Annual Billing Leads to More Energy Consumption – Paying Immediately Can Help

In Germany, customers usually receive their electricity, water and gas bills once per year. A recent study of ZEW Mannheim shows that this type of billing leads to more utility consumption. Paying these bills immediately could provide incentives to reduce consumption.

The current billing system for electricity, water and gas allows consumers to immediately enjoy the benefits of having these utilities – but it can take up to a year until they also feel the effects on their bank accounts. The findings from a behavioural experiment conducted by a ZEW economist show that it could be well worth changing the current billing system.

When consumers are required to pay their electricity bills immediately, they have been found to reduce their electricity consumption significantly by 14 per cent compared to when they have to pay at a later date. The economic experiment also showed that consumers were 13 per cent less likely to exhibit wasteful behaviour if they have to pay immediately. “When billing is carried at out at the end of the year, these costs are less salient in consumers’ present consumption decisions. In behavioural economics, this is described as a tendency to overvalue the present,” says Madeline Werthschulte, researcher in ZEW’s “Environmental and Resource Economics, Environmental Management” Department and author of the study. “This problem can be addressed by introducing immediate payment schemes, since this means that there is no time lag between consumption and payment.”