How Peer Effects Influence Energy Consumption

TL;DR

This paper models how peer effects among rational electricity users influence overall consumption and profit, revealing conditions under which peer effects reduce consumption and strategies to maximize profit.

Contribution

It introduces a two-stage game-theoretic model capturing peer effects on energy consumption and derives optimal pricing strategies under various information scenarios.

Findings

Peer effects can reduce aggregate energy consumption under certain conditions.

Exposing a subset of users to peer effects can maximize profit.

The model provides explicit expressions for consumption and profit under different pricing schemes.

Abstract

This paper analyzes the impact of peer effects on electricity consumption of a network of rational, utility-maximizing users. Users derive utility from consuming electricity as well as consuming less energy than their neighbors. However, a disutility is incurred for consuming more than their neighbors. To maximize the profit of the load-serving entity that provides electricity to such users, we develop a two-stage game-theoretic model, where the entity sets the prices in the first stage. In the second stage, consumers decide on their demand in response to the observed price set in the first stage so as to maximize their utility. To this end, we derive theoretical statements under which such peer effects reduce aggregate user consumption. Further, we obtain expressions for the resulting electricity consumption and profit of the load serving entity for the case of perfect price discrimination and a single price under complete information, and approximations under incomplete information. Simulations suggest that exposing only a selected subset of all users to peer effects maximizes the entity's profit.