Why Care About Transactive Energy?

What is transactive energy, and why should you care?

Transactive energy is what you get when energy prices are transparent to all interested parties. It's when customers of all sizes join traditional utility providers in producing, buying, and selling electricity, using automated controls to provide a more cost-efficient electricity exchange system.

Transactive energy comes from technological change. No electric market structure is immune. Whether traditionally regulated and integrated, or even whether un- or re-regulated, all electric marketplaces are equally susceptible. Each faces technological changes in the electric generation and communications sectors - changes that provide increased opportunities for customers to manage their energy consumption (and hence acquisition) behaviors. And while these customer options may potentially decrease the electric system's reliability, the resiliency of the grid may increase. Utilities will have opportunities previously unavailable to monetize existing and evolving services.

If you are a utility executive or state regulator, these changes in customer opportunities could mean revenue reductions and/or cost shifting between customers. If you are a utility customer - especially if you own an electric vehicle or generation sited on your premises - then you could monetize your energy production and use.

While dependent on such factors as utility rates and customer capitalization capabilities, opportunities continue to expand for utility customers to engage in cost-effective self-generation, as roof-top solar and other technologies become less expensive, more efficient, and politically more acceptable to individuals, shareholders, customers, and governments (including home-owner associations). At the same time, real-time interactive monitoring of electric use and self-generation provide opportunities for customers to engage in transactions between each other and with traditional utilities. These transactions include generating energy for others, as well as giving support to conservation demands from the host utility. As small generation technologies become less expensive, lighter, and less visually intrusive, more and more electric customers will choose to make the necessary investments. And that includes residential, commercial, and industrial customers.

Major retailers have incentives as well to reduce their long-term energy bills by self-generating, whether driven by cost or even simple customer desires. Federal agencies, especially the military, are under Presidential and Congressional directives to become more energy independent and "greener." Because of the competing demands of stakeholders pressing commercial and government customers to reduce their long-term energy costs, become more environmentally responsible, and assume greater control of their energy production and consumption, utilities that do not engage their customers for mutual benefits will ultimately suffer decreased revenues and amid increased customer departures.

Residential customers increasingly are seizing opportunities to become better environmental stewards by self-generating - small wind turbines in the rural areas, rooftop solar in urban. This trend marks the logical step forward from the historic construction of berm houses to reduce one's energy consumption, and is not wholly dependent on the cost-effectiveness of such generation.

Large commercial and industrial customers are investing in technologies to meet utility energy conservation and load-shedding requirements by self-generating and sharing their demand-side management benefits with each other. In other words, they are engaging in transactive energy systems. Important discussions nationally are occurring regarding time-of-day pricing and system maintenance fees for providers of last resort or similar services.

Utilities and regulators should develop operational and economic plans to capitalize on these transactive energy system technological capabilities and customer preferences. And they must do so before we reach the tipping point within each utility, whereby only those customers unable or unwilling to engage in self-generation, active load management, and customer-to-customer transactions remain to support the electric grid.

These scenarios - even within the next 10 years - are not unlikely.

The telecommunications industry historically relied on copper wire land lines to provide world class communications. But over the past 10 years, wireless communication devices, fiber optics, and other technologies have devastated the landline business with an increasing number of customers going entirely wireless or using the Internet as the communications vehicle. Large telecommunications providers (e.g., AT&T) have sought and received legislative and regulatory approvals to transition their customers to other communications technologies and to potentially abandon the costly to maintain land lines within a shrinking customer base. They have developed other revenue options, including providing wireless services, and have partnered with technology companies to market their products (e.g., the latest I-phone) and with developers and providers of applications that use those devices. In other words, they have changed their business plans to reflect technological innovations and customer expectations.

Similar dislocations can be seen today in the taxi cab industry, as Uber and Lyft rely on mobile communications devices, rapid responses to customer contacts, and a mutual evaluation of the experience to take market share from the cab companies relying on a to-down, centralized dispatch. The San Francisco Municipal Transportation Agency reported that taxi trips in that city declined 65 percent in 15 months. This results in reduced municipal revenues as taxi medallions or licenses become less valuable. For those municipalities that rely on electric utility real property taxes or utility revenues for tax revenue purposes, the shift from utility to customer generation and especially customer use of apps to reduce energy production through conservation may foretell reductions in municipal tax collections.

What is similar in the telephone, taxi, and electricity market place restructurings is the ability of customers to use affordable new technologies that can be personalized to their needs and desires.

