Published May 3, 2015 by Jeremy B. Smith.
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The smart grid offers a wide array of opportunities to improve efficiency of the electricity grid via load management policies. This chapter reviews the current state of knowledge in the economics literature as it relates to time-varying pricing and to behavioral interventions, which together comprise a large portion of regulators’ policy choice set. The authors present evidence that consumers respond to financial incentives, but that these are not the only determinants of behavior. For example, consumers are often uninformed and inattentive, and exhibit a tendency to respond to non-monetary incentives as well as monetary. The authors conclude that time-varying pricing is an effective and essential policy instrument, while instruments designed to boost customer attentiveness and allow households to become better informed about their energy use play an important complementary role. Smart meters are crucial in making such a policy package feasible. The power of randomized experimental designs, which underlie much of the evidence that is presented, is also discussed. The authors highlight important areas for future research, and recommend that such future research efforts continue to leverage randomized designs.