Thursday, March 12, 2009

"Smart Meters" Require to Understand Customer Behaviour

Demand Response economic foundations have been studied extensively and have been established with great detail during many years. There are many studies and a vast literature devoted specifically to analize the market barriers to energy efficiency, and to study the commercial, regulatory, and political mechanisms to overcome them. Nevertheless, the issue which up to now has not received much attention and has not been very studied regarding residential customers, but that is very important for the Demand Response success is "customer behavior" or "customer attitudes". This is briefly, simply and brilliantly described in the testimony of Bob Lieberman, commissioner of the Commerce Commission of the State of Illinois, before the Subcommittee of Energy and Pure Air (Committee of Energy and Commerce of the House of Representatives of the United States), in May 3, 2007 (1): “…95% of all customers – residential, small commercial, municipal – have absolutely no idea that the price of electricity varies by the hour and that the average of the hourly prices is likely to be significantly lower than the hedged retail price they have traditionally seen. And until they know that, they won’t realize that there is something in it directly for them; that investing in smart meters will give them access to lower cost electricity.”

Whereas there exist numerous econometric works on TOU rates effects on electricity demand (2), literature on the behavior of real response of the residential sector to TOU rates is very scarce. For instance, in California, a very environmental-conscious US state, consumers have been asked seldom about dynamic prices (time-of-use, critical-peak, etc.). Moreover, a survey carried out in 2001 (3) by the Field Institute asking for opinions on demand policies showed that the TOU rates support was 48%, 11% less than the support they have twenty years before, when in another survey of the same institute carried out in 1980 the support was 59%.

However, both the analysis of the results(4) of the advertising campaign for energy savings "Flex Your Power" carried out in summer 2001, and the behavior study (5) of the residential customers response to the California energy crisis, also happening in those dates, show that a voluntary reduction of electricity consumption can be obtained with some actions which can take customers, for instance switching off lights, reducing air conditioners use or rising thermostats, installing more efficient appliances, using electrical appliances less frequently, etc. This data let us to suppose that many residential consumers are more capable and have greater disposition to alter their electricity consumption patterns than they could think.

The fact is that the vast majority of the consumers do not know that electricty price varies hourly, and the electric utilities know very little about the attitudes their customers could have towards the hourly price variations. One reason for this is that consumers are not aware of what would be their own attitudes. Nevertheless, it would be particularly interesting to have information both when new Demand Responde technologies, and when the TOU price programs are designed, about what the customers motivations are to participate in such programs, their level of knowledge on the program operation which they are enlisted in, the technologies and the equipment that they are going to use for it, the limitations and potencial problems they can find when responding to price signals, and most important: what they are actually going to do during the peak hours.

Thus, although there are studies on the attitudes before TOU rates as old as the doctoral thesis of Stphen Black read in 1978 (6), at present we can only say that there is very little recent work regarding the "behavior and customer response behind the meter". This fact should not surprise us very much if we consider that the residential rate schemes have not changed very much all over the world in the last 30, 40 ó even 50 years. Consequently, along the challenge of installing advanced metering systems, electric utilities face to answer the main question for the success of these systems: Which are the attitudes of electricity consumers towards the possibilities new metering technologies offer them?

These reciprocal lack of understanding, customers regarding hourly prices and utilities regarding the behavior of customers facing hourly prices, are the root of many failures of Demand Response experiences, such as the Puget Sound Energy (PSE) one, whose ambitious residential program of time-of-use prices came count with around 300.000 clients between 2001 and 2002. However, it had to be abandoned due to some unexpected rate impacts (7). Regarding the experience of PSE, Faruqui and George (8) observed that, "…any program should make to majority of the customers better off, or it should not be offered." The consecuence of the PSE failure was a very negative influence in the adoption of the residential time-of-use prices in other places of United States.

Before this "reciprocal" lack of understanding described above, customer attitudes study and marketing strategies are needed for electric utilities in those countries facing the challenges of rolling out an Advanced Metering Infrastructure, and implementing with it a TOU rates program for its residential clients.

