SPECIAL SECTION ON SMART GRIDS: A HUB OF INTERDISCIPLINARY RESEARCH

Received October 9, 2015, accepted October 22, 2015, date of publication December 9, 2015,
date of current version December 18, 2015.
Digital Object Identifier 10.1109/ACCESS.2015.2507372

Understanding Customer Behavior in Multi-Tier

Demand Response Management Program
AQSA NAEEM1 , ALI SHABBIR1 , NAVEED UL HASSAN1 , (Senior Member, IEEE),
CHAU YUEN2 , (Senior Member, IEEE), AYAZ AHMAD3 ,
AND WAYES TUSHAR2 , (Member, IEEE)
1 Electrical Engineering Department, Lahore University of Management Sciences, Lahore 54792, Pakistan
2 Singapore University of Technology and Design, Singapore 487372
3 Department of Electrical Engineering, COMSATS Institute of Information Technology, Wah Cantonment 47040, Pakistan
Corresponding author: N. Ul Hassan (naveed.hassan@yahoo.com)
This work is supported in part by Lahore University of Management Sciences, Faculty Initiative Fund (FIF) grant and Singapore University
of Technology and Design (SUTD) through the Energy Innovation Research Program (EIRP) Singapore NRF2012EWT-EIRP002-045 and
IDC project IDG31500106.

ABSTRACT In this paper, we investigate the factors that influence the customer’s decision in subscribing to a
particular demand response management (DRM) scheme. Based on these factors, we suggest a classification
of customer types that include non-green comfort seeking behavior (NCSB) and green incentive seeking
behavior (GISB). We use multi-tier DRM plans that clearly specify the incentive and inconvenience for
NCSB and GISB customers. The grid operator can obtain maximum profit margin (after paying out the
incentives to participating users) from the DRM only if a specific number of customers participate in the
NCSB and GISB plans. Any deviation from an ideal subscription pattern is undesirable from the grid’s
perspective. We also develop a mathematical framework that is based on logistic regression and considers the
quantifiable as well as unquantifiable attributes of customer behavior. This model captures the probabilistic
nature of customer preferences for different DRM plans. Simulation results reveal that the actual subscription
of customers in NCSB and GISB plans significantly deviates from the ideal values. From these, we determine
a compromise solution that lies between the ideal and the actual solutions. We also identify that along with
economic factors, social factors, such as peer pressure and prompting green or caring behavior, could also
be used as potential tools by the grid operator to influence the customer preference. This paper can also be
used by the grid operator to design appropriate multi-tier DRM plans.

INDEX TERMS Customer behavior, demand response management, incentive, inconvenience, logit model.

I. INTRODUCTION demand and supply profiles [3]. DRM includes all activities
Smart grid has become a significant component of the energy that potentially enable the users to change their electricity
infrastructure, as it is conceived to facilitate power gen- consumption pattern either through electricity tariff varia-
eration, distribution and management in an efficient way. tions or direct incentive payments by the grid operator [4], [5].
It offers improved grid performance, reliability and secu- The true benefits of DRM programs for fine grained energy
rity by using advanced computing facilities and allowing management requires significant and active customer par-
bidirectional flow of information and energy between the ticipation [6], [7]. Empirical studies, however, show that
utility provider and customers [1]. The monitoring and reg- customers, particularly in the residential sector, are hesitant
ulation of the consumers’ intelligent devices enables smart to subscribe to DRM programs [8]. For example, the authors
grid to save energy, minimize cost and improve efficiency in [9] identify that the lack of clarity and awareness about the
of the system by delivering power in a controlled way to the specifics of DRM programs are a major hindrance towards
end-customers [2]. customer engagement. This observation is also supported
With a growing transition of conventional electric grids by [10], which further elaborates that users tend to limit their
into smart grids, Demand Response Management (DRM) power consumption when they are properly guided. Further-
can be viewed as an essential tool to regulate the electricity more, the customers’ continued participation also depends on
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 A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program

their satisfaction and previous experience with their service such programs [19]. Consequently, designing appropriately
providers. A survey conducted by Opower, which is a soft- specified DRM programs and understanding customer behav-
ware enterprise that provides a platform to utility companies ior becomes necessary, which requires multidisciplinary
to engage with their customers, shows that the customers’ research in engineering, social sciences and economics [20].
satisfaction depends on the quality of communication that
the energy provider establishes during the critical moments
of their lives [11]. These critical moments may vary from
receiving an unusually high bill to experiencing an unex-
pected power shutdown. Furthermore, the customers look
forward to receiving customer support in the form of alerts
and personalized information during these times. Therefore,
the existence of a quality communication between the utility
provider and the customer that clearly specifies the energy
usage, billing and management content is necessary to ensure
customers’ participation.

