Green Energy’s Demand Side: Lessons from the Starbucks App?
Envy with Green
Even before the US Senate’s historic passage of 2022’s $430 billion climate bill, climate tech start-ups were on an envious tear, raising well over $30 billion in investment in 2021. In the current year we’ve seen investments in everything from companies that re-imagine air conditioning refrigerants to electricity procurement to aviation fuel.
While meaningful steps all, the fundamental environmental problems faced by human society will not be solved by only “greening” our sources of energy supply. Supply is driven by demand, and as long as energy demand grows, so too will humanity’s impact on the planet. In concert with greening our sources of energy supply we must also do our part to green our demand. To date, addressing the demand side of energy – a root cause – has largely gone unaddressed in our rush to green technologies. This presents a particular opportunity for the power utility industry: the moment of intersection of business model disruptions, for start-ups and incumbents alike, with the global need to address climate change.
“There ain’t no such thing as a free lunch” (TANSTAAFL), an old American saying that became popular thanks to the work of Nobel Prize-winning economist, Milton Friedman. In addition to matters of public policy, the “no free lunch” concept applies equally to green energy. Specifically, all of our current sources of energy create a negative environmental impact and aren’t fully green:
- Electrification of home heating and automobiles? Only 20% of US electricity generation in 2021 was from renewables, the remainder coming from traditionally “dirty” sources.
- What’s more, electric vehicles still produce emissions from their tires. Studies conducted by the firm Emissions Analytics, as reported by the Guardian, showed that “Almost 2,000 times more particle pollution is produced by tire wear than is pumped out of the exhausts of modern cars”. Indeed, “tires are rapidly eclipsing the tailpipe as a major source of emissions from vehicles”. And heavier electric vehicles will now doubtless produce greater tire emissions.
- Terrestrial wind power? Disruptive to natural ecosystems (Miller & Keith 2018, Thaker, Zambre & Bhosale 2018), plus the landfill issue for worn windmill blades.
- Marine wind power? The same landfill issue, and also potential disruption to the marine upwelling zones that support aquatic life (Raghukumar, Chartrand, et al. 2022).
- Solar power? The landfill issue again makes its appearance (Atasu et al., Harvard Business Review 2021). In addition, lithium-ion batteries are the underlying storage medium, and lithium extraction is a very environmentally damaging process (Brooks 2021).
- Carbon capture? The soil compaction that arises from pipeline construction has been found to degrade crop yields (Tekeste, Ebrahimi, Hanna et al. 2020).
In summary, while all of these technology directions for greener energy are worthy and must be pursued, none of them offers a silver bullet answer to our environmental challenges. If we decrease the environmental impact of our energy supply, including its carbon footprint, by 10X but our energy demand subsequently increases by 20X then we will only be further paving our path to environmental disaster.
Today’s green technologies seem to always require that Mother Nature pays a price. This is nature’s subsidy for our not-quite-green technologies. Is there a complementary zero-subsidy technology that helps us asymptotically approach responsible stewardship of our planet? Perhaps we can take a cue from Starbucks’ seemingly prosaic mobile app.
Starbucks: the Bank?
As I’ve written before, Starbucks is an enviably successful food and beverage chain in part because the company has such an insightful understanding of data-driven behavioral economics. This understanding is manifest in Starbucks’ mobile app, which masterfully wields behavioral economics (zero-subsidy) nudges to drive customer traffic. Our resulting behavior as consumers is not only to keep buying Starbucks coffee, but also to keep our Starbucks apps and loyalty cards topped off with ample cash deposits. These deposits have uniquely given Starbucks access to their own private bank, a bank from which they can access money at zero interest. Genius.
While companies like Starbucks – as well as the better-known practitioners of behavioral economics online: Amazon, Uber, Facebook, Google, Netflix – have successfully grown their bottom lines by using behavioral economics to drive consumer purchase behavior, might we now need to deploy behavioral economics to help us manage consumer energy demand?
