Modeling Coincident Peak Pricing in Electricity Markets: Challenges and Peak Shaving Effectiveness

TL;DR

This paper presents a game-theoretic framework to analyze and improve the effectiveness of Coincident Peak pricing in electricity markets, emphasizing the roles of information signals, flexibility, and control resolution.

Contribution

It introduces a coupled nonlinear model with decision dynamics to evaluate peak shaving strategies, providing practical guidance for system operators and consumers.

Findings

Fictitious-play dynamics reliably reduce system peaks.

Best-response dynamics can increase peaks under tight capacity.

Finer action resolution and increased flexibility improve peak shaving.

Abstract

Coincident Peak (CP) pricing is widely used in U.S. electricity markets to allocate capacity and transmission costs. This paper develops a behavioral game-theoretic framework for CP-driven load shifting that couples a nonlinear cost-allocation model with day-ahead (one-shot) and real-time (sequential-learning) decision processes. We examine two update rules, namely best-response dynamics (BRD) and fictitious-play dynamics (FPD), across continuous and finite action spaces to quantify how flexibility, action resolution, and participation influence peak outcomes. Using ERCOT peak-day data, we find that FPD reliably reduces system peaks, whereas BRD is more variable and can increase peaks under tight-capacity conditions. Finer action resolution improves peak shaving, while the number of participants is largely neutral when aggregate flexibility is fixed. Meanwhile, information-provider signals can induce herding, whereas response-aware or diverse signals improve peak shaving. These results highlight both the potential and limits of CP pricing: smoothing information and enabling granular control are as important as the amount of available flexibility. The framework offers practical guidance for system operators and consumers: For ISOs, broadcasting smoothed CP signals and setting minimum controllable-capacity thresholds enhance coordination. For consumers, greater flexibility and finer control resolution improve both cost savings and peak-shaving performance.