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TransactiveEnergyModelsSeptember2016

PreparedbyNISTTransactiveEnergyChallenge:BusinessandRegulatoryModelsWorkingGroup

PrincipalAuthorsEdCazaletPaulDeMartiniJeffreyPriceEricWoychikJohnCaldwell

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1.Background..............................................................................................................................................3

1) Introduction................................................................................................................................3

2) TransactiveEnergyDefined.........................................................................................................3

3) DistributedEnergyResources.....................................................................................................4

4) DriversofTransactiveEnergy......................................................................................................9

2.TransactiveEnergyMarketStructures..................................................................................................12

1) Introduction..............................................................................................................................12

2) AFoundationforComparisonofTEMarketStructures............................................................14

3) TwoAlternativeMarketRetailStructures.................................................................................16

4) ComparisonsoftheTwoAlternativeMarketRetailStructures................................................29

3.BusinessModelsforTransactiveEnergy...............................................................................................32

1) CurrentElectricityBusinessModels..........................................................................................32

2) BusinessModelsforFutureMarkets.........................................................................................36

3) HowBusinessModelsWillChange............................................................................................39

4.TransactiveEnergyModelsOverseas...................................................................................................40

1) Denmark....................................................................................................................................40

2) Canada.......................................................................................................................................42

3) Japan.........................................................................................................................................42

4) Germany....................................................................................................................................43

5) Australia....................................................................................................................................43

5.ConclusionsandNextSteps..................................................................................................................44

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Chapter1:Background1

1. IntroductionAlargenumberoforganizations–bothpublicandprivate–arenowengagedinrethinkingthedesignoftheAmericanelectricitygrid.Scoresofwhitepapershavebeenwrittenonthesubject,andanumberofstatelegislativeandregulatorybodiesareactivelypromotinganewparadigmforelectricityservice.Whiletherearedifferencesinthedetails,ageneralmodelisemergingwhichiscenteredontheconceptofa“transactive”electricitygrid,inwhichtraditionalcustomerswillbemoreactivelyengagedinbothconsumingandproducingelectricity,andnewentitieswilladoptrolesofvaryingimportanceinprovidingormanagingservicesontheelectricalgrid.Thefutureroleoftheelectricutilityisgenerallyseenasshiftingfromaproviderofelectricitytoaproviderofelectricitydeliveryservicesandafacilitatoroftransactionsandoperationsonthegrid.

Thispaperwillexaminethisevolvingvision,beginningwithageneraloverviewandappraisalofitsunderlyingdrivers,andthenmovingontoadescriptionoftwoalternativetransactivemodelsthatareemergingascandidatesforputtingthevisionintooperationalpractice.Becauseanycomplexsysteminvolvingbuyersandsellersrequiressuitableincentivestoensurethatthosebusinessentitiesrequiredtomakethesystemworkhaveanincentivetodoso,thepaperwillalsodiscussvariousbusinessmodelsthatmightservethisend.

Thepaperwillalsobrieflydiscusssimilarinitiativestakingplaceinothercountries,andconcludewithanassessmentofthetransactiveelectricityconcept,alongwithsomecautionaryremarksabouthowatransitiontothissystemshouldoccur.

ThisisPartIofalargerworkdiscussingallaspectsofthetransactiveenergyphenomenon.PartIIwillfocusonlegislativeandregulatorymodelsthatcouldsupporttheevolutionandimplementationofatransactiveenergysystem.

2. TransactiveEnergyDefinedWhatis“transactiveenergy”?TheGridWise®ArchitectureCouncildefinesitas:

Asystemofeconomicandcontrolmechanismsthatallowsthedynamicbalanceofsupplyanddemandacrosstheentireelectricalinfrastructureusingvalueasakeyoperationalparameter.

1Thepurposeofthispaperistodescribeimportanttrendsandphenomenaimpactingtheelectricityindustry.Itisnotintendedasanadvocacypiece,andanyviewsoropinionsexpresseddonotnecessarilyrepresentthoseoftheorganizationswithwhichtheseauthorsareaffiliated,ortheorganizations’members.

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TheTransactiveEnergyAssociationdefinesitthisway:

TransactiveEnergyengagescustomersandsuppliersasparticipantsindecentralizedmarketsforenergytransactionsthatstrivetowardsthethreegoalsofeconomicefficiency,reliability,andenvironmentalenhancement.

Whatiscommontobothofthesedefinitionsistheideathatenergywillbeefficientlydistributedfromsupplierstoconsumersthroughsomeformofvaluationmechanism.Theseconddefinitionmoreexplicitlyidentifiesmarketsasthemeansbywhichthisvaluationwilloccur,andalsoexplicitlynotestheimplicationthatthiswillentailadecentralizedsystem,characterizedbymultiplebuyersandsellers.Thereisanimplication,too,intheseconddefinitionthatthereasonforadoptingatransactiveenergysystemisnotsolelyornecessarilybecausethiswillproduceamoreeffective,efficientmannerofprovidingreliableelectricityservice,butalsobecauseitwillservethequitedistinctgoalof“environmentalenhancement”.Andthereisanimplicationinbothdefinitionsthatthereisacontrastbetweenthissystemandtheonespresentlyinplacefordeliveringenergy–specificallyelectricity–whicharecharacterizedbyregulatedutilitiesthatplayacentralroleinmanagingserviceanddelivery.Thequestionthatfollowsiswhyalternativestothepresentsystem,suchastransactiveenergy,arebeingconsideredandinfactactivelyexplored.Theanswerliesinanexaminationofwhatfactorsarecreatingtheperceivedneedtoengageinthisexploration,andprincipalamongtheseisthepresenceofdistributedenergyresources.