A. STATE OF THE ART

In [9], [10], [12], and [13], various authors have proposed
user-friendly DRM programs for increased and active cus-
tomer participation. In [9], the authors develop DRM plans
that specify the inconvenience parameters for customers in
terms of scheduling delays and temperature deviations of
various flexible devices. The authors then determine the
effectiveness of such plans for the peak load reduction. The
authors in [10] proposed a DRM scheme, while considering
the impact of time varying price and incentives on user behav-
ior. In [12], the proposed DRM system employs a distributed,
game theoretic approach in which each customer gets to select
a daily schedule of household devices to reduce the energy
consumption. López et al. [13] model the customer partici-
pation behavior using a non-cooperative game. In this game,
the grid tries to reduce the peak load while users decide, based
on other users’ participation, whether or not they want to
participate in a given DRM program. Even though, efficient FIGURE 1. Contribution of this paper.

schemes have been proposed in the literature, most of them

assume that users are willing to participate if their objective
functions are optimized. However, the works in [14]–[16]
suggest that the responses and choices of individuals tend to
vary from the assumptions on which various DRM schemes
are based.
Various demand response research projects have also been
initiated across the world. The adoption of DRM techniques
in smart grid installments is dependent on several factors
including state policies, load demand profiles and techno-
logical growth. Some case studies on the deployment of
DRM schemes in the smart grid environment are available
in [17]–[19]. These studies also discuss the barriers that
inhibit the customers’ participation. Reference [18] further
strengthens the observation that the lack of customer engage-
ment plans is a major hindrance for residential customers
to adopt the time varying rates, where they are given the
option to participate. For this reason, the New York Depart-
ment of Public Service (NYPSC) has identified the key
approaches for maximizing the customer engagement by
redefining the marketing strategies and emphasizing the
need for considering the customer diversity while designing
B. CONTRIBUTIONS
In this paper, multiple DRM plans with clearly defined
incentives are being offered as products to customers.
As is shown in Figure 1, we identify and broadly categorize
the customer behavior into two types 1) Non-Green Comfort
Seeking Behavior (NCSB) and 2) Green Incentive Seeking
Behavior (GISB). The grid operator then use these categories
to specify the DRM plan parameters accordingly. Generally,
an exact determination of customers preferences and behav-
ioral patterns requires one to conduct an extensive survey
for which numerous resources are needed. However, in the
absence of these resources, appropriate mathematical models
can be used for determining the customers’ behavior. Thus,
the novelty of our work lies in the idea of designing different
DRM plans to cater different categories of users and also, in
using suitable models to understand the customer’s decision
making process towards these plans, while considering the
interests and objectives of the grid operator. By incorporating
the customer behavior in the study, we are able to quantify
the difference between the expected and actual benefits of the

2614 VOLUME 3, 2015

A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
grid operator that exist due to the deviation of the number of
customers in the plans from the ideal one.
To accommodate different customers’ behavioral patterns,
we build on the multi-tier DRM plans proposed in our earlier
work [9], [21]. The DRM plans for NCSB customers offer
less inconvenience and less incentive while that for GISB cus-
tomers offer relatively higher inconvenience and incentive.
As Figure 1 shows, the customers subscribe to either NCSB
plan or GISB plan. Their decision making process is influ-
enced by a number of factors, including peer pressure, social
standing etc., as well as the post-subscription behavior that
accounts for the analysis of the DRM plan in its implementa-
tion. The number of customers subscribing to different plans
will determine the profit margin for the grid operator. Grid
operator can obtain maximum profit gain only for certain
combination of NCSB and GISB customers. However, as
human behavior is affected by lot of social and economic
factors, obtaining ideal subscription in each plan could not be
possible for the grid operator. We therefore develop a math-
ematical model based on logistic regression that takes into
account the quantifiable as well as unquantifiable attributes
of customer behavior and captures the probabilistic nature of
customer preferences for different DRM plans.
Simulation results show that the actual subscription of
customers in NCSB and GISB plans significantly deviate
from the ideal values. For this reason, we find the compromise
solution which turns out to be an intermediate point at the
intersection of actual and ideal curves. In contrast to the ideal
solution, the compromise solution requires comparatively
lesser number of customer to switch their behavior from
NCSB to GISB or otherwise. We also identify that along
with economic factors, social factors and prompting green or
caring behavior can also serve the grid operator as potential
tools to influence customers to switch to the plan that favors
the grid’s objectives. Thus, this study can be used by the grid
operator to its advantage by adapting appropriate measures to
achieve the compromise solution.
The rest of the paper is organized as follows. In Section II,
we categorize customer behavior towards DRM in smart
grids. In section III, we discuss multi-tier DRM plans and
social and economic factors that influence customer decision
making process. In section IV, we discuss two methods to
determine actual customer preferences towards some specific
DRM plan. In this section, we also develop a mathematical
model of customer preferences. A case study and simulation
results are presented in Section V, followed by the conclusion
in Section VI. In the last, we present the derivation of logit
probabilities in Section VII.
II. CUSTOMER BEHAVIOR CATEGORIZATION
TOWARDS DRM
In this paper, our objective is to categorize customer behav-
ior towards DRM in smart grids. Further, as we propose
multi-tier DRM plans, taking insights from social sciences
and economics, we will also identify important factors
that influence customer’s attitude towards a certain plan.
VOLUME 3, 2015
These factors are not only directed by the environmental
concerns and awareness but also by the economic concerns,
such as price and financial incentives [22].
In order to categorize customer behavior towards DRM in
smart grids, it is important to understand that a traditional
grid has always operated by increasing electricity supply to
meet customer demands. Customers in traditional grid over
several decades have therefore acquired distinct electricity
consumption patterns. Deviation from this consistent con-
sumption routine is generally perceived as inconvenience
(or discomfort) by the customers and hence the resulting
reluctance to participate in DRM programs [23]. Further-
more, the authors in [24] have also identified biases that affect
energy consumption, including, e.g., maintaining a status-quo
and opting for the good instead of the best available option.
Thus, customer behavior towards DRM, which requires a
change in customer electricity consumption routine, not only
depends on the amount of inconvenience but also on the
demographics, monetary preferences, source of energy etc.
In [25], the authors used data from the Dutch National
Bank Household survey to understand energy conservation
behavior of residential customers. The survey particularly
focused on the impact of customer’s financial standing on the
energy conservation related decision making process. They
concluded that some customer’s attitude towards energy con-
servation is greatly linked to environmental concerns. On the
other hand, financially rich or older customers tend to prefer
comfort over conservation. Furthermore, the energy conser-
vation behavior was found to be independent of the public
awareness programs. Similarly, the work in [26] showed that
the consumers using ‘‘green’’ (renewable) energy sources
do not prefer to switch to other sources. On the contrary,
a greater number of consumers who obtain their energy from
the traditional energy sources such as, fossil fuels, are more
willing to switch to the greener energy source. Based on these
studies, we can broadly categorize customer behavior towards
DRM into following two types1 :
1) Non-Green Comfort Seeking Behavior (NCSB):
Customers with this behavior prefer comfort and are less
willing to accept high inconvenience irrespective of the
incentives being offered.
2) Green Incentive Seeking Behavior (GISB): Customers
with this behavior prefer energy conservation and are
more willing to accept high inconvenience but also
require high incentive or reward.
In order to attract customers with different behavior
towards DRM, it is obvious that we would require multi-tier
DRM plans. DRM plan for NCSB customers should gener-
ally offer less inconvenience and less incentive as compared
to another DRM plan designed to attract GISB customers.
It is important to note that customer selection of a DRM
plan despite their behavioral tendencies strongly depend on
the offered plan parameters, i.e., the values of inconve-
1 Note that there might be sub-categorizations of customer behavior but
we do not consider them in this paper.
2615

