Playing with Peaks: A Game-Theoretic Comparison of Electricity Pricing Mechanisms

TL;DR

This paper compares two electricity pricing mechanisms, peak pricing and coincident peak pricing, using game theory to analyze their effects on peak demand under different information scenarios, revealing trade-offs between coordination and miscoordination risks.

Contribution

It provides a game-theoretic analysis of peak and coincident peak pricing mechanisms, highlighting conditions where each performs better in controlling peak demand.

Findings

Under perfect information, CP never exceeds AP in peak demand.

With imperfect information, CP can cause larger peaks than AP due to miscoordination.

Progressive demand cost structures may reduce risks while maintaining benefits.

Abstract

As electricity consumption grows, reducing peak demand--the maximum load on the grid--has become critical for preventing infrastructure strain and blackouts. Pricing mechanisms that incentivize consumers with flexible loads to shift consumption away from high-demand periods have emerged as effective tools, yet different mechanisms are used in practice with unclear relative performance. This work compares two widely implemented approaches: anytime peak pricing (AP), where consumers pay for their individual maximum consumption, and coincident peak pricing (CP), where consumers pay for their consumption during the system-wide peak period. To compare these mechanisms, we model the electricity market as a strategic game and characterize the peak demand in equilibrium under both AP and CP. Our main result demonstrates that with perfect information, equilibrium peak demand under CP never exceeds that under AP; on the other hand, with imperfect information, the coordination introduced by CP can backfire and induce larger equilibrium peaks than AP. These findings demonstrate that potential gains from coupling users' costs (as done in CP) must be weighed against these miscoordination risks. We conclude with preliminary results indicating that progressive demand cost structures--rather than per-unit charges--may mitigate these risks while preserving coordination benefits, achieving desirable performance in both deterministic and stochastic settings.