3. DistributedEnergyResourcesAnydiscussionoftransactiveenergymustbeginwithdistributedenergyresources:thesourcesofelectricitysupplyorrelatedservices,suchasstorage,thatcanbeownedandoperatedbythirdparties,includingentitieswhoarereceivingelectricityservicefromtheirlocalutility.Withoutthese,therewouldbenothingtoengageintransactionswith,asidefromadjustingone’sownelectricitydemandinresponsetotime-varyingpricessetbytheutility.Anditisonlytheirgrowingpresenceonthegridthatwillmakeitnecessarytoconsideradeparturefromthetraditionalmethodofmanagingelectricityserviceatthedistributionlevel.Presently,theoverallsaturationlevelofdistributedenergyresourcesisstillrelativelylow,exceeding1%oftotalgenerationcapacityinonlyaboutone-fourthofallstates.(HawaiiisthestatewiththehighestcurrentlevelofDERpenetration,atjustover12%oftotalcapacity.)Buttheirpresenceisgrowingandisdoingsoatanincreasingrate:AccordingtotheEnergyInformationAdministration,distributedsolarPVaccountedfor11%oftotalnewelectricitygenerationcapacityaddedin2015;upfrom8%oftotalcapacityadditionstheyearbefore.Thereareanumberofdriversresponsibleforthisphenomenon.

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Onefactorthathascontributedtotheinterestindistributedenergyresourcesisagrowingconcernaboutreliability.AccordingtoareportpublishedbyInsideEnergy2,from2000to2014,the5-yearannualaverageelectricityoutageratedoubledeveryfiveyears,andduringthattimeperiod,therewere19weather-relatedoutages(eightduetohurricanes)thataffectedmorethanone-millioncustomers.Thereportattributesthissignificantgrowthtoaginginfrastructure,increasedpopulationdensity,andanincreaseinextremeweatherevents.Similarly,astudydonebyLawrenceBerkeleyNationalLaboratory3foundanaverageannualincreaseof10%inthedurationofelectricityoutagesfrom2000to2012,andalsothateventsrelatedtosevereweatherwasaprincipaldriverforthistrend.In2012,forexample,HurricaneSandyleftmorethanonemillioncustomerswithoutpowerforoveraweek.Whiledistributedenergyresourcessuchasrooftopsolarpanelscannotinandofthemselvesprovideprotectionagainstextendedpowerdisruptions,theseresourcesarecommonlyincludedinmicrogrids,whichhavebecomeincreasinglypopularasameansofensuringresiliencyofelectricitysupply.Microgridswereoriginallyembracedmainlybymilitaryinstallationsforthispurpose,butinrecentyearshavebecomeincreasingpopularwithcommercialandindustrialcustomers,campusfacilitiessuchasuniversitiesandhospitals,andevenresidentialcommunities.Theirgrowthinrecentyearshasbeenphenomenal:AccordingtoaquarterlyreportbyNavigantwhichtracksmicrogridprojects,thetotalgeneratingcapacityforallmicrogridsintheU.S.thatwereeitherinoperationorunderdevelopmentinthefourthquarterof2012wasjustover2,000MW,butasofthesecondquarterof2016,totalcapacityhasnearlytripledtoabout5,800MW.

Anotherfactorcontributingtotheriseofdistributedenergyresourcesistheexistenceofpoliciesatthestateandfederallevelthatpromotethedevelopmentofcleanenergy.Twenty-ninestatesandthe

2JordanWirfs-Brock,“PowerOutagesontheRiseAcrosstheU.S.”,August18,2014,InsideEnergy,http://insideenergy.org/2014/08/18/power-outages-on-the-rise-across-the-u-s/3Larson,LaCommare,Eto,andSweeney,“AssessingChangesintheReliabilityoftheU.S.ElectricPowerSystem”,August2015,LawrenceBerkeleyNationalLaboratory

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DistrictofColumbiacurrentlyhaverenewableportfoliostandardsinplacethatsetpercentagetargetsandtimelinesfornon-carbon-emittingelectricitysources.Thesetargetsgenerallyrangefrom10%to30%andspecifytimeframesof5to10years,butotherssetmoreambitiousgoalsand/orlongertimeframes.California,forexample,istargeting50%ofelectricityproductionfromrenewableresourcesby2030,andHawaiihasseta100%renewablesgoalfor2045.Twenty-twostatesandtheDistrictofColumbiaactuallyhaveRPSpolicieswithexplicitsolarand/ordistributedgenerationprovisions.SomeregionsintheUnitedStatesareconsidering,orhavealreadyadopted,“cap-and-trade”programswhichlimitcarbonemissionsthroughtheuseofcarbonallowancesthatcanbeboughtandsoldbetweenelectricityprovidersWhiletheseemissionstradingsystemsaretargetedtolarge-scalecarbon-emitters,theimplicitvalueonCO2emissionsreductionsthatresultfromtheiroperationcouldpotentiallybemonetizedinawaythatprovidesbenefitstosmaller-scaleprovidersofcleanelectricity.Similarly,whenandiftheEPA’sCleanPowerPlanisimplemented,atangiblevaluetoCO2emissionsreductionswillresultwhichcouldpotentiallybecapturedbyprovidersofcleandistributedenergyresources,ifthemethodofcompensationfortheseresourcestakesintoaccountthebenefitofthesereducedemissions.