nience and incentive. Therefore, changing the plan param-
eters can lead to a different combination of customers in
the two plans. For example, some GISB customers may
select a low inconvenience plan if the incentive associated
with high inconvenience plan is not good enough for their
liking. By accepting a lower inconvenience value plan, such
customers are still contributing towards the green initiative.
Therefore, attracting a specific number of users in each plan
for some desired grid objectives (e.g., a certain profit mar-
gin) by designing multi-tier DRM plans with appropriate
incentive and inconvenience values is quite challenging. It
is also important to note that several social and economic
factors also influence the customer’s selection of a particular
plan.
In the next section, we describe our multi-tier DRM plans
and discuss customer subscription pattern.
III. MULTI-TIER DRM PROGRAM
As previously discussed, a major hindrance for customer
participation in DRM plans is the lack of clarity in defin-
ing inconvenience and associated incentives, e.g., how many
times a user will be required to change his/her routine elec-
tricity consumption pattern and how much compensation
will be offered. Additionally, in order to maximize partici-
pation, different plan parameters are required to accommo-
date different customer behavior. We propose a multi-tier
DRM program with two distinct DRM plans to accommodate
NCSB and GISB customers.
We consider a residential community comprising
of K customers or homes, each of which subscribes to DRM
program. Each home is supported by an interface home
controller that provides the two-way communication link
between the grid and home. Home controller is also respon-
sible for an exchange of aggregate load profile with the grid
operator and the execution of DRM plans. We assume that the
flow of power is unidirectional i.e., from the grid to the home
FIGURE 2. Residential community subscribed to DRM programs.
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A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
via home controller. Figure 2 elaborates the concept of such
residential community. We assume that every customer has
a set of electrical appliances, which can be categorized into
essential and flexible loads. For DRM, power consumption
and scheduling of flexible devices can be controlled. Flexible
devices are further divided into shiftable and thermal loads.
As the name suggests, the operation of shiftable loads can
only be delayed from the customer’s preferred time slot,
e.g., clothes dryer (CD) can be operated half an hour later
than usual but whenever it is operated, it will consume the
same amount of power. On the other hand, thermal loads are
generally used to regulate temperature and by changing the
thermostat set point, power consumption of these devices can
be changed (Air Conditioner (AC) is one typical example
of thermal load). Figure 3 shows how shiftable and thermal
loads operate with and without DRM. Delaying shiftable
devices and changing the thermostat set point for a certain
time duration creates inconvenience for customers. In our
previous work [9], we proposed DRM plans, that specified
inconvenience of various flexible loads by the following
parameters:
• Shiftable loads: Scheduling delay in minutes from
customer’s preferred starting time for the operation of
the shiftable load, denoted by 1t̂(j) (index j denotes
j-th shiftable load).
• Thermal loads: Temperature deviation from customer’s
defined thermostat set point calculated using two param-
eters θ ref (j) and α(j) and the total duration when the
grid operator changes the set point, denoted by t̃ max (j)
(index j denotes j-th thermal load).
Further details of these parameters can be found in
[21] and [27].
We assume that Is and It respectively denote the set of
shiftable and thermal loads. In this paper, for NCSB and GISB
customers, we define two different DRM plans such that
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A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
FIGURE 3. Shiftable and thermal loads.
1t̂NCSB (j) ≤ 1t̂GISB (j), ∀j ∈ Is , θNCSB
ref (j) ≤ θ ref (j), ∀j ∈ I ,
GISB
αNCSB (j) ≤ αGISB (j), ∀j ∈ It and t̃NCSB
max (j) ≤ t̃ max (j), ∀j ∈ I
GISB
(the subscripts NCSB and GISB are used to denote the plan
parameters and variables related respectively to NCSB and
GISB customers).
In this paper, we combine the inconvenience of various
flexible loads into a single normalized value that is deter-
mined by the following equation [21]:
1 X X
Ṽ = 1t̂(j) + t̃ max (j)(1 + α(j))
V̂max j∈Is j∈It
where, V̂max denotes the maximum inconvenience value (this
value is set by the grid operator, details can be found in [21]).
It is obvious that using (1), ṼNCSB ≤ ṼGISB .
After defining inconvenience, the grid operator is also
required to announce an incentive. Again as in [21], we
assume a polynomial relationship between the incentive and
inconvenience, i.e., h = aṼ r , where, r = 1, 2, . . . and a is
some constant, whose value is defined by the grid operator.
The higher the value of exponent r, the higher will be the
incentive. Similarly, the higher the value of a, the higher will
be the incentive offered by the grid operator for a given value
of inconvenience. If we assume a linear relationship between
incentive and inconvenience, a can be viewed as the slope
of the straight line. In the rest of the discussion a will be
identified as the incentive-inconvenience ratio.
Grid operator can obtain a certain financial advantage
by controlling the flexible loads of participating customers
(i.e., by creating inconvenience). We assume that this finan-
cial advantage is due to the peak load reduction resulting
from DRM. However, it is important to note that the peak
reduction and hence the financial gain to the grid operator
starts to saturate (and the returns diminish) as the inconve-
nience values of DRM plans are further increased [9], [21].
VOLUME 3, 2015
t TABLE 1. Multi-tier DRM plans for NCSB and GISB customers.
t
(1) In a multi-tier DRM program (of given inconvenience
values), it is therefore, more convenient for the grid operator
to fix a certain profit margin (or a target peak load reduction)
and find the ideal number of customers in each plan (without
considering consumer behavior) in order to maximize the
value of a. We used this approach in [21] and determined
the incentive that the grid operator can associate with the
DRM plans.
A sample multi-tier DRM program for NCSB and GISB
customers with the associated values of inconvenience and
incentive is given in Table 1. In this table, we assume
two shiftable loads, i.e., Clothes Dryer (CD) and Dish
Washer (DW) and two thermal loads, i.e., Air Condi-
tioner (AC) and Water Heater (WH). The value of V̂max is
assumed to be 1440. Using (1), we find ṼNCSB = 0.0979
and ṼGISB = 0.2375, i.e., the inconvenience value for GISB
customers is almost 2.42 times higher than NCSB customers.
The incentive values associated by the grid operator for the
linear and quadratic cases are also given in this table (more
details can be found in [21]).
In a community comprising of K customers, let KNCSB and
KGISB respectively denote the number of customers subscrib-
ing to NCSB and GISB plans. In the ideal case, i.e., for an
optimum number of users in each plan, the grid operator is
able to reduce peak load and obtain a maximum profit margin
after paying out incentives to the participating customers.
2617

