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.