Behavioural economics could knock £1.7bn off energy bills in the UK – if government gets the policy right

This is a guest post by Jim Kapsis, the Director of Market Development and Policy Strategy at Opower, a behaviour-based energy efficiency and smart-grid software company with headquarters in the USA.  Jim was previously an energy and climate advisor at the U.S. Treasury Department.

New behavioural approaches to energy efficiency could save British households hundreds of millions of pounds each year, avoid millions of tons of carbon, and get more people to take advantage of the government’s new Green Deal and fuel poverty programs.  The key lies in the new smart meters that will be deployed to every UK household over the next few years and whether the Department of Energy and Climate Change (DECC) allows suppliers, working with innovative companies, to translate this new energy data into value for consumers.   

Citing concerns about consumer privacy, DECC is currently considering policies that could make it difficult, if not impossible, for meaningful behaviour-based efficiency to work in the U.K. Across the Atlantic there are a number of policies in place that have facilitated a strong behaviour-based efficiency market that successfully protects consumer privacy and saves them money.

Big savings
Opower is the leading behaviour-based energy efficiency and smart-grid software in the United States.  Partnering with over 55 utility companies, we provide nearly 10 million residential customers with access to a suite of software-based applications to manage their energy usage.  Put simply, Opower provides households with an anonymous comparison of their energy usage to other similar households to motivate them to use less, and then gives them customized advice so that they can take immediate energy saving actions.  We work with suppliers to provide this information to households through multiple communications channels:  paper-based home energy reports (separate from the bill), an on-line web portal, email, and text messages.

Independent evaluators have shown that this approach consistently reduces consumption by 1.5% to 3.5% leading to monetary savings across customers of all demographics, including low income, seniors, and renters.  One evaluation estimated that Opower’s program could save $3 billion each year if rolled out to the entire U.S. population.  Opower also increases the rate of participation in other energy efficiency programs that we promote, such as insulation and lighting programmes, by as much as 59 per cent.

To date, we have saved more than 350 GWh of energy, and have committed to a goal of 1 Terawatt-hour in savings by the end of 2012.  If Opower were deployed to every household in the UK, it could save more than £1.7 billion over three years in energy bills and avoid more than 3 million tonnes of carbon.

The American Example

How has Opower succeeded in the U.S.?

First, more than 20 states require suppliers to reduce energy consumption by a certain percentage each year and in several states, such as California and Texas, suppliers can earn a performance incentive from the state for exceeding their goals.  This incentive is important because it helps suppliers to view efficiency as a capital investment similar to generation capacity, like a new gas plant or wind farm, and allows them to earn a return that they can pass onto their shareholders.  In the UK, suppliers are required to pursue some efficiency under the Certified Emission Reduction Target (CERT), but efficiency investments lose rather than make them money so they do the minimum required.  Energy Market Reform and the new Energy Company Obligation (ECO) present opportunities for DECC to fix this incentive problem.

Second, the U.S. has policies and metering infrastructure that allow suppliers to access energy consumption data at the monthly level with traditional meters and at 30-minute intervals with smart meters.   (In contrast to the UK, U.S. suppliers have been able to read meters monthly for decades since meters are located outside rather than inside the home.) Based on our initial work with smart meters in the U.S., Opower estimates that daily and sub-daily data increases our savings by 50 per cent or more over monthly data.

Opting out vs opting in
Working with U.S. suppliers, Opower has offered an opt-out program where customers automatically receive periodic home energy reports, but have a simple and transparent way of opting out if they so choose.  It is this “default” approach that allows Opower to get up to 85 per cent of households to reduce their energy usage, rapidly scale these savings, and rigorously measure and verify our results using a rigorous statistical approach. The public benefits of an opt-out or “default” structure has been widely documented, including by the UK’s own Cabinet Office.

DECC, however, remains unconvinced that energy suppliers should have default access to energy usage information from smart meters.  This means that households would have to pro-actively provide suppliers or another company access to this data.   Even under a generous opt-in rate of 5 per cent, such a policy would deny UK households of up to 80 per cent of the potential benefits that OPOWER alone could provide or upwards of £1.3 billion left on the table over three years.  Noting the benefits of an opt-out approach to support the public interest, California recently passed a law on smart meters that permits suppliers default access to energy usage data as long as it is used for “system, grid, or operational needs, or the implementation of demand response, energy management, or energy efficiency programs.”

DECC should consider a similar approach to protect consumers from the misuse of their data while at the same time ensuring that they realize the full potential benefits in energy, emissions, and bill savings.  Before finalizing its policies, DECC should work with suppliers on rigorous research trials (i.e. randomized control) to see what level of data access delivers the most benefits to consumers.  After all, it is the consumers who are ultimately paying for the smart meters and they deserve a return on their investment.

3 comments

  • I do not like this approach, although I acknowledge its power. Clearly, peer pressure can be a legitimate means of changing habits, and, when seeing litter being dropped, for example, one could wish that it was more effective. But that is a case where behaviour adds cost to others. If pricing is appropriate, there is no reason why I should not choose to be wasteful, or rather, there may be good reasons why my consumption is higher than “peers”. Do I, as a consumer, have any input to the selection of the peers, and why should neighbours be the selected peer group? How about others with my “lifestyle” living in another country or another part of this country?
    The key trouble with the approach is that there is an intrusion of privacy by a corporation. They have to collect a lot of data, and use it for purposes other than that for which it was recorded. Opower may well be benign, and benignly managed, and have found a way to add convenience to its customers, but that does not ensure that it always will be. Their service depends, for its accuracy, on collecting data from those who may well not be its customers. I am quite sure that the data collected can be used for purposes that are not to my benefit. This can only be justified for substantial benefits, and 1.5% of consumption, even 3.5% is not a substantial benefit.
    It may be that the software suite could, though its analysis of individual consumptions, identify the different consumptions by different devices – fridges, TVs hot water, PCs, kettles, standby etc. This sort of nudging does not have the involuntary intrusions of the approach outlined, and would (perhaps) achieve the same benefits.

  • Pingback: What the biggest ever UK trials tell us about smart meters | the green living blog

  • Pingback: The smart meter roll-out: why more green groups need to get involved | the green living blog

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