FIGURE 4. Five stages of customer’s selection process.
However, in practice, the number of users subscribing to each
plan may substantially deviate from the ideal values. For this
reason and as described in the previous sections, understand-
ing customer behavior and response to energy management
programs is crucial in the development and implementation of
any DRM scheme. It is important then to outline some social
and economic factors that influence a customer’s decision
making process.
Social and Economic Factors that influence Customer’s
Decision Making Process: Customer’s preference for a
given DRM plan is influenced by factors such as the envi-
ronmental and social constraints, past experiences, accumu-
lated judgment and peer pressure. These elements reflect
the subjective nature of the customer’s selection within the
limitations of certain parameters (such as, the type or income
of the user). Generally, a consumer’s decision making process
to purchase some commodity is viewed in five stages [28].
These stages for a multi-tier DRM program are as shown in
Figure 4. Below we explain these stages:
1) Demand Realization: In the first stage, a customer real-
izes his/her electricity demand and consumption pat-
tern, e.g., the dish washing time, thermostat set point
of AC, number of hours AC is turned ON in a day etc.
The customer also realizes that changing the electricity
consumption pattern by subscribing to a DRM plan
can cause inconvenience but will also be economically
beneficial.
2) Gathering Information: The customer in the second
stage thoroughly studies the offered plan and under-
stands which devices are associated with each plan.
Consumer also tries to understand what distinguishes
one plan from another within the multi-tier DRM pro-
gram and gather information about any other offers
available in the market. Customer might also obtain
feedback from his peers about the DRM plans and also
about their subscription preference.
3) Assessment of Alternatives: In the third stage, the cus-
tomer evaluates all the information to assess the pros and
cons of each plan.
4) Decision - To subscribe or not to subscribe: Once the
consumer has made a decision, he informs the grid about
his decision and completes all the necessary formalities.
5) Post-Subscription Evaluation: The final stage for the
customer is to analyze the program in its implemen-
tation. This is the last stage where the answer to the
question ‘‘Was the decision correct?’’ gets answered.
The user might be bounded for a fixed period or may
have a leverage to switch in case of dissatisfaction. That,
however, will depend on the policy adopted by the grid.
In case, more customers select a plan that goes against the
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A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
grid operator’s expectations, an understanding of these stages
of decision process will assist the grid operator to come up
with viable strategies to change the customer’s decision by
offering counteractive measures. For example, in this selec-
tion process, we can see that at the information gathering
stage, customer’s decision can be influenced by the peers
or by the general perception of the plan. Additionally, the
grid operator can also draw more attention to specific plans
by giving them specific labels e.g., ‘‘green plan’’ or ‘‘caring
plan’’ in order to attract more participating in such plans.
We will discuss these issues in more detail in later sections.
In the next section, we discuss different ways to determine
actual preference of a customer towards a DRM plan.
IV. DETERMINING CUSTOMER PREFERENCE
IN MULTI-TIER DRM PROGRAM
In a multi-tier DRM program, there are two ways to deter-
mine the preference of a customer towards a certain plan
1) customer preference survey 2) customer preference model-
ing. Both methods have their advantages and disadvantages.
A. CUSTOMER PREFERENCE SURVEY
IN MULTI-TIER DRM PROGRAM
In customer preference survey, every customer is asked to
answer a certain set of questions in order to determine his
behavior and preference for some particular DRM plan.
In this method the design of a questionnaire is a challenging
task. The survey form can be categorized into fundamental
and detailed questions. The fundamental questions may aim
at collecting the background information and social behavior
of the user. For instance, questions like Are you aware of
the parameters announced by the grid? or How much incon-
venience level are you willing to tolerate? Answer to these
questions can be marked on a scale of 1-10 with 1 being
the lowest and 10 being the highest. The responses to this
section will help in understanding the reasons, which prompt
the users to select some specific plan.
The second module of the survey can include some detailed
questions on the understanding of the respondents and they
may assist in reviewing and revising the current DRM poli-
cies to adapt to the demands of users and to the grid. For
instance, questions like What do you understand by DRM in
Smart Grids? or How well are you aware of the functions
of Advanced Metering Devices installed at your household?
To assess the user’s response, certain weights can also be
assigned by finding keywords in the answers provided by
the consumer. For the former question, the terms like peak
demand, peak hours or ancillary generation will show a
higher level of familiarity to the concept.
Generally, an exact determination of customers prefer-
ences and behavioral patterns requires one to conduct an
extensive survey, which requires lot of resources. A survey
conducted on a reduced sample size has a certain probability
of error. The survey would be conducted by the grid operator.
When the multi-tier DRM programs that are designed in this
paper will be implemented or offered to customers by the
grid operators, such detailed surveys would be conducted.
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A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program