Academic research from around the world has repeatedly shown (Gosnell, List & Metcalfe 2016, Goldstein, Cialdini & Griskevicius 2008) the beneficial impact behavioral economics can have on reducing energy use, particularly at the household level (Frederiks, Stenner & Hobman 2015, Griskevicius, Cialdini & Goldstein 2008). Coupled with the fact that not all household energy use is essential, behavioral economics readily lends itself as a tool for lowering carbon footprints. Specific examples include the California Energy Commission’s study (Mills, Curtin at al. 2019) finding that “Aggregate energy demand places gaming among the top plug loads in California, with gaming representing one-fifth of the state’s total miscellaneous residential energy use”, and “User behavior influences gaming energy use more than technology choice; duty cycle and game choice are particularly strong drivers of demand.” Or note the Carbon Trust’s findings on video streaming that “The type of viewing device has a significant impact on the total carbon footprint – the footprint (related specifically to the energy of the viewing device) of watching on a 50in TV is roughly 4.5 times that of watching on a laptop, and roughly 90 times that of watching on a smart phone.”
American Express’ recent study on sustainable products has shown that consumers are not so refractory as to prioritize price over environmental concerns. Helping manage pro-environmental behavior at the consumer level (Linder, Giusti et al. 2022) is a significant business opportunity, magnified now that the spread of electric vehicles has succeeded in merging the energy used to power our households with the energy used to power our transportation. Of course, with any behavioral economics solution for demand management, respect for ethics and consumer privacy must remain paramount, as well as treading that fine line between “libertarian paternalism” (Thaler & Sunstein 2003) and reactance (Brehm 1966).
Managing Supply and Demand: The Future of Utilities
The companies responsible for delivering power to us – i.e., utilities worldwide – today can avail themselves of ever increasing arsenals of artificial intelligence technologies to help predict and optimize supply (Haupt, McCandless et al. 2020, Vitart & Robertson 2018, Domeisen, White at al. 2022, Ruan, Wu, Zheng et al. 2020, Bartos & Chester 2015, Gao, Schlosser & Morgan 2017). On the demand side, demand response solutions generally fall into the category of coarse-grained measures such as power-saver advisories, or finer-grained, device-based (e.g., smart thermostat) solutions. In the latter, utilities’ partnerships with Google’s Nest unit, as well as companies such as Leap and OhmConnect, position those technology companies to disrupt the power industry from the demand side, while utilities’ principal focus remains on supply.
To date, the votaries of Big Data – Google, Amazon, et al. – have proven themselves Zen masters of deconstructing every industry by extracting the strategic value in the data. (See Google’s acquisition of Fitbit, Amazon’s acquisition of iRobot, and both companies’ thrusts into automobile data. Google in particular continues to make noteworthy inroads into the power industry.) Via control of smart thermostats, Big Data companies stand to gain control of the demand side of the power industry, potentially disintermediating utilities from their paying end-customers.
It may now be both a technology and a business imperative that power utilities emulate Starbucks’ mobile app to directly practice demand response, driven by real-time behavioral economics at the level of the individual consumer (not just the thermostat!), to help manage consumer energy consumption. In so doing, utilities may retain connection with their end-customers, not ceding control to the smart thermostats of third-party demand response companies.
Further, as climate change’s effects continue to ramify, we can anticipate government regulation of household energy consumption. Look no further than the household water usage restrictions now in place in drought-stricken California. When similar restrictions materialize in power consumption – and they will – utilities will be faced with three choices: rolling blackouts; appealing to (i.e., paying) the third-party companies that are managing demand response to dampen consumption; or using the utility’s own behavioral economics-driven demand response applications to shape consumption, seamlessly integrated with their systems that now manage supply. Which of these solutions will be most beneficial to the rate-payer? Or to the power utility’s shareholders?
Technology Solutions for the Next Billion People
In addition to being a business imperative – and most importantly of all – reducing per-capita carbon footprints is a moral imperative. Daniel Bressler’s sobering 2021 article, “The mortality cost of carbon”, is a must-read for business people and private citizens alike. It goes without saying that climate change is an existential issue for our species and others, as most recently articulated in the PNAS perspective, “Climate Endgame: Exploring catastrophic climate change scenarios” (Kemp, Xu et al. 2022). Faced with such challenges, humanity will have to fight back with every tool at its disposal, whether passive design (Mushtaha, Salameh et al. 2021), informed food choices (Clark, Springmann et al. 2022), space bubbles, or behavioral economics.
Hopefully, one day, a scientist somewhere in the world will win a Nobel Prize in physics for a technology breakthrough that helps us alleviate, and maybe even reverse, the worst effects of climate change. Till then, our cheapest and most readily accessible solution to modulate energy consumption, both for power utilities and the planet at large, may be to leverage the work and insights of a bevy of some past Nobel winners: Kahneman, Thaler, Akerlof, Shiller. Behavioral economists all.