Using behavioural economic theory in modelling of demand response

Abstract Demand response is recognised as a potentially cost-effective means for providing the increasing amounts of flexibility needed in power systems with increasing penetrations of renewables. However, existing techno-economic approaches for flexible power systems modelling do not recognise that demand response, where it affects the comfort of the end-user, is heavily influenced by the biases and preferences of consumers. That is, demand response is modelled under the assumption that end-users are always rational and active economic agents. This has consistently resulted in seemingly inexplicable gaps between modelled and observed results for demand response schemes. Behavioural economics, which applies psychological insights into economic modelling, has been proposed to address this problem. This work determines the suitability of behavioural economics as an approach for modelling demand response before reviewing the application of behavioural economics ideas in energy related studies. Then, the effect of different customer biases and preferences on the modelling of demand response is studied, through adaptation of an existing techno-economic demand response model. The results demonstrate that consideration of biases can impact modelling of demand response provision, especially when demand for an energy end-service is high. These findings are of interest to procurers of demand response. Results also demonstrate that appealing to customers pro-social preferences can be an effective way of soliciting demand response. This can have strong regulatory implications as reliance on incentives to procure demand response, as the techno-economic approach assumes, may ‘crowd-out’ such pro-social attitudes, increasing the overall system cost of eliciting demand response and, hence, of operating the electricity system.