial found that consumers have greater confidence in an information document that has detailed pricing information on it – even though only around 1 in 10 were able to interpret the table correctly. Moreover, when the detailed pricing information is the first thing consumers see, it leads to them making worse decisions.
Lis: That’s a great approach, and we also used Predictiv for the early stages of these UK trials. The results you’ve described are really interesting, but they only really point us to what we shouldn’t do, rather than what we should do. Did you find anything that can inform positive recommendations?
Ravi: Yes, we actually ran a second trial. In that trial we found that loss aversion appears to increase consumers’ comprehension about a letter informing them that their energy discounts are about to expire. Full reports for both trials are available on the AER’s website (here and here).
Lis: So what do your experiments tell us about why people don’t switch? Is it because they don’t understand their options or is it inertia causing them to stay with their current provider?
Ravi: It’s probably a combination of both – consumers may not realise or understand that there are substantially better offers out there for them. But even when targeting consumers who could easily switch and save substantial amounts of money and know that this is the case, the vast majority do not take action. This suggests there is significant scope to improve – this might mean more trials to see if we can increase the proportion of people who switch providers. However, it may also mean that we need to rethink the way that we approach the problem, and take more proactive steps to shift this behaviour.
This might include doing more to encourage automatic switching solutions that currently exist in the market and remove a lot of the friction from switching regularly. For example, in the UK organisations such as Flipper and Switchd offer these services, while in Australia Choice has recently launched its Transformer service. It could also mean thinking about whether regulators take extra steps for especially “sticky” consumers – for example, providing their details proactively to the best performing switching services or comparison sites on an opt-out basis. Or it might mean regulating on the basis of outcomes, and focusing on minimising customers who are on a “bad deal” (or close to a good deal), while still encouraging retailers to innovate and compete in positive ways.
Lis: All exciting ideas! Ravi, we’ve just scratched the surface of how to use behavioural insights to create better outcomes for consumers in energy markets around the world. For those following, you can tune into my talk at BX2018 to hear more about our research in the UK and Australia, and what we’d like to test next.