Media Briefings

THE WINTER FUEL PAYMENT: A simple name change would encourage recipients to save energy

  • Published Date: April 2014

Changing the name of the Winter Fuel Payment (WFP) would make recipient households more likely to invest in renewable energy technologies while still achieving the health goals of the current policy. That is the central finding of research by Ian Lange, Mirko Moro and Mohammad Mahbubur Rahman, presented at the Royal Economic Society 2014 annual conference.

Their study finds that although the WFP does not require households to spend the cash benefit on fuel, they are up to 62% less likely to invest in renewable energy technologies, such as solar water heaters, solar panels and micro wind turbines. This is because the WFP name appears to encourage households to use fuel.

The authors comment:

‘Households have different mental budgets for different expenditure categories (in this case fuel) that they keep strictly separated. They see the WFP as a subsidy for fuel and substitute away from investments in renewable technologies that could save energy and save them money.’

More…

Changing the name of the Winter Fuel Payment (WFP) would make recipient households more likely to invest in renewable energy technologies while still achieving the health goals of the current WFP policy.

Although the WFP does not require households to spend the cash benefit on fuel, households in receipt of the WFP are up to 62% less likely to invest in renewable energy technologies such as solar water heaters, solar panels and micro wind turbines. This is because the WFP name appears to encourage households to use fuel, rather than investing the payment in renewable energy technologies

Since WFP eligibility is based on the date at which a member of the household turns 60, and because the WFP is not means-tested, it is possible to compare households who just missed eligibility with those that are only recently eligible. Information on household characteristics such as employment status and income were also controlled for.

To ensure that differences in renewable energy installations were attributable to the WFP name, the researchers looked for changes in the propensity to purchase other durable goods. No change in investing in a new kitchen or car was found between those in receipt of the WFP and those not, while there was a clear negative shift in the probability of installing renewable solar or wind technologies.

Keeping older citizens warm in winter could still be achieved by nudging people towards cleaner or more efficient energy sources. Perhaps a benefit name that includes the words ‘renewable energy’ or ‘energy efficiency’ would ensure that households consider more energy efficient technologies while still achieving the health goals of the current WFP policy.

The WFP is a non-taxable, non-means tested, unconditional payment of £200 per household for households with at least one member over the age of 60 at the qualifying week (the placement of the qualifying week has changed over time, however during the years in our data the qualifying week came in September). The payment is £300 if at least one member of the household is over the age of 80 years.

The payment includes no obligation to spend the money on energy and does not affect other benefits that the individual may be eligible for. Payments are generally made in November or December. Previous research has shown that the name of the benefit increases the percentage of the cash payment recipients put towards household heating fuel. This new research focuses on the unintended consequences of this label effect.

Researchers used data from tens of thousands of households included in two waves of the population-based British Household Panel Survey and Understanding Society Survey covering four years to document that there is significant drop in the propensity to install solar water heater, solar panels and micro wind turbines occurring just after the receipt of the payment.

The authors suggest that the label may play a vital role in priming households to spend their cash on fuel, instead of on investing. After receiving the cash transfer, households do not change their spending on remodelling the kitchen or the bathroom. There is not even a change in money spent on TVs, freezers, washing machines, tumble dryers, dishwashers, microwaves and cars. Households just forgo their investments in renewable technologies.

The consumption or investment behaviour of rational agents should not be affected by the labelling of items, in this case transfers. The authors’ explains that their findings can be better understood if looked at under the lenses of behavioural scientists. In particular they refer to the concept of mental accounting. Households have different mental budgets for different expenditure categories (in this case fuel) that they keep strictly separated. They see the WFP as a subsidy for fuel and substitute away from investments.

The authors show that the decline in the propensity to renewable energy instalment is not due to other concomitant factors such as changes in employment, income, education or household size. Their study also shows that the distortion is stronger for households, which are composed by older citizens.

ENDS

Notes for editors:

‘Policy Labels and Investment Decision-Making: The Effect of the Winter Fuel Payment on Renewables’ by Ian Lange, Mirko Moro and Mohammad Mahbubur Rahman

The research was funded by the Nuffield Foundation (http://www.nuffieldfoundation.org) and is published as University of Stirling working paper (http://hdl.handle.net/1893/18897).

For further information, contact:

Romesh Vaitilingam: romesh@vaitilingam.com, +44 7768 661095