Combining “carrot and stick” to incentivize sustainability in households

Electrical utilities are a main stakeholder for achieving sustainable policy goals. Effective tariff designs that incentivize electricity savings among consumers can contribute to fulfilling these goals. Prior research suggests that penalties are more effective in promoting behavior change, which can be explained by insights from behavioral economics: Loss aversion describes that people react more strongly to losses (penalties) than to rewards of the same magnitude and go greater lengths to avoid them. However, in markets where consumers freely choose their preferred tariff, it remains a major challenge to persuade consumers to voluntarily subscribe to penalizing tariffs. The present study employed a choice experiment using choice-based conjoint analysis to examine consumer preferences for electricity tariffs that apply a combination of rewards and/or penalties for electricity consumption. Results from a representative sample of Swiss electricity consumers show that consumers prefer tariffs that reward decreases in electricity consumption, rather than tariffs that penalize increases in consumption, but that tariffs combining rewards and penalties achieve substantial potential market acceptance. Direct tariff attractiveness ratings additionally support these findings showing that consumers perceive combined Bonus-Malus tariffs as sufficiently attractive. Future research avenues and implications for marketing strategies and energy policies are discussed.