In the absence of such data, we can make use of mathe-
matical models to determine customer preferences in such
DRM programs.
B. CUSTOMER PREFERENCE MODELING
IN MULTI-TIER DRM PROGRAM
In this paper, we use the most widely used discrete choice
method, ‘‘logit model’’, to determine the customer’s prefer-
ence for a certain DRM plan. It is a logistic regression model
that is used to understand the customer choice for a certain
product. This model requires a product set, some quantifi-
able attributes of the products and unquantifiable attributes
that are mostly related to customer social and physiological
behavior. Based on the given product set, quantifiable and
unquantifiable parameters, a utility function is associated
with each product and the model then determines a certain
probability of acceptance for a particular product. To use
this model for our multi-tier DRM program, we have the
following parameters:
• Product set: In our paper, there are two DRM plans and
we assume that the customers have to select one of these
plans. With this assumption we require that the selection
of plans must be mutually exclusive, i.e., customers must
either subscribe to NCSB plan or GISB plan.
• Quantifiable attributes: The noticeable quantifiable
parameters of DRM plans are the incentives (hNCSB ,
hGISB ) and inconveniences (ṼNCSB , ṼGISB ). We assumes
that the customers are completely aware of these plan
parameters. Also note that in this paper we assume a
polynomial relationship between incentive and inconve-
nience, i.e., incentive and inconvenience are dependent
on each other.
• Unquantifiable attributes related to customer behavior:
This model also assumes a class of unquantifiable vari-
ables associated with customer behavior that affects
his/her choice. It takes into account the user’s past
experiences, peer pressure and general perception of
any plan. All those factors that influence a person’s
daily also life have a direct impact on his/her behavior
as a customer of a particular product or service [16].
This observation is also supported by psychologists who
explain that the pattern of customer decision and per-
ception of products is formulated by their behavior and
conscious experience. These unquantifiable attributes
are a major reason that hinders exact predictability of
human behavior. It is also important to note that the
surveys are mainly designed to quantify these attributes.
The unquantifiable attributes related to NCSB and GISB
customers are lumped together and denoted respectively
by NCSB and GISB .
Based on the quantifiable and unquantifiable parameters,
we define a utility function for NCSB and GISB customers,
Ui = αi hi + i , i ∈ {NCSB, GISB}
where αi is a constant. The unquantifiable attributes NCSB
and GISB are user specific and are modeled as independent
and identically distributed (iid) random variables of extreme
value of type-1 and are drawn from Gumbel distribution with
variance π 2 /6). It means that the unobserved factor for Plan-
NCSB gives no information about that of Plan-GISB. Another
way to think of this is to consider that the observed factor
is sufficient to specify the utility while the remaining factors
simply constitute the white noise. This leads to simplification
of the expression of choice probability that takes the closed
form and can be easily interpreted. The probability density
function and the cumulative distribution functions are given
by the following equations [29],
f (i ) = exp−i exp(− exp−i ), i ∈ {NCSB, GISB} (3)
−i
F(i ) = exp(− exp ), i ∈ {NCSB, GISB} (4)
In this model, a customer subscribes to a plan that provides
the greatest utility in equation (2). Therefore, customer pref-
erence for a DRM plan can be neatly summarized as follows:
Subscribe to NCSB Plan if and only if UNCSB > UGISB ,
otherwise subscribe to GISB plan.
With this characterization, the probability of a user sub-
scribing to NCSB plan can be computed as [30],
pNCSB = Prob(UNCSB > UGISB )
= Prob(GISB − NCSB < αNCSB hNCSB − αGISB hGISB )
= Prob(1 < αNCSB hNCSB − αGISB hGISB ) (5)
where 1 = GISB −NCSB . Note that the difference between
two extreme value parameters follows a logistic distribu-
tion [30]. As NCSB and GISB are iid extreme value random
variables, their difference given by 1 has the following
distribution:
e1
F(1) = (6)
1 + e1
Using (6) the probability that a customer prefers NCSB Plan
over GISB Plan is given by,
eαNCSB hNCSB
pNCSB = (7)
eαNCSB hNCSB + eαGISB hGISB
Equation (7) is known as the ‘‘logit probability’’ for choosing
NCSB Plan. The derivation of logit probability using (5) can
be found in [30] but is also provided in the appendix for the
sake of completeness. By further simplifying equation (7), we
get the probability that a customer prefers NCSB Plan over
GISB Plan,
1
pNCSB = (8)
1 + eαGISB hGISB −αNCSB hNCSB
Similarly, the probability that the user prefers GISB Plan over
NCSB Plan is given by,
1
pGISB = (9)
1 + eαNCSB hNCSB −αGISB hGISB
We can easily verify that, pNCSB + pGISB = 1. Once the
(2) probabilities are obtained, the actual number of participants
in a DRM plan can be determined as,
Ki = pi × K such that i ∈ {NCSB, GISB} (10)

