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Paying for flexibility - Increasing customer participation in demand response programs through rewards and punishments
Type
presentation
Date Issued
2014-09-03
Author(s)
Abstract
Steering electricity demand will be a crucial aspect for guaranteeing energy system reliability when the share of fluctuating electricity supply from renewable energy increases. Thus, demand response programs (DR) play an important role in future energy systems (Hancher, 2013). However, an open question evolves around the question of how to best help customers to accept these programs (Hancher, 2013; Steg & Vlek, 2009, EU, 2003; He, Keyaerts et al., 2013). It is commonly assumed that customers should be financially compensated when they participate in DR (Hancher, 2013; DOE, 2006). This translates into understanding "Paying for flexibility" as rewarding DR participants for the provided flexibility. However, "Paying for flexibility" could also be understood in the way that customers will have to pay if they still want to have the flexibility of using electricity whenever and wherever they want in the future. In this case, DR would - instead of rewarding customers for participation through financial compensation - punish those customers who do not participate through the introduction of service fees. Similar to rewards, punishments are a measure of operant conditioning to influence behaviour (Skinner, 1938) and they have effectively been used in various social systems, e.g. traffic fines for speeding. In the light of recent theories of decision-making that distinguish between heuristic or "automatic" and information-based or "deliberative" decision-making processes (Weber & Johnson, 2009), the paper at hand investigates the role of punishment and reward for consumer acceptance of DR. Due to the common assumption that rewards are the appropriate intervention to increase customer acceptance of DR (Hancher, 2013; DOE, 2006) which is in line with established views in environmental behaviour (Osbaldiston & Schott, 2012; Kazdin, 2009; Steg & Vlek, 2009; Iyer & Kashyap, 2007; Abrahamse et al. 2005; Geller, 1995), electric utilities are inclined to design DR based on rewards. However, in an experimental study with 151 undergraduate students in their role of energy consumers at a business school in Switzerland, we find that DR schemes based on punishments are more effective in increasing customer participation in the program compared to DR schemes based on rewards. These findings can be explained with prospect theory and loss aversion (Kahneman & Tversky, 1984). We also find that there is no significant effect of punishments and rewards on customer loyalty towards the firm and attitude towards joining the DR. Thus, punishments are more effective in increasing customer participation without jeopardizing the loyalty of a company's customer base and the consumer's attitude towards joining DR. Additionally, they appear more efficient from an economic point of view as they result in lower costs (Balliet et al., 2011; Gächter, 2012): whereas the variable costs for reward-based DR increase with each participating customer, there are no variable costs for punishment-based DR. Based on our findings we encourage firms, policy makers and research not to be afraid of environmental fines and optimize the design of their customer intervention measures.?
Language
English
Keywords
smart grid
demand response
incentives
experiment
HSG Classification
contribution to scientific community
HSG Profile Area
SoM - Business Innovation
Refereed
No
Event Title
Behave Energy Conference 2014
Event Location
Oxford, Said Business School
Subject(s)
Division(s)
Eprints ID
235521