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Another,extremelysignificant,spurtothegrowthofdistributedenergyresourceshasbeenthepolicyofnetenergymetering.Netenergymeteringreferstothepracticeofcompensatingcustomerswithsolarpanelsbysimplyallowingthecustomer’smeterto“spinbackwards”whenmorepowerisproducedthanconsumed.Thispractice,onceembracedbyutilitiesasasimplesolutionforaddressingthecomplexquestionofhowtocompensatecustomerswhoproduceexcesselectricityattimes,becameproblematicasthenumberofthesecustomersgrew.Theproblemwiththepracticeisthatcustomersarecompensatedataper-kilowatt-hourratethatincludeswithinitfixedcostsfortransmission,distribution,andcustomerservicethattheutilityneedstorecover.Technically,suchfixedcostswouldbestberecoveredthroughaflatmonthlycustomercharge,orademandcharge,butbecauseofpublicandregulatoryantipathytotheideaofsettingahighfixedchargeforcustomersregardlessoftheamountofelectricitytheyactuallyconsumed,mostofthesefixedcostshavetraditionallybeen“rolledinto”theper-kilowatt-hourenergycharge.Consequently,customerswithsolarpanelsarebeingpaidfortheenergythattheyareprovidingataratethatisabovewhattheactualavoidedenergycostisforutilities,andarethereforebeingsubsidizedattheexpenseofothercustomers.(Bypayingdistributedenergyprovidersanamountthatincludescoststhattheutilitywasactuallysupposedtocollectfromtheseproviders,theutilityiscompelledtorecoverthesecostsbyothermeans,whichentailsraisingthepriceofelectricitytoallcustomers.Consequently,customerswithoutsolarfacilitiesarepayingextratocoverthebenefitthatsolarenergyprovidersreceivedwhichexceededitsactualvaluetotheutility.)Inspiteofthesubsidyissue,moststatescontinuetocondoneandevenembracenetmeteringasapolicythatpromotesthedevelopmentofdistributedenergyresources.Presently,forty-onestatesandtheDistrictofColumbiahavenetmeteringpolicies,althoughmanyarebeginningtocountenancetheideaofallowingtheutilitytorecovermoreofitsfixedcoststhroughhighermonthlycustomerordemandcharges,and/orallowingtheutilitytocompensatedistributedsolarprovidersattheavoidedcostofelectricityonly.Themajorityofstateswithnetenergymeteringpolicies,however,stillallowdistributedsolarproviderstoreceivethefullper-kilowatt-hourrateforenergyprovided,atleastuptoacertain

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annuallimit,andinthesecasesaverypotentsubsidyfortheexpansionofdistributedresourcescontinuestoexist.

Thereareothergovernmentandregulatorypolicies,asidefromnetmeteringandthosedirectlymandatingincreasesinrenewableenergy,whichareindirectlysupportingthegrowthofdistributedenergyresources.Atthenationallevel,theDepartmentofEnergy,withitsQuadrennialEnergyReview,GridModernizationWorkingGroup,partnershipwithGridWiseAlliance,andfundingofresearchinvolvinganumberofgridmodernizationprojects,istakingaleadingroleinpromotingthevisionofadecentralized,modernizedelectricitygrid.ProgramssuchasNewYork’sReformingtheEnergyVision(REV),Minnesota’se21initiative,Massachusetts’GridModernizationWorkingGroup,NewJersey’sGridResiliencyTaskForce,andHawaii’sPowerSupplyImprovementPlanallsupportchangesthatareatleastconducivetoagreaterrelianceupondistributedenergyresources.Thesewillbediscussedatgreaterlengthinthesequeltothisreport,whichwillfocusonlegislativeandregulatorydriversoftransactiveenergy,andthealternativeregulatorymodelsthatcouldsupportthem.

Decliningcostshavealsocontributedtotheincreasingpopularityofdistributedsolarfacilities.AccordingtoarecentreportbyLawrenceBerkeleyNationalLaboratory4(seegraphbelow),themedianinstalledpriceofbothresidentialandnon-residentialsolarphotovoltaicfacilitieshavefallensignificantlyduringtheseventeen-yearperiodfrom1998to2015.ThemedianinstalledpriceforresidentialPV,whichwasabout$12/WDCin1998,hadfallento$4/WDCin2015,whichisanaverageannualrateofdeclineofabout6.6%peryear.However,astheauthorsnoteinthereport,therateofpricedeclinewassteeperafter2009,andtheyattributethisinitiallytoadropinglobalPVmodulepriceswhichwasthensustainedbydeclinesinotherhardwarecostsand“soft”costs.(“Soft”costsincludesuchthingsasmarketing,instillation,permitting,andothersuchexpensesassociatedmainlywiththedeliveryandinstallationchannel.)Ifsolarpricescontinuetofallatthisrate,theninjustafewyears,theper-kilowatt-hourdeliveredpriceofdistributedsolarenergywillattainparity–evenwithoutnetmeteringsubsidiesandtaxbreaks–withmoreconventional,lessexpensiveelectricgenerationsources.

4BarboseandDargouth,“TrackingtheSunIX:TheInstalledPriceofResidentialandNon-ResidentialPhoto-VoltaicSystemsintheUnitedStates”,August2016,LawrenceBerkeleyNationalLaboratory

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4. DriversofTransactiveEnergyThegrowingpresenceofdistributedenergyresourcesisprobablythesinglemostimportantdriveroftransactiveenergy.Asnotedabove,whiletheirpresentlevelofsaturationislow,thislevelisgrowinginbothabsolutequantityandrelativeshareoftotalgeneration.Anditisalmostcertainlynocoincidencethatinthosestateswhererenewablegenerationcapacitypenetrationhasexceeded1%-theDistrictofColumbia,Hawaii,California,Vermont,NewJersey,Massachusetts,Maryland,Arizona,Connecticut,Colorado,Delaware,Nevada,andNewYork–therehasbeenamarkedinterestamonglegislatorsand/orregulatorsinexploringinnovationsintheworkingsoftheelectricalgrid,includinggridmodernization,decentralization,andmarketmodelsatthedistributionlevel.Thereare,however,otherfactorsthatarealsoactingascatalystsforchange,andthesearedescribedbelow.

