Here are two questions:
1) How much was your electric bill last month?
2) Why did you pay that much (or that little)?
If you are like most people, you probably have a vague idea about the answer to the first question, but the second one has you stumped. Sure, you may remember you ran the air conditioner a bit more (or a bit less) last month because it was hotter (or cooler) than normal. Maybe you were on vacation, so your house sat empty and dark. Or you got a huge new state-of-the-art home theater set and you’ve spent the last two weeks watching every favorite movie in beautiful 3-D.
The point is you have some educated guesses. What you don’t have are any facts or data to validate them. Not to mention, the only fact you do have—the total bill amount—comes a month after you made all your decisions, leaving your imperfect memory to fit the pieces back together. There may also be a problem with the guesses themselves. They are limited by what you know about energy use. So you know that running an air conditioner is expensive, but you don’t know how much more money it’s costing you to keep your house at 70 degrees instead of 75. Your focus on the air conditioner has left you blind to the costs of running your dishwasher and washing machine in the middle of the day.
The result is that every day, millions of Americans make decisions about energy that could be much better. By introducing time of use rate structures and empowering consumers with the type of knowledge just mentioned, utility companies have the potential to help people save money by encouraging off-peak usage of high consumption devices, like washers, dryers, air conditioners, and plug-in hybrid electric vehicles (PHEVs). In a yearlong study by the U.S. Department of Energy, smart grid customers reduced peak consumption by up to 15 percent, and overall consumption by up to 10 percent.
A smart grid is basically an old electricity grid with a bigger brain. If old grids were like television (powerful but static), the smart grid is like the internet (powerful and interactive). It uses technology to allow appliances in a home or office to talk to power company stations and vice versa. Behavioral economics can play a major role in the smart grid’s success by changing how people relate to the energy they use.
In the area of energy consumption, one immediate area where improvement could be made is through better feedback about energy usage and its consequences. As many energy researchers have noted, one of the fundamental problems to smarter decision making is that energy is invisible. It’s difficult to tell when you are using a lot of energy and why. Feedback mechanisms that make energy visible and understandable are likely to produce the greatest successes in changing individual energy habits for the better.
One such story of experimenting with innovative feedback mechanisms (told in Nudge) comes from Southern California, where an energy company gave people a ball called the Ambient Orb that glowed red when homeowners were using a lot of energy, and green when they were using very little. The effect of such a simple, but powerful and clear signal, was dramatic. Within a few weeks, Orb users had reduced their peak energy consumption by 40 percent.
With a few creative tweaks, the Orb might have cut down on energy use further. In Nudge, Thaler and Sunstein wondered what would have happened if the Orb played a selection of a user’s least favorite songs if her energy consumption went past some pre-set level. Might one person’s new energy conservation habits spread to select friends and family if information about their household usage was transmitted to their Facebook page?
Notice also what a crude device the Ambient Orb is. It displays no information about what machines are hogging energy. With only two colors, it tells users nothing about how much energy they are using or saving beyond the basic message of “more than usual” and “less than usual.” And it offers no information to users about the benefits of turning up the thermostat or washing dishes by hand. Yet, even with those limitations, to cut peak energy consumption by 40 percent is no small feat.
From a decision-making perspective, the feedback potential of smart grid technologies like smart meters, smart energy panels, and smart appliances is enormous. Not only does it offer consumers new information, but it also enables them to experiment with new behaviors to see which ones can save money without completely upending their current habits. The development of these technologies will have to cognizant of how consumers make energy decisions. Simply dumping huge amounts of new information in consumers’ laps is unlikely to be a great help. The great challenge will be in designing systems that provide rich amounts of energy information in ways that are as easy to understand and act upon as the Ambient Orb. If successful, you’ll know why you paid what you did last month and why you’ll pay less this next month.