VOLUME 3, 2015 2619


where K is the total number of customers in a given
community.
In the next section, we present a case study to evaluate
the difference between ideal and actual customer subscription
behavior. We also give some policy recommendations to
prompt a change in the behavior of customers.
V. CASE STUDY
We consider a residential community consisting of
1000 customers. We assume that each customer uses a max-
imum of four flexible loads, two of which are thermostat
loads and the rest are shiftable loads. The remaining house-
hold appliances form the essential base load. This allows
the community to have a specific aggregated load demand
curve with a distinct peak. We assume that the residential
community has a peak load demand of 3.7 MW as given
in [27]. We assume that the grid operator is aware of the
peak demand and its primary objective is to reduce the peak
load by regulating the power consumption pattern of the
customers flexible loads. To control the customer’s power
consumption profile, the grid operator offers Multi-tier DRM
plans to customers and disseminates the information as given
in Table 1. According to this table, two plans are offered to the
customers to accommodate NCSB and GISB behavior. The
amount of inconvenience for GISB customers is 2.42 times
higher than NCSB customers. Similarly, the incentive offered
by the grid operator for GISB customers is also higher than
the NCSB customers. In our case study, we restrict our
analysis to the linear and quadratic relationships between the
incentive and inconvenience. We use αNCSB = αGISB = 100,
while computing the values predicted by the model.
FIGURE 5. Ideal and actual number of NCSB customers (linear case) for
different values of a.
In Figures 5 and 6, we vary the value of a (i.e., the
incentive-inconvenience ratio), while keeping the same val-
ues of inconvenience as given in Table 1: i.e., ṼNCSB =
0.0979 and ṼGISB = 0.2375. We use linear relation-
ship between incentive and inconvenience. For example,
if a = 0.05 then, hNCSB = 0.49¢ and hGISB = 1.19¢.
Thus as the value of a increases, the incentives also increase.
In Figure 5, we plot NCSB customers for the ideal and
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A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
FIGURE 6. Ideal and actual number of GISB customers (linear case) for
different values of a.
actual cases. We can see that as the value of a increases,
the grid operator requires more and more NCSB customers,
while customer preference model predicts otherwise. The
trend is opposite for GISB customers, which is evident from
Figure 6 as more customers would wish to subscribe to GISB
plan for higher and higher incentive values. We can also
see that the ideal and actual curves intersect approximately
at KNCSB = 300 and KGISB = 700, where a = 0.07.
This intersection point can be seen as a compromise between
the expectations of grid operator and customer preferences.
The solution provided by the intersection point is termed
as the ‘‘compromise solution’’.
FIGURE 7. Ideal and actual number of NCSB customers (quadratic case)
for different values of a.
In Figures 7 and 8 we repeat the simulations for the
quadratic relationship between the incentive and inconve-
nience. However, in these simulations we use higher value
of a as compared to the previous case. This choice of values
of a allows us to see the intersection point (a is defined as
a ratio). Again it is evident that as the incentive payments
increase, grid wants more customers in NCSB plan, while the
customers prefer GISB plan. Interestingly, we can see that at
the intersection point again KNCSB = 300 and KGISB = 700.
The intersection point is roughly achieved around a = 0.2
i.e., 0.1916¢ for NCSB customers and 1.128¢ for GISB
customers.
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A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
TABLE 2. Cost saving for the grid operator and total incentive payment for linear and quadratic relationship for the multi-tier DRM program of Table 1.
FIGURE 8. Ideal and actual number of GISB customers (quadratic case)
for different values of a.
We now thoroughly investigate the impact of customer
participation in different plans and its relation to the profit
margin of the grid operator. Using the incentive and inconve-
nience values of the DRM program in Table 1, and the algo-
rithm proposed in [21], in Table 2, we determine the %age
peak load reduction, cost saving for the grid operator, the total
incentive payment (i.e., KNCSB hNCSB + KGISB hGISB ) and the
net profit to the grid operator for the linear and quadratic cases
for various combinations of NCSB and GISB customers.
We can observe that as the number of GISB customers
increases, the cost saving as well as the total incentive pay-
ments by the grid operator also increases. The net profit of
the grid operator thus changes. Notice that these calculations
are done by the grid operator without any consideration of
customer preferences. From this table, we can observe that
for the linear case, the grid operator can gain a maximum
profit of 18$ only if 200 customers subscribe to NCSB plan
and 800 to GISB plan. For the quadratic case, again the
grid operator can gain a maximum profit of 18$ but that
requires 800 customers in NCSB plan and only 200 in GISB
plan. On the other hand, customer preference model predicts
that (for the given multi-tier DRM plans) the linear case
will attract 292 customers in NCSB plan and the remaining
708 customers will be in GISB plan. For the quadratic case,
the incentive value of GISB plan is 5.88 times higher than
VOLUME 3, 2015
the NCSB plan, while its inconvenience is only 2.42 times
higher than NCSB. The model predicts that the quadratic case
will attract 157 customers in NCSB plan and 843 customers
in GISB plan. Thus there is a huge gap between the ideal
and actual number of participants particularly in the quadratic
case.
TABLE 3. Ideal, actual and compromise number of NCSB and GISB
customers (linear case).
TABLE 4. Ideal, actual and compromise number of NCSB and GISB
customers (quadratic case).
In Tables 3 and 4, we summarize the ideal, actual and
compromise solutions for the linear and quadratic cases. Note
that compromise solution is the number of NCSB and GISB
customers obtained at the intersection point of the curves in
Figures 5, 6, 7 and 8. We can see that for the linear case,
actual solution and compromise solutions are very close and
they are also not far away from the ideal solution. This shows
that for the linear case, obtaining a compromise solution
would be much easier for the grid operator. The grid operator
can also try to obtain the ideal solution as it is not that far
away from the actual solution and would require convincing
92 NCSB customers to opt for GISB plan that is more green
and also provides more incentive. On the other hand, for the
quadratic case, actual as well as the compromise solutions are
very very far away from the ideal solution. In this case, we
can again observe that the compromise and actual solutions
though far but are still close enough as compared to the
ideal solution. Therefore it would be comparatively easier
for the grid operator to attain the compromise solution that
would require converting 143 GISB customers into NCSB
customers. However, achieving the ideal solution would be
2621

