Opt-In, Opt-Out Options Vie for Top Billing in Efforts to Reduce Electricity Use

Hundreds of thousands marched through the streets of New York and other cities in September 2014 to raise awareness of climate change. And global conferences in Lima and Paris will aim to reach a universal climate agreement in the next 15 months. With interest in the subject heating up, policymakers around the world are increasingly alert to ways to combat climate change.

Substantial policy attention has focused on the greenhouse gas emissions from energy generation. The Environmental Protection Agency estimates that electricity production was responsible for 32 percent of all US greenhouse gas emissions in 2012, the largest single source category. One approach to reducing these emissions is to clean up the electricity supply by increasing use of renewable sources like solar and wind or by improving transmission infrastructure.

As important as these supply-based efforts are, policymakers tend to focus first on electricity demand. Just as “a penny saved is a penny earned,” so it is with kilowatt-hours: the cleanest way to generate electricity is not to generate it at all. This is doubly true at peak hours – those summer afternoons when air conditioners are running and the power company has to fire up its least efficient generators to keep up with the increased demand. “Demand-response” energy policies thus aim to minimize these peaks in consumption.

But what is the best way to get electricity users to reduce their peak energy demands? In “Demand Impact of a Critical Peak Pricing Program: Opt-in and Opt-out Options, Green Attitudes and Other Customer Characteristics,” economists at Power System Engineering, a Wisconsin-based consulting firm, analyze data from a recent demand-response pilot program in Minnesota and South Dakota.

In this program, Sioux Valley Energy, a utility serving 21,000 residential and rural customers, implemented a type of demand-response strategy known as critical peak pricing (CPP). Using this strategy, some customers’ rates were higher during the peak hours of 4 to 8 p.m. and lower at other hours of the day. During the pilot phase, which ran from June through August 2011, participating customers were subjected to 13 CPP event days when such prices went into effect.

Sioux Valley wanted to know what strategy would best promote reductions in peak-period electricity use. Accordingly, pilot participants were divided into three groups. Customers in the first group were on a CPP “opt-in” basis: they were invited to request billing under the variable CPP rate, but would otherwise continue to pay the flat rate. The second group was “opt-out”: customers were put on the CPP rate automatically, but they were guaranteed a bill that would not exceed their flat-rate bill (and could request to return to the flat rate if so desired). The third group was “tech only”: customers’ billing did not change, but an in-home device alerted them to the critical periods during CPP event days so they could change their use voluntarily.

Participants in all three groups were surveyed about their “green attitudes” on climate change and actions to address it, as well as the electrical equipment operating in their home including air conditioners. Their energy use was monitored around the clock during the study period. Each group’s peak-period energy use during CPP event days was compared to its peak-period use on non-event days.

The three groups responded very differently to the CPP program during the pilot. Opt-in participants reduced their peak-period energy use by an average of 1.04 kilowatts (kW), or 27 percent. Opt-out participants averaged a reduction of 0.27 kW, or 7 percent. Tech only participants’ reductions were the smallest, and among residential customers, not statistically significant.

Within these averages lay substantial variation in usage reductions according to participants’ “green attitudes.” Customers with green attitudes used energy less in general and reduced energy use more on event days compared to other participants. This effect was the greatest for the “tech only” participants with in-home displays only, whose reductions had no price incentive. The effect of green attitudes was the weakest among residential opt-in customers. Researchers speculated that some customers who opted into the CPP program might have done so because their load was already largely falling outside of peak hours. If so, this dynamic would limit the effectiveness of an opt-in program in maximizing peak-period usage reductions, if the program were expanded to all Sioux Valley customers.

For future study, the researchers recommend offering CPP rates on an opt-out basis, letting customers revert to the traditional rate if they want to, but not guaranteeing that their bill would not increase under CPP. Based on the results reported from the initial study, one would expect that such a program might successfully encourage peak-period reductions in use that would not have otherwise occurred.

Article Source: Fenrick, Steve A., Lullit Getachew, Chris Ivanov, and Jeff Smith. “Demand Impact of a Critical Peak Pricing Program: Opt-in and Opt-out Options, Green Attitudes and Other Customer Characteristics.” The Energy Journal, 2014.

Feature Photo: cc/(Andrew Imanaka)