Theevolutiontoatransactiveelectricitysystemisoftendiscussedunderthemoregeneralheadingof“gridmodernization”,sinceitisassumedthatafundamentalelementofgridtransformationwillbethetransitiontoamoredecentralizedelectricitysystem,withmoreelectricitycomingfromdistributedenergyresources,andmanycustomerstakingamoreactiveroleinmanagingtheirelectricityservice,asbothconsumersandproducersofelectricity.TheGridWiseAlliancehasbeentracking,bystate,whatithasdeterminedtobethemostimportantdriversofgridmodernization,andreportingontheseregularly,withthemostrecentupdatepublishedinJanuary2016.5Thethreegeneralcategoriesofdriversthathavebeenidentified,indecliningorderofimportance,are1)gridoperations,whichincludessuchthingsastheextentofAMR/AMIdeployment,microgrids,andthepresenceofadvancedcommunicationsandcontroltechnologies,2)customerengagement,asreflectedindynamicpricingtariffsandotheravenuesforactivecustomerinteraction,and3)statesupport,asevidencedbyincentivesormandatesthatsupportgridmodernizationactivities.Accordingtothemostrecentreport,gridmodernizationactivities,baseduponthesethreecategoriesofdrivers,aremostprevalent(indescendingorder)in:California,Illinois,Texas,Maryland,Delaware,theDistrictofColumbia,Oregon,Arizona,Pennsylvania,andGeorgia.However,thereportspecificallyhighlightsCalifornia,Massachusetts,andNewYorkas“threestatestowatch”:Californiabecauseofthemanyregulatorypoliciesthathavebeenpassedtopromote,amongotherthings,thevaluationandintegrationofdistributedenergyresources;Massachusetts,becauseofregulatoryordersrequiringutilitiestosubmit10-yeargridmodernizationplansandintroducetime-varyingrates;andNewYorkbecauseofits“ReformingtheEnergyVision”initiativewhichincludesplansforthedevelopmentofadistributionplatformthatwillsupportgreaterintegrationofdistributedenergyresources.

Stateswillplayacriticalroleinshepherdingthetransactiveenergyprocess,andmanyhavealreadybeguntodoso.Manyareofferinggrantsorprizes,forexample,tofundmicrogridprojects,suchasNewYork,California,andConnecticut.Others,suchasMinnesotaandMaryland,havesponsoredstudiestoexplorethefutureroleofmicrogrids.Andseveralhavetakentheleadinpromotingand/orexploringthegeneralconceptofgridmodernization,whichgenerallyentailsavisionofadecentralizedgridwithmanyautonomousentitiesbuyingandsellingelectricityandotherrelatedservices.Accordingtothe

5“3rdAnnualGridModernizationIndex”,January2016,GridWiseAlliance

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GridWiseAlliancereport,citedabove,thestateswhicharepresentlyattheforefrontofsupportingsuchactivitiesareIllinois,California,Massachusetts,Oregon,Pennsylvania,Hawaii,NewYork,andTexas.Itisinterestingtoobservethatmanyofthestatestakingtheleadinfosteringgridmodernizationactivitieshavegonethroughregulatoryrestructuringthatinvolvedtheunbundlingofelectricityserviceintoseparategeneration,transmission,anddistributionentities,andthederegulationofgenerationtoallowforcompetition.Forthesestates,themovetowardtransactiveelectricitysystemsatthedistributionlevelmightmerelybeseenasthenextphaseinaprocessthatbeganwithrestructuringandcompetitionatthewholesalelevelmorethanadecadeago.

Anydiscussionofdriversmustincludeanimportantobservation:Thereisapronouncedlackofuniformityinvolvingtheextenttowhicheachofthesedriversareimpactingchange,andthislackofuniformityisevidentincustomers,utilities,andregulators.Whileitmightbetrue,forexample,thatthereisanewgenerationof“tech-savvy”consumerswhoexpectanddemandmorechoicesandactiveinvolvementinanyproductorservicethattheyacquire,includingelectricity,itisequallytruethatthereis,andwillcontinuetobe,abaseofcustomerswhoascribeparticularvaluetothefactthattheydon’thavetothinkmuchabouttheirelectricityserviceatall.Aslongasthelevelofreliabilityisacceptable,andthepriceisnotunreasonable,thislatterclassofcustomerswouldconsiderittobeanimpositionanddeclineinthequalityoftheirserviceiftheyweresuddenlyrequiredtoinvestmoreoftheirtimeinmanagingtheirelectricitysupply.Thiswillbeparticularlytrueofresidentialcustomers,butmayalsoapplytoasignificantshareofcommercialcustomers,andperhapsindustrialcustomersaswell.Whilesmartappliancesandotherfeaturesofinteractiveautomationmightservetoreducetheneedforcustomerstobecome“daytradersinelectricity”,therewillcontinuetobeacontingentforwhomactivesupplymanagementandevendemandresponsewillbeconsideredtobeanuisanceunworthyofanypotentialsavingsachieved.Anynewtransactiveplatformmustaccommodatetheentirespectrumofcustomersonthesystem:fromtheactive“prosumers”whobothsupplyandreceiveelectricity,tothetraditionalconsumerwhosimplywantstobeassuredthatthelightswillcomeonwhentheswitchesareflipped,andthatthebillforthisserviceisnottoohigh.

Amongutilities,andstateregulators,thewillingnesstoembarkuponnewbusinessandregulatoryparadigmsthatsupporttransactiveenergywillbedrivenbyconditionswithintheirrespectivejurisdictions.Suchconditionsincludetheexistingandprojectedlevelofdistributedenergyresourcepenetration,theparticularcleanenergygoalssetbythestate,thecurrentpricelevelofelectricity,thelevelofelectricityreliabilityanditsvulnerabilitytoextremeweatherevents,theeconomichealthoftheregion,andeventhepoliticalleaningsofstatelegislatorsand/orregulators.Theexistingregulatorystructurewithinastatewillalsobeimportant,includingwhetheritisarestructuredstateoronethatstillhasverticallyintegratedutilities,iflocationalmarginalpricingexistsatthewholesalelevel,andifretailcustomerchoiceexists.Here,too,therewillbeasignificantdiversityamongtheseconditionsacrossthecountry,andthiswillresultindifferentlevelsofcommitmenttoandeventualadoptionoftransactiveenergymodels.

Whiletheevolutiontoadecentralized,transactiveelectricitygridisstillverymuchintheembryonicphase–eveninthosestateswherethemodelisbeingaggressivelyexplored–therehasneverthelessbeensignificantworkdonebyanumberofindividualsandinstitutionsindevelopingframeworksforhowthesenewsystemsmightactuallywork.Theframeworksaddresssuchimportantissuesashow

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electricitysupplyandrelatedserviceswillbevalued,howtransactionswillbemanagedonthegrid,whatparticulartechnologieswillberequiredforenablingthesystem,andwhatentitieswillberesponsibleforperformingcertainessentialfunctionstosupportitsoperations.Thenextsectionwilldescribetwosuchframeworksthatshowparticularpromise,andwhicharebeingconsideredbystatesthatarecurrentlyattheforefrontofthegridmodernizationmovement.

