Unlocking demand-side flexibility

Abstract

In our lives, we face a lot of decision-making situations in every single moment, but it is not easy to make effective decisions every time. The failure of effective decision-making stands out in certain sectors, most prominently concerning electricity consumption. Time-varying electricity pricing, which emerged as a new policy instrument to manage peak demand, complicates the electricity consumption decision even further. Doubts remain about whether residential electricity consumers are well informed or capable enough to make effective consumption choices under dynamic tariffs. In this research, we suggest a micro-level foundation for understanding the households’ adaptive decision-making process, its apparent limitations, and possible roles that decision-relevant information may play to improve the decision effectiveness. Extending this conceptual understanding, we use a randomized controlled trial for 320 households to test the effect of information about distant alternatives and their payoffs on the nature of demand response to the dynamic tariff. We find that the dynamic tariff is effective in curtailing peak demand with the effect more pronounced for households with the decision-relevant information. In particular, the informed households are about three standard deviations more demand responsive in peak hours, while not compromising their daily electricity consumption by pursuing more aggressive decision alternatives. Our interpretation of the results in terms of the household-level pre-experimental electricity consumption patterns also confirms insights from the conceptual exploration. Our study concludes that the provision of simple, decision-relevant information may not only improve the effectiveness of demand response program by increasing the curtailment of peak demand, but also enhance its public acceptance by alleviating disutility associated with the foregone electricity consumption.