To Opt-In or Opt-Out: What Works For Time-Variant Pricing

Source: Johannes Rössel, wikimedia commons

It would be logical to assume that we make decisions based on our needs, desires, and values regardless of how the choice is presented. For instance, we wouldn’t expect the choice to become an organ donor to depend on whether you must check a box to accept or decline donation. But we would be wrong: our decisions depend a great deal on how the choice is presented.

Choice architecture gets to the heart of the debate on whether it’s preferable to offer people the opportunity to opt-in or to opt-out, and this question has become crucial to the discussion about time-variant electricity pricing throughout the country.

Opt-out vs opt-in time-variant pricing

Currently, most electricity customers pay for electricity at a single flat rate (i.e., one price per kWh consumed). Such pricing is simple but doesn’t reflect actual system costs, which are higher during times of the day when overall energy demand peaks. Time-variant pricing instead allows utilities to charge more for electricity during periods of peak demand, and less during periods of lower demand.

Since the benefits of time-variant electricity pricing – including lower electricity bills, reduced greenhouse gases, and a more efficient, resilient electric grid – increase with greater adoption, the question has been raised whether everyone should automatically be subject to these types of rates. In particular, utilities are trying to decide whether to use an opt-in structure, in which the default is a flat rate and people can choose to have varying rates, or opt-out, in which case consumers who are unhappy with time variant pricing have the choice to go back to their original, flat-rate tariff.

An opt-in, time-variant rate may likely result in fewer tangible system benefits because fewer users will choose to participate. Research finds people tend to stick with the default option by systematically avoiding box-checking, or un-checking in the case of opting out. For example, countries that allow people to opt-out of organ donation (such as France and Sweden) have over 80 percent participation in the program, while countries that require opt-in (such as Germany and the U.K.) have less than 30 percent participation. Not surprisingly, the pattern of low recruitment for opt-in holds true for time-variant pricing as well, with average adoption rates hovering around 80 percent when customers are given the choice to opt-out compared with 15 percent for opting in.

Although some states, such as Minnesota, are considering using an opt-out structure and making time-variant pricing the default option, opt-in has become the norm across the U.S. For example, both California and New York offer voluntary time-variant rates.

So why might a utility choose not to have default time-variant pricing when research shows adoption is much higher?

The main constraint is the lack of advanced meter infrastructure for electricity, which allows the utility to measure consumption every hour of the day, rather than just total consumption at a monthly level. The upfront costs of deploying advanced meter infrastructure can be substantial and the utility’s investment in advanced meters for customers who ultimately choose to opt-out of the program is unlikely to be recovered. Hence, most utilities have chosen to avoid widespread installations by going the opt-in route.

Measures that can improve opt-in time-variant pricing

As a result, utilities lose out on the benefits of time-variant pricing due to low opt-in adoption, but there are measures a utility can take to ensure higher levels of adoption using opt-in. For example, EDF is working with Consolidated Edison (ConEd) on a forthcoming opt-in time-variant pricing pilot. As ConEd and other utilities consider the most effective scheme, they might think about using the measures listed below. They need only to look to Arizona Public Service, which used some of these measures and enjoyed a relatively high 30-40 percent adoption using opt-in time-variant pricing over the past two decades.

• A variety of rate offerings: Having only one peak rate will be unlikely to attract potential customers and does not lead to maximum benefits. For example: there are certain times of the year, such as during a heat wave, when electricity prices are extremely high for just a few hours. Let’s call this the ‘critical peak.’ Of course, there are also daily peak and off-peak hours. Providing a ‘critical peak price’ option along with traditional daily time-variant rates would not only help accommodate different types of customers (expanding the customer base), but would provide a tangible system benefit, as both of these rates would result in decreased consumption at peak times.

• Extensive outreach and marketing: The utility must engage, empower, and educate customers so they are aware of the new rate system as well as understand its potential benefits. If more people see the benefits of time-variant pricing, they are more likely to participate and take advantage of its offerings.

• Bill protection: Protecting the customer from sharp bill increases, particularly during the transition period, will reduce concerns about increasing bills from rate changes. Utilities can provide shadow billing for the first three to five months of the program – whereby they provide the customer with a bill showing how much she owes under the new and old tariffs – and then ask the customer to pay whichever is lower. This allows the customer to benefit from changing her behavior and better understand which actions lead to lower or higher bills.

Although opt-out time-variant pricing is likely to result in much higher levels of adoption, these measures can help utilities increase participation levels beyond what could be achieved through opt-in time-variant pricing, thus maximizing the benefits that come along with it.