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Chapter2:TEMarketStructures

1. IntroductionTransactiveEnergy(TE)representsthemethodstoenableallwholesaleandretailsellersandbuyersofenergyservicestotransactwitheachother.ThefocusofthischapterisonretailTEmarketstructuresonthedistributiongridthataredevelopingnowandmayevolveoverthenext15yearsormore.

Thispaperrecognizesthatthereareemergingopportunitiesfordistributedenergyresource(DER)providerstoofferarangeofenergyandgridservicesforwholesaleandretail.ThisincludesutilitypurchasesofdistributiongridservicesfromDERprovidersasalternativestotraditionalgridinvestmentsasiscurrentlydevelopinginCalifornia,Hawaii,MinnesotaandNewYork.Additionally,peer-to-peertransactionsareemergingasmulti-usermicrogridssellenergyservicestonearbycustomersacrossautilitydistributionsystemasbeingconsideredinBoston6andPittsburgh7,forexample.

TEwilldomorethanjustexpandthefocusofcurrenttransactionsfromtheelectrictransmissionsystemtothedistributionsystem;itwillenabletransformationofgridoperations.TE,atdistributionandretail,willbeshapedbymarketparticipants’andutilities’businessmodels,regulatorystructures,andtheirinteractions.

ThischapterprovidesacomparativediscussionoftwoproposedapproachestoimplementTEmarketsatretail.TEatretaildrawsonseveralmethodsemployedinwholesaleelectricmarketsandrelatedcontrolsusedtoachievesystemreliabilityandeconomicefficiency.However,theretaildistributionsystemisfundamentallydifferentthanthewholesaletransmissionsystemonseveralkeydimensions.Assuch,thischapterwillalsohighlightkeyconsiderationsabouthowbothnewelectricitymarkets8mayoperateattheretaillevelandhowtheywillneedtointeractwiththecontinuingoperationofwholesalepowerandtransmissionmarkets.

InseveralareasacrosstheU.S.thecurrentwholesalemarketiscomprisedofa)wholesaleTransmissionSystemOperator(TSO)9operatingspotmarketsforimbalancesandb)forwardbilateralenergymarketstoaddressthemajorityofparticipants’needstoreducecommercialuncertaintyregardingpriceandavailability.ThischapterdoesnotdirectlyaddressTEforaverticallyintegratedutility,itscustomersandthird-partydistributedenergyproviders.Themethodsdiscussedcouldbeadaptedbutwouldneedfurtherdiscussion.

6Bostonmulti-usermicrogrid:http://www.bostonredevelopmentauthority.org/getattachment/fa993b9a-d3ab-43a2-8981-94a7a49b8a337Pittsburghdevelopments:http://www.districtenergy.org/blog/2015/07/21/pittsburgh-embarks-on-district-energy-plan/8Theterm“markets”isusedbroadlytorepresentanytypeoftransactioninvolvingabuyerandaseller,thisspecificallyincludesutilitytariffofferingsandlong-termbi-lateralcontracts.9ATSOisalsoknownintheUnitedStatesasanISOorRTO.WewillusethetermTSOhere.TheexistingTSOsareCAISO,ERCOT,ISO-NE,MISO,NYISO,SPP,andPJM.

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ThischapterdrawsontheworkofDOE’sGridwiseArchitectureCouncil,NationalInstituteofStandardsandTechnology(NIST),NewYorkREV’sseveralworkinggroups,andCalifornia’sseveralworkinggroupeffortsandtheSmartGirdInteroperabilityPanel(SGIP).

Discussionofdistributionlevelmarketshasbeendrivenbypublicpolicyregardingimprovingoverallsystemreliabilityandeconomicefficiencytocreatenetbenefitsforcustomers.RetailanddistributionmarketsarelargelyunderthejurisdictionofstateregulatorsasexemplifiedbythestatelawsandregulationinCalifornia,HawaiiandNewYork.10Generally,thesethreestatesareseekingtocapturethelocationalnetbenefitsofdistributedresourceslocatedonthedistributionsystemandoncustomers’premises.Thesebenefitsinclude“reductionsorincreasesinlocalgenerationcapacityneeds,avoidedorincreasedinvestmentsin[transmissionand]distributioninfrastructure,safetybenefits,reliabilitybenefits,[environmental]andanyothersavingsthedistributedresourcesprovidestotheelectricgridorcoststoratepayersoftheelectricalcorporation.”11

Theresultingmarketdesignswillneedtoconsiderarangeofpotentialstructuralelementstorealizethenetbenefitsdesired.Thisincludesintegratingexistingandnewvariouspricingschemes(rates,tariffsandmarketbasedprices),demandsidemanagementprogramdesign,andcompetitivemarketprocurementsforthedeploymentofcost-effectivedistributedresourcesthatsatisfypolicy,marketparticipantandutilityobjectives.Also,somedistributionlevelmarketsmayevolvetoincludeanorganizedmarketforbi-lateralenergytransactionsacrossdistributionascontemplatedbysomemulti-usermicrogridsandbyDERprovidersandretailenergyserviceproviders.Ultimately,thismayalsoincludeamarketstructureforimbalanceenergyatdistributionlevel.

