Demand response as a common pool resource game: Nudges versus prices

Penelope Buckley, Université Grenoble Alpes

With the increasing share of renewable energy and distributed power generators, there is a need for new strategies in the management of the electricity grid in order to maintain power supply and demand. This balance is harder to achieve as supply and demand levels can change rapidly and unexpectedly, in particular on high demand days when natural conditions are unfavourable for the use of renewable energy sources. Moreover, the power generation infrastructure is highly capital intensive, such that demand side management may be one of the cheaper tools available for balancing supply and demand. Given the greater difficulty of producing peak electricity, there is a need to have a more flexible residential energy demand. Demand response programs, defined as the changes in electricity usage by end-use consumers from their normal consumption patterns in response to signals, are one of the main tools used or experimented in the management of the electricity grid (Balijepalli et al. 2011.

In this paper we use a common pool resource (CPR) game to compare two methods of incentivising households and individuals to lower their electricity consumption during peak periods: dynamic pricing and nudges. We explore, under which mechanism consumers are more willing to reduce their consumption via their choice of different electricity consuming appliances. As such the paper is related to the main conference theme on the role of consumers at the heart of the energy system, and in particular to the questions concerning consumers and the networks, and consumer opinions.

Differently to previous experiments on nudges (Delaney and Jacobson, 2015; Boun My and Ouvrard, 2017), we contextualise the CPR game though the choice of the electricity consumption level of five appliances during 10 periods. The total consumption of these activities is the CPR contribution, and payoffs depend on own consumption and the amount consumed by the group. The group represents a neighbourhood or a society. In the nudge treatment, subjects are nudged towards the socially optimal level of consumption using injunctive norms (approval or disapproval of their behaviour). The average consumption observed in the nudge treatment is used to calculate the price implemented in the price treatment. The objective is to quantify the nudge via an equivalent price, to determine whether a similar result is achieved when the price is designed with respect to the behaviour under the nudge.

We find that across all 10 periods, consumption is significantly lower in the nudge treatment, and higher for control groups. In the price treatment, consumption remains between the two at or slightly above the target. We conclude that the nudge treatment performs as well as an equivalent price without the implied loss of welfare. When comparing decisions under the nudge and price treatments to the control groups, the consumption decisions are significantly different from period 2 for the nudge and, consistently different from period 7 for the price. We conclude that the nudge is understood and integrated into subjects’ decision making quicker than an equivalent price. When examining solely the behaviour of subjects in the nudge treatment, we find that although group consumption is reduced on average, at the individual level, subjects who tend to under-consume continue do so, and those who overconsume continue to overconsume. Such results have policy implications as to whether the use of nudge such as described in this paper leads to a greater divergence in residential electricity consumption behaviour? In a real-life setting, are households who consume less most willing to make the effort to reduce their electricity consumption, whereas those households with higher levels of consumption are not?

Keywords: common pool resource, demand response, laboratory experiment, incentives, nudge, price