Capacity subscription: solving the peak demand challenge in electricity markets

In competitive power systems, investment in generation capacity is left to market participants. As a consequence, due to the special characteristics of electricity, power systems may become unacceptably unreliable during peak demand. One way to solve this problem is self-rationing, a variant of priority service, adapted to a competitive environment. With this concept, consumers subscribe to their anticipated demand for capacity during system peak conditions. When these conditions occur, the individual consumer's demand is limited to subscribed capacity. This paper proposes capacity subscription, self-rationing in a competitive market, as a solution to the challenge of matching generation to peak demand. It is shown that this can be economically efficient. Some illustrations are given, and a framework for market implementation is outlined. Capacity subscription enables consumers to pay for their individual preferences for uninterrupted supply, thus making the generation adequacy aspect of reliability a private instead of a public good.