Dynamic electricity pricing—which charges consumers more during hours when a lot of people are consuming electricity and it costs more to produce, and less during hours when fewer people are consuming electricity—could encourage consumers to reduce their peak-time electricity use when electricity is more costly and valuable. But because of political constraints, many countries do not mandate such time-of-use policies and rely on voluntary participation. To optimize the success of these programs, EPIC Scholar Koichiro Ito, an associate professor at the University of Chicago Harris School of Public Policy, and his co-authors evaluate which types of consumers conserve the most and what role an upfront financial incentive plays in cutting electricity use.
The researchers conducted a field experiment in Yokohama, Japan, where the government provided smart meters to more than 3,000 households. The researchers randomly distributed $60 take-up incentive to a segment of these households to encourage them to take up a dynamic pricing program. They also calculated how much each household could be expected to save if they decided to switch based on their past electricity usage patterns and used this information to further encourage households to switch to dynamic pricing.
The researchers found that consumers who would expect to save money without changing their behaviors were more likely to choose to opt into the new pricing scheme. Fifty percent of those expected to save joined the program. But the key to the program’s success is not getting consumers to join, but getting consumers to join who will change their behavior and use less energy in peak hours. Who are those consumers? That’s what the researchers sought to find out.
The researchers discover that those who are eager to join the dynamic pricing (the lower numbers on the x-axis) reduce peak-time electricity usage (the negative numbers on the y-axis) if they actually join the program. These consumers conserve up to 1 kWh per hour. In contrast, those who are reluctant to take up the dynamic pricing (the higher numbers on the x-axis) do not conserve much (hovering around zero on the y-axis) even if they are incentivized to join the program. This is where the optimal amount of financial incentive for take-up becomes so important, the researchers note: the right take-up incentive encourages more consumers to join the program and leads to electricity conservation, but too high of an incentive could encourage consumers to join who would conserve little to no electricity.