AnydiscussionofTEmarketstructuresshouldalsoconsiderthelevelofmarketmaturityandliquidityinaninitialdesignandfutureevolution.Toooften,marketstructurediscussionsignoretoday’srealitythatthevastmajorityofdistributedenergyresourcesarelocatedoncustomers’premisesandcompensatedbyexistingnetenergymeteringtariffs,otherretailratedesignsand/ordemandsidemanagementprograms.Thismeansthatmostdistributedenergyresourcescannotprovideenergytoanotherparty.Therearelimitedexceptions,buttheamountisverysmallinrelationtotheliquidityneededtocreateaviabledistributionlevelenergymarket.Theprimaryfocusofnear-termTEmarketdevelopmentisonestablishingviablestructuresforpricingandsourcingdistributiongridservicesasrequiredinCalifornia,HawaiiandNewYork,andcontemplatedintheDistrictofColumbiaandelsewhere.Also,certainretailtariffstructures,suchasnetenergymeteringwilllikelybereplacedoverthenextdecadebymarketorientedmechanismsincludingthosehighlightedinthispaper.Plus,marketstructuresthatenablecertainbi-lateralenergytransactionssuchasmulti-usermicrogridswillemerge.Further,thereisastronginterestinestablishingpricingandmarketstructuresthatcanintegratethefullvalueofdistributedresourcesacrossthepowersystem,notjustdistribution.

Finally,theviabilityofanymarketdesignisequallydependentonmeetingtheneedsofthebuyersandsellersofservices.Thismeans,forexample,supportingthebusinessmodelsofparticipantsincluding10CaliforniaAssemblyBill327,§769,2013;HawaiiHouseBill1943“GridModernization”,2014;NewYorkDepartmentofPublicService,ReformingtheEnergyVision,Case14-M-010111CaliforniaAssemblyBill327,§769,2013

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considerationssuchasbankabilityofprojectsandmanagementofotherriskssuchasfirmnessofservicedelivery.Assuch,transactiveenergymarketsareunlikelytobecomposedonasinglestructure.Instead,theywilllikelybecomprisedofseveralelementseachaddressingspecificpolicyandparticipantobjectives–muchlikethestructureofthewholesalemarketsacrosstheU.S.today.Theseobjectiveswillshapethescope,scaleandstructuresthatareemployedovertimeandwillprovidethelensbywhichtoconsiderthediscussionofconceptualmarketstructuresthatfollows.

2. AFoundationforComparisonofTEMarketStructuresToprovideamorecompletecontextforTransactiveenergyandthedevelopmentofmarketstructures,itisusefultofurtherdefineadditionalaspectstoconsider.

Oneaspectisconsiderationofthealignmenttothepolicyobjectivesofastateorjurisdiction.Eachstateshouldclearlydefinetheobjectivesforitsparticularneeds.Itisalsousefultodefinetheprincipalmethodsusedintransactiveenergy–“markets”and“controls”.Ageneraldefinitionofamarketis:

Anactualornominalplacewhereforcesofdemandandsupplyoperate,andwherebuyersandsellersinteract(directlyorthroughintermediaries)totradegoods,services,orcontractsorinstruments,formoneyorbarter.

Markets12includemechanismsormeansfor(1)determiningpriceofthetradeditem,(2)communicatingthepriceinformation,(3)facilitatingdealsandtransactions,and(4)effectingdistribution.Themarketforaparticularitemismadeupofexistingandpotentialcustomerswhoneeditandhavetheabilityandwillingnesstopayforit.

Electricitymarketsasgenericallyreferredtointhischapterincludewholesale/transmissiongridandretail/distributiongrid.Theseelectricitymarketsmayemployoneormoreofthreegeneralstructures:prices(e.g.,computedspotmarketprices,bid-basedauctions,bid-askbasedover-the-countermarketclearingprices,tariffswithtime-differentiatedpricesincludingdynamicprices);programs(e.g.,energyefficiencyanddemandresponse)and/orprocurements(i.e.,requestforproposals,bilateralcontractssuchasapowerpurchaseagreement).

Physicalcontrolasinagridcontrolsystemisdefinedas:

Theuseofdevicesormechanismstodirect,regulate,orstabilizethebehaviorofaphysicaldeviceorsystem.Implicitinthisdefinitionistheideathatabsentadeviceorsystemfailure,thethingbeingcontrolledwillalwaysrespond(withinphysicallimits)tothecontrolcommandorsignalandthatthecontrolmechanismdeterminesthebehaviortobecommanded.

Inelectricpowersystems,variousmarketmechanismsandcontrolsystemsareusedoverdifferenttimeperiodsfrommulti-yearresourceandcapitalinvestmentplanningthroughreal-timeoperations.Additionally,theintegrationofmarketsandcontrolsbecomesmoretightlycoupledovertime,particularlyinintra-dayoperations.Forexample,longertermplanningforresourceadequacyand12http://www.businessdictionary.com/definition/market.html

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transmissionalreadyincludeconsiderationofservicesthatdistributionconnectedresourcesmayprovideasanalternativetomoretraditionalresourcesandinvestment.Thisisalsoincreasinglyaconsiderationinretail/distributionmarkets.Tomeettheselong-termneedsforresources,generally,long-termcontractsareused.Theseforwardcontractsaregenerallysourcedthroughcompetitiveprocurementprocessesorbilateraltransactionsreflectingmarketbasedsolutions.Thisisalsotypicallythecaseforenergytransactionsbetweennon-utilityparties.Long-termcontractsandtariffsmaybeusedforvariousancillaryandgridservicesatwholesale.

Real-timewholesalemarkets(dayaheadandintra-day)haveevolvedoverthepast20yearstobetterintegrateandalignmarketpriceswithphysicalcontrolofthegridtoaddresschangesinpreviouslyscheduledservicedeliveries.Thesereal-timemarketsarealsocalledspotmarkets.Thisreal-timeoptimizationatwholesalemarketswithanISO/RTOdevelopslocationalmarginalprices(LMP)asaresultoftheoptimaldispatch.LMPreflectsthezonalorsystemlevelenergypriceplusthecalculatedbasisdifferentialwhichreflectsthereal-timetransmissionconstraints,aswellaslosses,betweenawholesaleenergymarketdeliverypointandthetransmission-distributionsubstationbasedLMPpricingpoint(“pnode”).AnLMPvaluereflectsanoptimalre-dispatchofwholesaleresourcestomitigateconstraintsaswellasreducelossesbasedonreal-timestateinformationofthephysicalgridpowerflows.Gridstateinformationisanengineeringbasedforecastofthesystempowerflows.Thisstateforecastisusedtodeterminingtheeconomicoptimizationofvariousresources,basedonpre-existingbidsfora5-15minintervals,toderiveanLMP.Thisspotpricemayalsobeusedtosettlelonger-termcontractsthatusevariablepricing.Insimpleterms,thewholesalemarketiscomprisedofbothlong-termforwardtransactionsandreal-timespotmarketslargelyusedforchangestothepreviouslycontractedlonger-termtransactionsand/orchangestothephysicalgridtoensurereliableandeconomicallyefficientoperation.

