Welfare Effects of Home Automation Technology with Dynamic Pricing

A fixed cost investment in home automation technology can eliminate consumers’ marginal costs of responding to changing demand conditions. We estimate the welfare effects of a home automation technology using a field experiment run by a large electric utility that randomly assigned both a technology and price treatment. Average treatment effects reveal that the home automation technology reduces demand more than twice as much as an alternative technology that only informs consumers of price changes. Furthermore, the average demand reductions during critical price events provide sufficient supply-side welfare gains to fully offset the installation costs of the device. Finally, we estimate household-specific treatment effects by matching households on their pre-treatment policy functions. This demonstrates the additional surplus gained by the utility if it targeted these treatments to households with the largest estimated demand responses.