Understanding the UK energy consumers’ willingness to support vulnerable populations through the adoption of low carbon technologies (LCTs) is crucial for policy makers and energy providers alike. We conducted a national study employing the Contingent Valuation Method (CVM) to evaluate energy customers’ willingness to pay (WTP) for a social tariff designed to help vulnerable customers adopt LCTs. This analysis involved a significant sample of almost 5,000 customers. In the process, we took the opportunity to explore the impact of methodological nuances on WTP and providing actionable recommendations for employing CVM effectively in these types of study.
- The Core Questions Explored
The study meticulously explored consumers’ WTP through two distinct contexts, shedding light on how framing affects their responses:
- Context 1: Mandatory Charge Setting. The question posed was as follows:
“How acceptable would you find an additional charge of £XX per year to help those in vulnerable situations make their homes more energy efficient?”
This framing sought to gauge the acceptance of a compulsory contribution towards aiding vulnerable individuals.
- Context 2: Voluntary Charge Setting. Here, participants were asked:
“If the new tariff meant that your annual energy bill would be higher by £XX per year, how likely would you be to sign up to this new, alternative tariff and switch from your current one, and help those in vulnerable situations make their homes more energy efficient?”
This scenario aimed to measure the likelihood of voluntarily opting into a higher-cost tariff for the sake of social good.
- The Main findings
The study indicated overall that the mean average WTP for the social tariff was close to £12, to be paid on top of their annual bill. At this point 53% would accept the charge. However, customers were quite polarised around this average: A fifth were not willing to pay anything, while a third were willing to pay £20 or more.
Analysis of customer sub-groups showed interesting differences. For example, younger customers (18-34 year olds) indicated a higher WTP of £13 compared to older customers (55+ year olds) with a WTP of £11. Some of the differences could be associated with customers’ ability to pay, where we see those in AB socio-economic groups, in urban areas and in more affluent regions giving generally higher values.
- How Variations in Methodology Affected Willingness to Pay
The study’s findings highlighted significant variations in WTP based on the initial price point (starting value), the framing of the charge (mandatory vs. voluntary), and the response scale used.
- Starting Value Impact: The initial charge level presented to respondents had a profound effect on their stated WTP. A higher starting point significantly increased the WTP, suggesting that the first price mentioned acts as an anchor, influencing subsequent valuation.
- Mandatory vs Voluntary Charges: The mean WTP for a mandatory charge was notably higher than for a voluntary one, indicating that the compulsory nature of the payment increases the stated level of acceptance by customers.
- Response Scale Effect: The study also examined the influence of 4-point versus 5-point scales on WTP. The absence of a mid-point in the 4-point scale led to greater acceptance of charges less than £14 and similar acceptance from £14 upwards, when compared to a 5-point scale. However, while a 5-point scale with a “Neither/Nor” mid-point gave generally similar results to the 4-point scale, a 5-point scale with a “Don’t mind / Don’t know” mid-point resulted in a slightly lower WTP.
- Behavioural Insights and Recommendations
The observed differences in WTP due to methodological features can be attributed to the anchoring and framing effects, two well-established behavioural psychology theories. These insights underscore the importance of carefully designing CVM surveys to mitigate bias and accurately measure WTP.
Recommendations for Applying CVM include:
- Randomising Starting Values: This approach ensures a balanced representation across the price spectrum, reducing the influence of the anchoring effect.
- Opting for a 4-Point scale instead of a 5-point scale: This is because there are a variety of ways in which the mid-point can be interpreted; for example, if the next value presented when a respondent first chooses the mid-point is higher than before, the resulting WTP can end up considerably higher, compared to when the next value is lower.
- Extend Understanding Through Follow-Up Questions: Additional queries can elucidate factors influencing WTP, such as the respondents’ financial capacity and their personal perspectives on social responsibility.
This study not only advances our comprehension of energy customers’ WTP for social tariffs but also offers guidance for deploying CVM methodologies more effectively. These findings are pivotal for crafting energy policies and tariffs that align with consumer willingness to support environmental and social initiatives.
A full technical paper on this research is available on request
By David Pearmain, February 2024.
(with thanks to Professor Iain Fraser of Kent University for his input to this paper)