Thefollowingsectiondiscussestwoalternativedistributionmarketstructuresthatdrawuponbasicconceptsfromtheexistingwholesalemarketmechanismsabove.

16

3. TwoAlternativeRetailMarketStructuresThepatchworkevolutionoftheretailmarketonadistributiongrid,andthestilldevelopingwholesalemarketsfordistributedgeneration,hasresultedinaconfusinglylargenumberofvariationsinproposalsfordistributionlevelmarket-controlstructures.Twoalternativeapproaches;TeMixandDistributionMarginalPricing(DMP),illustratedinFigure1,areintroducedtofacilitateadiscussionontheirpotentialapplicability.

Figure1:Retail/DistributionTransactiveEnergyMarketStructures

ThesetwoalternativesrepresentthescopeofthecurrentdiscussionsunderwayintheUSandglobally.Itishopedthatthisframingenablesacogentdiscussionoftheconsiderationsforpolicymakersandstakeholders.

TeMix:Two-WaySubscriptionRetailTariffonanAutomatedBilateralTransactionPlatform13ProposedbyTeMixInc.,andhostedonabilateralTransactiveEnergyPlatform14,thisapproachfeaturestwo-wayforwardsubscriptionsandspottransactionsthatcoordinateretailgeneration,storage,andenduseinvestmentsandoperations.Thetransactionsservetheloadplacedonwholesalemarketsinresponsetowholesalelocationalforwardandspottenderpricesaswellaspoint-to-pointforwardandspotdistributionprices.TheDistributionoperator(DO)continuesastheregulatedutilityowner/operatorofthedistributionwiresandpolesfacilitieswhileofferingdistributionserviceunderatwo-waytransactivedistributiontariff.Importantmarketparticipantsareretailenergypartiesthatincludeconsumers,prosumerswithdistributedgenerationandstorageandstandalonedistributedgenerationandstorage.Theseretailenergypartiesbuyandsellenergyatthewholesale/retailinterfaceinresponsetotwo-waytransactivetariffsforenergyattheretail/wholesaleinterfaceanddistributionservicesto/fromtheirfacilitiesandthatinterface.These

13Thisalternativeispartiallydescribedin“AModelInteroperableTransactiveRetailTariff”athttp://www.sgip.org/Publication-Retail-Tariff.14RetailTransactionPlatformsforCalifornia,EdwardCazalet,“APresentationtothePowerAssociationofNorthernCalifornia,April21,2015,http://www.temix.net/images/PANC_April_21_2015_Presentation_-_Cazalet.pdf

RetailMarketStructures

TeMix DistributionMarginalPricing

17

transactionsarehostedontransactionplatformsthatemploytheOASIS/SGIPTeMixProfilestandardprotocolsforAutomatedTE15.Aroadmapforimplementationofthisapproachhasbeenpublished.16

Figure2illustratesthestructureofaproposedTEstructurethatcanbecreatedwithminimalorganizationalandregulatorychange.

Figure2:StructureforTeMixTwo-WaySubscriptionRetailTariff&Platform

Inthismarketstructure,astandards-basedretailTEplatform17showninthemiddleofthefigureinterfaceswiththeexistingdistributionoperators(DOs)andLoadServingEntities(LSEs)atthebottomofthefigure.Thesepartiesfrequentlypostforwardandspottenderstobuyandsellforpoint-to-pointdistributiontransportandlocationalenergytoeachretailenergypartyasshownatthetopofthefigure.

TheLSEinterfaceswiththeexistingbalancingoperator(e.g.,aTSO)aswellasforwardsandfutureselectricityenergymarkets.Theretail/wholesaleenergymarketinterfaceisattransmission

15Cazalet,EdwardG.,“AutomatedTransactiveEnergy(TeMix)”,Grid-InteropForum2011,http://temix.com/images/GI11-Paper-Cazalet.pdf.16“ARoadmaptowardaSustainableBusinessandRegulatoryModel:TransactiveEnergy”.StephenM.Barrager,Ph.D.,andEdwardG.Cazalet,Ph.D.,April2016,http://www.temix.net/images/51_State_II_20160308_Submission_Narrative_copy_2.pdf.17http://www.temix.net/images/PANC_April_21_2015_Presentation_-_Cazalet.pdf

18

substationforthefeedersthatprovidetwo-waydeliverybetweenendcustomersandthetransmissionsubstation.Forwardandspottendersforenergyarefrequentlypostedattheretail/wholesalemarketinterfacebytheLSE.

Thistwo-waysubscriptiontariffprovidesasimpletransactiveinterfaceforendcustomersanddistributedresources.Theenergysubscriptionisbasedonforwardtendersfromtheexistingwholesalemarkets.Thetransporttariffistwo-wayanditrecoversmoreofthefixedcostofdistributionwhenthedistributionfeederandsubstationismorefullyloadedineitherdirection.Thisresultsinadynamicpriceforeachfeederandperhapsatdifferentlocationsonthefeeder.

AsillustratedinFigure3,asubscriptionprovidescustomerswithafixedamountofnetenergy(uselessgeneration)ineachhourofayearorseveralyearsatafixedmonthlypayment.Thepaymentscoverallfixedandvariablecosts.Typically,aseparatetariffisprovidedforenergyandtransport.Customersarepaidaspotpriceforanyunusedsubscribedenergyandpaythesamepriceforanyexcessenergyusedinrelationtothesubscribedamountineachhour.

