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For energy (and water) conservation, moral suasion is no substitute for getting the prices right

Meredith Fowlie, Associate Professor and Class of 1935 Distinguished Chair in Energy | April 7, 2015

My office light switch recently acquired a little sticker that politely reminds me to turn it off when I leave.

light switch with sticker

And over the past year, an edgy Lawn dude  and an amicable  Bear  have been urging Californians to cut back on water use in order to meet our drought-stricken state’s water restrictions (which have to date relied on public spiritedness versus serious enforcement).

drought message on water conservation

The use of moral suasion to encourage conservation is not unique to California. Public appeals for reductions in energy and water use are ubiquitous. And it is easy to see why. For political and jurisdictional reasons, it is often easier to mount a conservation campaign than raise energy or water prices in times of scarcity. But what impact do these interventions actually have on energy and water consumption?

Prices versus moral suasion

A new E2e working paper explores this question in the context of electricity. More than a year after the Fukishima earthquake, several of Japan’s nuclear power plants were still out of commission and electricity supply was tight. Policy makers were looking for ways to reduce electricity consumption during critical peak times.

Koichiro Ito and his co-authors set out to test the relative effectiveness of an increase in critical peak electricity prices versus “moral suasion”:  a polite request for voluntary reductions in consumption. Customers who volunteered to be part of the study were randomly assigned to one of three groups:

  • A price treatment: Higher electricity prices during critical peak hours. Customers were charged prices ranging from $0.65/kWh – $1/kWh (up from a base rate of approximately $0.25/kWh).
  • A “moral suasion” treatment: Courteous day-ahead and same-day requests for electricity demand reductions during critical peak days.
  • Control group: No notification of/price increases during critical peak events.

The figure below summarizes the average impacts of the two treatments on household electricity consumption during critical peak hours (relative to the control group). Effects are summarized by treatment “cycles”.  Each cycle consists of three non-consecutive critical peak event days, so the graph helps to illustrate how the effect of the treatments persist (or not) across repeated critical peak days throughout the season.

Average effect of treatment on peak electricity consumption

graph

It probably will not shock you to learn that the price treatment had a much larger impact on consumption as compared to moral suasion.  The courteous appeal for voluntary reductions measurably reduced consumption during the initial events, although the effect peters out quickly. In contrast, the response to the price treatment persists throughout the duration of the experiment.

Of course, these quantitative findings may not generalize beyond this set of Japanese electricity customers. But key qualitative findings are consistent with other studies. During the California electricity crisis, for example, researchers similarly found that demand response to public appeals for voluntary conservation was significantly smaller than response to price increases (although the effects of moral suasion were found to be somewhat more persistent).

Can public appeals for conservation hold water in California?

These qualitative results are compelling – and pertinent to a crisis we are currently facing here in California.

cars on freeway

Source: Bakersfieldnow.com

We are in the midst of the most severe drought on record. Last year, the Governor issued a voluntary reduction order, asking Californians to please cut back on water use by 20 percent. In the latter part of last year, customers in my district cut back a non-trivial 13 percent in monthly year-over-year comparisons. But we are off to a slow startthis year, conserving just 4 percent in January and February.

Absent divine intervention (e.g. torrents of rain in the coming dry season), we need more than benign intervention (e.g. public appeals for voluntary conservation). An executive order issued last week signals a move in this direction.  The order  imposes mandatory water restrictions designed to achieve a 25 percent reduction in potable water use by urban residents.

Hitting this conservation target will be difficult – if not impossible – to achieve with only public appeals and hard-to-enforce restrictions. So, to echo arguments that have been made again and again on this blog (we are a persistent bunch), the time is ripe for water prices that reflect the true cost of water use.  This would not only help incentivize sustained conservation, but also help to cover operating and infrastructure costs that currently exceed revenues (see this report for a sobering look at water sector finances).

As far as I can tell, the state does not have the ability to directly control how local water agencies set their rates.  But a perfect storm of rising infrastructure costs and water scarcity could force the issue. We are already seeing water price increases andconservation pricing proposals.

If the current crisis does lead to substantive and widespread water rate reform, there will still be plenty of work for Lawn Dude and friends. In water, like electricity, lack of salience, hassle costs, and other factors can stand in the way of cost-efficient investments in efficiency.

We should put public campaigns in their rightful place: useful complements to – but not substitutes for – efficient price signals.

Cross-posted from the blog of the Energy Institute at Haas (tag line: Research that Informs Business and Social Policy).

Comments to “For energy (and water) conservation, moral suasion is no substitute for getting the prices right

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  2. There’s roughly 42,000 injection wells in California and California is in another drought why there isn’t a push for better oil recovery process. I read an article on plasma pulse technology (PPT). This new process uses no water or chemicals and produces no earthquakes. It has been successfully tested in California and seems like a win for all: low cost to the oil companies; no chemicals being put down the wells (win for the environmentalists) and frees up millions of gallons of water for California- win… With the right push this is something that can be started now with 0 cost to anyone.

  3. Raise prices? Are you kidding? The problem is not with pricing. Don’t punish the consumer. Meredith, did you know that while we were having the drought during the last two winters, regulators let more than 2.6 million acre-feet out into the bay due to a lack of storage capacity? Gov Moonbeam should direct the state resources to building more reservoirs so we can truly save for a rainy day.

  4. Price as a rationing mechanism disproportionately hits the poor. The wealthy pay the higher prices and continue consuming larger amounts of water, while the lower income households are the ones forced to cut back.

    Mandatory restrictions in ALL HOUSEHOLDS are the fairest mechanism to equitably spread the sacrifice.

    Similarly seeing this illogic applied to income taxes helps make it easy to understand why it’s wealthy tax payers who are always touting a flat tax.

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