Nicole Sintov has a message for utilities designing time-of-use (TOU) rate plans: Stop thinking of your customers as rational actors.
Sintov, an assistant professor of behavior, decision making and sustainability at The Ohio State University, recently published research showing customers on a TOU pilot were basing decisions of whether to remain in the program on perceived savings — rather than the savings showing up on their bills.
"People don't spend a whole lot of time understanding their electricity bill," Sintov told Utility Dive. "They stay enrolled when it's not benefiting them."
A California problem first
Getting customers to spend time with their energy bills has long been difficult for utilities, and the transition from flat-rate plans to TOU structures won't make understanding easier. The challenge is nowhere as clear as in California, where the state's investor-owned utilities (IOUs) will begin shifting all customers to TOU rates in 2019 and 2020.
A new type of variable rate design is necessary to adapt the grid to a more modern mix of distributed energy resources and controllable loads. Utilities are working to familiarize all customers with the new rates, but advocates for low-income customers warn they must make extra efforts to ensure vulnerable populations understand and can benefit from TOU rates. In California, the Environmental Defense Fund has worked to protect these customers as the state undertakes its switch to the new rate structure.
The group says utilities "must invest the time, effort, and capital" to ensure vulnerable customers are benefiting.
"Without this effort, many communities may see suffering from the time-of-use rollout in the near-term, and may miss economic development opportunities provided by the growing clean energy economy," the group said in a blog post.
"In my interactions with utility folks, they tend to think of customers as rational decision makers. And there is evidence to suggest that sometimes goes on — but that's not what we found, and building your programs around that expectation may not work."
Assistant Professor, Ohio State University
California will be the first large-scale mandatory switch to TOU rates in the United States, but many believe more states will inevitably switch because the new rates will allow utilities to better manage and balance the grid.
Slightly less than half of IOUs offer an optional TOU rate, a 2017 Brattle Group survey found, (about 14% of all U.S. utilities). But overall, there were only 2.2 million residential customers enrolled in the plans, which Brattle said amounted to 1.7% of all residential customers, "and 3.4% of those customers for which a TOU is available."
So while there are relative few electricity consumers on TOU rates, that is about to change rapidly in California and perhaps across the country.
Sintov says her research is a warning to utilities: a lack of customer understanding could be undermining their TOU programs.
Are customers rational?
Ohio State University's research identifies the study's utility partner only as "a large power utility in the southwestern United States ... [that] prefers to remain unnamed." Otherwise, it is forthcoming with its methodology.
The mystery utility sent invitations for its 2016 time-of-use pilot to about 197,000 customers and roughly 14% volunteered to participate. Those customers were placed into one of four groups: a control group that remained on a fixed-rate plan and a trio of groups utilizing different TOU plans.
Researchers ultimately left out one of the TOU groups due to "roll-out issues and additional complexities specific to Rate 3," leaving the control and two groups, one of which included an intentional over-sampling of low-income and elderly customers. After several months of experience with the program, varying between three and six months, customers in the TOU groups were asked whether they intended to remain enrolled, and what was driving that decision.
While the TOU rate did help to decrease peak demand, researchers noted "this effect is small." And Sintov said customer savings were about 3%, but it wasn't actual savings that drove customers' decision whether or not to remain in the program.
"Perceived savings is the strongest predictor of intent to remain on TOU, over and above actual savings, even though it is only weakly related to actual changes in bills and usage," the paper concluded. "Residents may thus join DSR programmes based on perceived savings without achieving actual monetary or energy use savings, which may undermine the goals of these programmes."
What's going on here? Customers said they were staying in the program based on savings — but they weren't saving all that much, said Sintov.
Digging into responses, researchers found customers who thought they understood the TOU rates, whether or not they did, were more likely to stick with the program. But those who were better-informed and who actually did understand the new rate structure were more likely to quit.
"People are more likely to remember things that they do often," said Sintov, explaining the conclusions. "They may be recalling efforts they made to curtail use during peak time, but probably the efforts they made were not ones that moved the needle."
Sintov said one problem is that customers don't have a very good idea of how much electricity their devices and appliances actually consume. Smart meters are beginning to help address this, but she said "there isn't that sort of granular information available to customers right now."
Utilities need to address these issues, said Sintov, because successful programs should provide savings and retention.
"If people enroll in these programs expecting savings and then do not see them, that's not good for the pocketbook and not good for the program," she said.
Utilities can help by providing customers with more information and keeping TOU programs simple. But they would also be well-served to acknowledge the quirks of human behavior. "People aren't always the best guessers of why they're making a purchase," said Sintov.
"In my interactions with utility folks, they tend to think of customers as rational decision makers," she said. "And there is evidence to suggest that sometimes goes on — but that's not what we found, and building your programs around that expectation may not work."