FIGURE 9. Using social influence to shift customer behavior.
extremely difficult as it would require 643 green customers
to switch from green to non-green behavior.
In the following, based on our study, we give some use-
ful recommendations that could be helpful in influencing
customer behavior:
• Social Influence: The grid operator can use social influ-
ence to prompt behavioral change as is suggested by
Figure 9. Social influence can cause a change in cus-
tomer’s feelings, attitude and behavior towards a spe-
cific plan. If the grid operator wants more GISB users,
green behavior could be emphasized and given more
recognition. Similarly, peer pressure can also be used
for the grid’s advantage as some individuals tend to
change their beliefs as a result of either an interaction
with another social group or an attempt to fit in.
On the other hand, if more NCSB customers are required
to obtain the ideal or the compromise solutions, the
grid operator could instead give more recognition to the
caring behavior for the elderly or comfort seeking cus-
tomers. Apart from these, awareness campaigns through
the social media, celebrity endorsements or an expert’s
advice can also be used to switch the customers to the
desired plan. It is also important that the grid operator
should understand the customer base and if required
launch plan switching campaigns. Furthermore, if the
grid operator wants to retain the current number of cus-
tomers in any plan, then it is essential for him to ensure
the customer’s satisfaction. It can be done by delivering
not only the promised services but also by conducting
focus groups to show the utility companies’ concern for
what their customers think. Moreover, the grid operator
could also leverage the critical moments of the cus-
tomers’ lives (i.e. when they experience unprecedented
power outages or when they require billing information
etc.) by providing appropriate customer support and
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A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
information alerts. By enriching the customers’ experi-
ence when they seek information, the energy provider
can ensure the customer’s satisfaction and continued
participation in the program.
• Economic Influence: The grid operator can also come
up with altogether different multi-tier DRM plans with
different incentive and inconvenience values. The grid
operator can also increase or decrease its net profit
margin for certain time durations to prompt behavior
switching. For example, grid operator can decrease its
profit margin and increase incentives to attract more
GISB customers.
VI. CONCLUSION
In this paper, we categorized customer behavior into
two broad categories, NCSB and GISB. We proposed
multi-tier DRM plans clearly specifying the incentives and
inconveniences of various flexible devices in order to attract
significant customer participation. We also developed a math-
ematical model to determine the actual preference of a cus-
tomer towards a DRM plan of given parameters using logit
Model. Taking insights from social sciences and economics,
we also identified factors that could possibly influence cus-
tomer decision making process. We then used a case study to
further understand the ideal and actual number of customers
that subscribe to various plans depending on the DRM plan
parameters. We also identified a compromise solution that
lies between the ideal and actual solutions. In some cases, it
is thus easier for the grid operator to attain a compromise
solution, which requires convincing lesser number of cus-
tomers to switch their behavior. We also identified that along
with economic factors, social factor such as peer pressure
and prompting green or caring behavior could also be used
as potential tools by the grid operator to influence customer
VOLUME 3, 2015
A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program

preferences to meet some of its desired objectives. This study Here we make change of variables. We consider u = e−i
can also be used by the grid operator to design appropriate where −e−i di = du. The limits also change as follows;
multi-tier DRM plans. i −→ −∞, u −→ ∞ and i −→ ∞, u −→ 0 which
gives us,
APPENDIX  
In this section, we derive equation (7) from equation (5), Z 0 X
following [30]. For the ease of notation, we refer to NCSB pi = exp −u e−(αi hi −αj hj )  (−du);
∞ j
as Plan-A and GISB as Plan-B in the following derivation.  
The probability that the customer selects Plan-i where, Z ∞ X
i 6 = j and i, j ∈ {A, B} is given by, = exp −u e−(αi hi −αj hj )  du;
0 j
pi = Prob(Ui > Uj ; ∀j 6 = i and i, j ∈ {A, B})  
e−(αi hi −αj hj )
P
= Prob(j < i + αi hi − αj hj ; ∀j 6 = i and i, j ∈ {A, B}) exp −u j ∞
= (16)
− j e−(αi hi −αj hj )
P
0
This expression becomes the cumulative distribution for
j evaluated at i + αi hi − αj hj , if i is given. In this case, eαi hi
according to equation (4), the cumulative distribution for j pi = P α h ; ∀j and i, j ∈ {A, B} (17)
je
j j
can be written as,
F(j ) = exp(−exp − (i + αi hi − αj hj )) (11) Thus, the probability of selecting Plan-A is given as,