Electric utilities and their regulators are at a redefining of the relationship between energy provider and customer. Today, customers have affordable self-generation technologies, energy management technologies, and the communication technologies necessary to maximize the value to them, not the utility, of energy produced or not consumed. Regulators must be aware that as customers wholly or partially leave the full requirements status, utility revenues will decline and fewer customers will remain to maintain the traditional electric grid.

What You Should Do

What are your logical next steps?

First, if you are a regulator, encourage electric utilities to establish new partnerships with their large customers.

For example, some national guard armories make ideal partners for solar generation, as many armories record their peak electric use on weekends, while the utility can use the Monday-Friday electric generation for system benefits. Large grocery stores generally have back-up generators to ensure their frozen foods remain frozen in the event of a utility power failure. Such stores can partner with the utility to add additional back-up generation that can serve as an "anchor" of a microgrid. Many data centers maintain electric storage devices to provide instantaneous power in the event of the utility's failure. A portion of such storage capacity could be used by the utility for frequency regulation.

Second - and again I'm talking to regulators - encourage utilities to establish new relationships with their residential customers.

Historically utilities have offered special rates to religious institutions and customers that permit the utility to cycle on/off their HVAC system. With "smarter" appliances and the "smart" phones and applications to manage those appliances from a distance, utilities and their customers or third parties can manage electricity demand in mutually and financially beneficial ways. As plug-in vehicles proliferate, time and location of recharging can have implications for the utility and customer. Preferential rates for night time recharging at home or charging at the place of employment (presumably with more robust distribution system attributes) will need to be evaluated for both the utility's and customer's benefit, as well as for fairness to other customers.

It will take foresight to integrate the increasing number of smart appliances, and other technological innovations into the transactive energy system, to produce reasonable, responsible, and affordable electric rates and payment schedules. Each of these and countless other options can be monetized for the benefit of the electric utility, the partnering customers, and the grid at-large. However, it will take innovative regulatory policies to do it.

Third, please take special note: Even as smart technologies increasingly permit customers to work together to shift generation load and demand between themselves - and this could occur independently of the electric utility with its responsibility to manage voltage and line capacity - there may be other customers who suffer adverse consequences.

Customers may be notified that they must reduce their electric load during peak hours can negotiate for additional generated electricity from a "neighbor" or have the "neighbor" reduce their electric load sufficiently for both customers. Such transactions can be made independent of the electric utility and regulator, but also represent an opportunity for the utility to act as a broker to identify customers who could benefit each other and the grid at-large by engaging in energy transactions. This is a new world in which governors, legislators, and regulators will have to change their mindsets and policies. Just as applications like Napster changed the music industry, applications that permit customers to transact energy business outside the utility and regulatory framework will change the electric industry. Utility executives and state regulators should be talking about the implications that customer controlled generation and load management will have on other customers, the utility, and the regulatory model.

Forewarned is Forearmed

The electric grid and traditional utility will not be replaced by customers engaging in transactive energy transactions, but there will be winners and losers. Winners will be those companies and regulators who recognize that technological changes can be monetized. Losers will be those who cling to traditional behavior and billing practices past a tipping point.

But take warning: Transactive energy is a slowly building economic force. Just as a tidal wave begins with a small, but growing wave surge far from the shore, customer opportunities will only increase. Rather than wait for the economic impact of large numbers of customers to abandon the traditional electric energy marketplace, as happened in the telecommunications industry, regulators, legislators, consumer advocates, and utility executives should not wait to develop the most appropriate regulatory models for their particular situation.

To this end, the Transactive Energy model developed by the GridWise Architecture Council (GWAC) can form the basis for discussions between utility executives and regulators. The GWAC model establishes an intellectual framework through which utilities', regulators', and customers' technological and behavior opportunities may be evaluated, modeled, and accommodated.

In any case, however, any such new regulatory model should recognize that customers will drive change.

Armed with price information, plus smart control and automation technologies, and able to self-generate or purchase electricity or conservation from the utility or third parties, it will be customers themselves that will change the marketplace and roles for utilities and regulators alike. And customers also will exert both positive and negative impacts on system reliability, affordability, and efficiency.

The speed of transition can be impacted by regulatory and utility resistance, but the direction and ultimate results will be determined by technology and customer investments. Utilities, regulators, and customers should engage the appropriate models that monetize the value to energy producers and consumers of both the energy and the management capabilities offered by smart devices and apps.