This project considers the interaction of prosumers with the power grid using prospect theory, a seminal contribution to behavioral economics that won the Nobel Prize (?prosumer? refers to an electricity consumer who also takes the role of a producer and seller of electricity). Prospect theory gives a methodology for understanding people?s economic choices based on their actual behavior and their assessment of potential gains and losses versus the assessed levels of risk. Prospect theory thus helps one to understand the actual dynamics of economic choices, without assuming that the outcomes that might be predicted using game theory must actually come to pass. The project takes the stand that achieving a sustainable smart grid requires transforming today?s power grid into a prosumer-centric grid in which a significant portion of energy stems from renewable sources and other prosumer-owned devices. The success of this vision is contingent on large-scale, active prosumer participation in energy management. However, just because such participation can be of significant benefit to participants, it cannot be assumed that prosumers will actually become fully involved in the smart grid. Empirical data shows that, despite its exciting prospects, the widespread adoption of the smart grid has been hindered by modest user participation. Motivated by emerging grid scenarios, this project employs the mathematical framework of prospect theory to study smart grid energy management. The results of the project will advance multiple disciplines including power systems, game theory, economics, and cognitive psychology. The behavioral experiments will pioneer the generation of new real life models for user participation in energy management. This interdisciplinary research will provide necessary mathematical foundations to expedite the realization of a prosumer-centric, sustainable smart grid vision. The developed techniques will provide a fundamental understanding of the role of prosumers in the smart grid. It can also lead to new economic and regulatory grid protocols and policies. A software tool will create a new platform for participation in smart grid research and education. The unique marriage of smart grid design and cognitive psychology will offer an innovative educational opportunity to involve graduate and undergraduate students from both engineering and psychology via new and existing courses as well as participation in behavioral experiments. Outreach events targeted at high school and minority students will be organized.
There is ample evidence (anecdotal and otherwise) that decision making in real life is often guided by perceptions that deviate from the precepts of standard game theory. Using prospect theory to understand the role of such users? perceptions in the smart grid, an increasingly prosumer-centric system, is a stepping stone toward accelerating its adoption. Preliminary investigation of prospect theory in energy management reveals that deviations from standard game theory can lead to undesirable grid performance, thus necessitating new prospect theory schemes cognizant of real life prosumer behavior. Using prospect theory, a novel framework is introduced to fundamentally understand the role of prosumer participation in energy management. Due to an interdisciplinary mix of theory, algorithm design, and cognitive psychology experiments, this research will yield the following key innovations: 1) new fundamental results on the impact of prosumer behavior on energy management, 2) prosumer-centric, sustainable energy management schemes and associated pricing mechanisms that optimize grid operation by tightly integrating the effect of user behavior and subjective utility perceptions via novel prospect theory notions, 3) a new stochastic prospect theory game class for grid-aware energy management that accounts for grid dynamics and uncertainty due to factors such as renewables, and 4) real life cognitive psychology experiments coupled with a new software platform that will yield new, realistic behavioral models for smart grid prosumers.