Competitive electricity markets with consumer subscription service in a smart grid

Abstract

This paper presents a theory of consumer subscription service, unifying priority service and dynamic pricing within a two-settlement system in ways that foster efficient risk management and competitive electricity markets. Consumer subscription service entails transactions in two time periods: a forward transaction that allows consumers to select service options to hedge financial risks and a spot transaction that allows consumers to secure electricity on demand. The difference between the forward subscription and the actual consumption is settled at spot prices determined in a competitive wholesale electricity market. Priority service offers consumers choices from a menu of reliability-differentiated service options with compensatory insurance for curtailments. Following the principles of revelation and competitive consistency, the priority service menu provides consumers opportunities to choose options that are consistent with their individual preferences and demand characteristics. Combining priority service and dynamic pricing, consumer subscription service is Pareto superior to an undifferentiated service design. Overall, consumer subscription service provides consumers incentives and tools for efficient demand management fostering price-responsive demand in competitive electricity markets. It facilitates an essential linkage between competitive wholesale and retail markets in ways that would enable consumers to be engaged in the process of the industry’s transition toward a smart grid future.