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

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.