Since ’s are independent, the probability for selecting eαA hA

pA = ; (18)
Plan-i is given as, eαA hA + eαB hB
Y
pi | i = exp(−exp − (i + αi hi − αj hj )); which is the required expression.
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AQSA NAEEM received the M.S. degree in
electrical engineering from the Lahore Univer-
sity of Management Sciences (LUMS), Pakistan,
in 2015, where she is currently pursuing the
Ph.D. degree. She has been a Research Assistant
with the Advanced Communication Laboratory,
LUMS, for about two years, and has contributed
to research on indoor localization. Her current
research interests include various aspects of smart
grids.
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A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
ALI SHABBIR received the B.Sc. degree in
electrical engineering from the University of
Central Punjab, in 2010. He is currently pur-
suing the M.Sc. degree in electrical engineer-
ing with the Lahore University of Management
Sciences, Lahore, with a specialization in embed-
ded and electronics. His research interests include
DRM in smart grids and IoT. Besides that he has
also initiated two startups for providing affordable
solar energy solutions and automation/control for
households and commercial activities.
NAVEED UL HASSAN (M’08–SM’15) received
the B.E. degree in avionics engineering from the
College of Aeronautical Engineering, Risalpur,
Pakistan, in 2002, and the M.S. and Ph.D. degrees
in electrical engineering, with a specialization
in digital and wireless communications, from
the Ecole Superieure d’Electricite, Gif-sur-Yvette,
France, in 2006 and 2010, respectively. In 2011, he
joined as an Assistant Professor with the Depart-
ment of Electrical Engineering, Lahore University
of Management Sciences, Lahore, Pakistan. Since 2012, he has been a
Visiting Assistant Professor with the Singapore University of Technology
and Design, Singapore. He has several years of research experience and
has authored/co-authored numerous research papers in refereed international
journals and conference proceedings. His major research interests include
cross layer design and resource optimization in wireless networks, demand
response management, and integration of renewable energy sources in smart
grids, indoor localization, and heterogeneous networks.
CHAU YUEN (S’02–M’08–SM’12) received the
B.Eng. and Ph.D. degrees from Nanyang Techno-
logical University, Singapore, in 2000 and 2004,
respectively. In 2005, he was a Post-Doctoral
Fellow with Lucent Technologies Bell Labs,
Murray Hill, NJ, USA. In 2008, he was a Visiting
Assistant Professor with Hong Kong Polytechnic
University, Hong Kong. From 2006 to 2010, he
was a Senior Research Engineer with the Institute
for Infocomm Research, Singapore, where he was
involved in an industrial project developing an 802.11n wireless local area
network system and actively participated in the third generation Partnership
Project Long-Term Evolution (LTE) and LTE-A standardization. In 2010,
he joined the Singapore University of Technology and Design, Singapore, as
an Assistant Professor. He has authored over 200 research papers in interna-
tional journals or conferences. He holds two U.S. patents. He received the
IEEE Asia-Pacific Outstanding Young Researcher Award in 2012. He serves
as an Associate Editor of the IEEE Transactions on Vehicular Technology,
and was awarded as Top Associate Editor from 2009 to 2014.
VOLUME 3, 2015
A. Naeem et al.: Understanding Customer Behavior in Multi-Tier DRM Program
AYAZ AHMAD received the B.Sc. degree in
electrical engineering from the NWFP University
of Engineering and Technology, Peshawar,
Pakistan, in 2006, and the master’s degree
in wireless communication systems and the
Ph.D. degree in telecommunications from Ecole
Superieure d’Electricite, Gif-surYvette, France,
in 2008 and 2011, respectively. He is currently
an Assistant Professor with the Department of
Electrical Engineering, COMSATS Institute of
Information Technology, Wah Cantonment, Pakistan. His research inter-
ests include resource optimization in wireless communication systems and
energy management in smart grid.
VOLUME 3, 2015
WAYES TUSHAR (S’06–M’13) received the
B.Sc. degree in electrical and electronic engineer-
ing from the Bangladesh University of Engineer-
ing and Technology, Bangladesh, in 2007, and
the Ph.D. degree in engineering from Australian
National University, Australia, in 2013. He was a
Visiting Researcher with National ICT Australia,
ACT, Australia. He was also a Visiting Student
Research Collaborator with the School of Engi-
neering and Applied Science, Princeton Univer-
sity, NJ, USA, during summer 2011. He is currently a Research Scientist
with the SUTD-MIT International Design Center, Singapore University of
Technology and Design, Singapore. His research interest includes signal
processing for distributed networks, game theory, and energy management
for smart grids. He was a recipient of two best paper awards, both as the first
author, in the Australian Communications Theory Workshop in 2012 and the
IEEE International Conference on Communications in 2013.
2625