(1)Testimony of Commissioner Bob Lieberman
(2) Veáse por ejemplo “The Value of Dynamic Pricing in Mass Markets.” Faruqui, A. and S. S. George. 2002 The Electricity Journal. 16:45-55.
(3) See
The California Poll. Study #8002. 1980. Field Institute. Survey variables 108 to 116. Biblioteca de Ciencias Sociales y Humanidades de la Universidad de California en San Diego.
“Using Mass Media to Influence Energy Consumption Behavior: California’s 2001 Flex Your Power Campaign as a Case Study.” Bender, S. L., M. Moezzi, M. H. Gossard, and L. Lutzenhiser. 2002. Proceedings American Council for an Energy Efficient Economy. 8.15-8.28. Washington, D.C.: American Council for an Energy Efficient Economy.
(5) “Conservation Behavior by Residential Consumers During and After the 2000-2001 California Energy Crisis”. Lutzenhiser, L., R. Kunkle, J. Woods, and S. Lutzenhiser. 2003 pp. 146-200. CEC Public Interest Energy Strategies Report. Pub. # 100-03-012f.
“Attitudinal, Normative, and Economic Factors in Early Response to an Energy-Use Field Experiment.” Black, J. S. Ph.D. Dissertation. University of Wisconsin-Madison. 1978.
(7) PSE's time-of-use program was launched in 2000 during the West Coast energy crisis and provided financial incentives for customers to shift their electric consumption to off-peak times of the day. During the crisis, the cost of power during peak periods was much as $145 higher per megawatt-hour than off-peak power. The program was designed to help PSE avoid buying this high priced power and then having to pass those costs along to customers. Most customers on the TOU program at the time paid less than they would have on traditional flat rates.
During the company’s general rate case earlier in 2002, the TOU program was modified to reflect a calmer wholesale electricity market where the price difference between peak and off-peak power was as little as $5 per megawatt-hour. The result was less difference between the TOU program’s retail peak and off-peak prices, meaning lower financial incentives for TOU customers to shift their power consumption. The costs of administering the program were also added to participants’ bills under the revised plan. Since this revised plan went into effect in July 2002, from July through September 2002, TOU customers’ bills were approximately 80 cents more per month. PSE had to reimburse these customers the $1.00 per month administrative charge that was added to the program in July.
“We believe in the fundamental principle that customers whose energy efficient should be rewarded,” said Steve Reynolds, PSE’s president and chief executive officer. “But it is clear that the program as currently designed is not giving many of our customers the rewards they expected and that we believe it should. We intend to analyze and restructure the program to see if it can add value in conjunction with our ongoing and expanded conservation programs." And "… when exploring new territory, you need to be able to recognize when the program is not working as you had hoped.” ["PSE proposes to end pilot time-of-use program ahead of schedule." PSE News Release 11/06/02. ]
(8) “Demise of PSE’s TOU Program Imparts Lessons.” Faruqui, A. and S. S. George. Electric Light & Power. January, 1. 2003.

Some links:
2008 Behavior, Energy and Climate Change Conference. Sacramento. CA. November. Precourt Energy Efficiency Center. Stanford Univ.

One study of how nudge people toward socially-desirable outcomes was carried out in San Marcos, California. Researchers found that when households were informed of how much energy they were consuming compared to the average household in their neighbourhood, those consuming more than average cut back while those consuming less used more. However, when a smiley face was put next to a lower than average figure, those households consuming less maintained their lower level of consumption.
The Constructive, Destructive, and Reconstructive Power of Social Norms

Nudge: See Guiding Forces By Benjamin M. Friedman. August 22, 2008. New York Times. Sunday Book Review. [NUDGE. Improving Decisions About Health, Wealth, and Happiness By Richard H. Thaler and Cass R. Sunstein. 293 pp. Yale University Press]

The Design Council in Britain conducted research in 2005 which, while not directly referencing behavioural economics, drew on many of its concepts such as harnessing social norms by comparing the energy consumption of identical houses.
Creating Concepts

Energy billing and metering: changing customer behaviour UK Department for Business, Enterprise & Regulatory Reform (BERR)

Ofgem Review - Consumer Attitudes to Energy February 2007.

Wokje Abrahamse. 2007. Energy conservation through behavioral change: examining the effectiveness of a tailor-made approach

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