Thesubscriptionissimplyasetofforwardtransactionsbetweenacustomerandoneormoreretailers.Similarly,thespotpaymentsarespottransactionsfortheimbalancebetweentheforwardtransactedamountandthemetereddelivery.Thetwo-waysubscriptiontariffisalsocalledatransactiveretailtariff.18Insummary,hereishowitworks:

18http://www.sgip.org/Publication-Retail-Tariff

19

Figure3:Two-WaySubscriptionRetailTariffs

Energyistransactedattheretail/wholesaleinterface.Thetransportprice(bothspotandforward)iscalculatedusingaformulathatrecoversmoreofthelargelyfixeddistributioncostsusingahigherpriceoftransportwhenthetransportismoreheavilyloadedineitherdirectionandlessofthecostsusingaverylowpricewhenthetransportislightlyloadedineitherdirection.Alternatively,anLSEcanprovidebundledenergyandtransportdeliveredtothecustomerfacility.

Thetwo-waysubscriptionretailtariffisespeciallyusefulwithaconventionaldistributionoperatorthatdoesnotdispatchgenerationordemandresponse.Withthetwo-waytariff,distributiontransportismoreexpensivewhenthelineisheavilyloadedineitherdirection.Fromtime-to-time,underregulatoryscrutiny,thesteepnessofthedistributionpriceformulaisadjustedtoreflectlong-runinvestmentcostsofdistributionandshort-runcongestionoccurrences.Additionally,thedistributionownerbasedonlong-termplanningcanofferincrementallong-termsubscriptionsforadditionaltwo-waydistributioncapacityatpricesthatrecoverinvestmentcostsandcouldbehigherthanthecostsofthesubscriptionsalreadycontractedfor.Thisapproachcanbeimplementedwithverylittlechangestoexistingbusinessandregulatorymodelsandlittlehardwareinvestmentassumingintervalmetersarealreadyinplace.

TogetherthetransportandenergytariffsmayinitiallyencourageendusergenerationinvestmentsuchasPV,butasPVinvestmentsreachthelevelthatcausesreverseflowsmid-dayandlargeflows

20

toserveeveninguses,thetransporttariffandenergytariffswillencourageenduserandthirdpartyinvestmentinstorageorstorage+solar.Or,dependingonthepricesandavailabilityoftenderedsubscriptionsforadditionaldistributioncapacityasdescribedinthepreviousparagraphendusersandthirdpartyownersofdistributedgenerationandstoragemaydecidetosubscribetoadditionaldistributioncapacity.

End-usecustomerscanalsoposttendersforenergyattheretail/wholesalemarketinterface.Suchcustomerscanpostpeer-to-peertransactionswithneighbors.Thepaymentsfordistributiontransportforatransactionbetweentwocloseneighborswilllargelynetout,sotherewillbelittlecostdisadvantagetotransactionsatthesubstationandtransactionsintheneighborhoodbetweentwocloseneighbors.

Customerswithoutautomationcanmodifytheirenergyusemanuallyandlikelysavemoney.Automatedcustomerdevicescanrespondtothespotandforwardtenderpricesandsavemoneyforthecustomer.Or,customerdevicescanusetheforwardpricestooptimizetheiroperationandcommunicatetotheserviceinterfacetheirproposedforwardproductionandconsumptionofenergy.Theenergymanagementsystemassociatedwiththeserviceinterfaceacceptstenderstocreatetransactionsforenergyorcreatetenders.

Theuseofasimpleformulafordistributionpricesreducesanddeferstheneedforcomplex,expensivesensorandoptimizationsoftwarefordistributionfeeders.ItalsomeansthatsmallerdistributionutilitiescanaffordtoemployTEonfeederswithlimitedcapacityand/ortwo-wayflows.Optimizationcanstillbeappliedtodistributionoperations.

TheLSEpartiescanbefranchisemonopoliesormultiplecompetitiveretailers.Customersreceivingmultipletendersfromcompetitiveretailerswouldtypicallyselectthelowestpriceoffertoselltothemorthehighestpriceoffertobuyfromthem.Spotpricesforenergywouldtypicallybeset.Asdiscussedearlier,suchmarketswouldbesubjectprimarilytostateregulationwithFERCpotentiallyinvolvedinanytransactionsatthewholesalelevel.

ThetransformationofapowermarkettoaTEmodelbasedontheTeMixapproachisillustratedbytheCaliforniaMarketTransformationRoadmapinthefigurebelowusingthesix“swimlanes”setforthbySEPAinthe51stStatePhaseII.19..

19“ARoadmaptowardaSustainableBusinessandRegulatoryModel:TransactiveEnergy”.StephenM.Barrager,Ph.D.,andEdwardG.Cazalet,Ph.D.,April2016,http://www.temix.net/images/51_State_II_20160308_Submission_Narrative_copy_2.pdf.

21

ThetransformationbeginswithTEpilotstodeploythetwo-waysubscriptiontariffonTEPlatforms.Onesuchpilotisnowunderway20.Followingthepilots,thestandardTransactiveEnergyPlatformscanbedeployedandconfiguredfromsecurecloudserversoveraboutfiveyearsformanyIOUandPOULSEs,DOsandothernon-utilityLSEs.

Thetwo-waysubscriptiontariffswillbephasedinbycustomerchoiceandbycustomersector,DOandLSE.Lowincomecustomerscanbeoffereddiscountedsubscriptionsbutshouldbeabletorespondautomaticallytospottenderstosavemoremoney.Existingnetmetering,TOU,demandchargeanddemandresponseprogramswillbephasedoutinordertobereplacedbythesimplersubscriptiontariffmodelforallcustomersandotherretailenergyparties.

Nochangestothewholesalemarketsarenecessary.ThenextlogicalstepforanISOistoimplementstandardwholesaleTEPlatformsforenergyatdistribution/transmissionsubstations.Forwardplanningwillincreasinglybedonebycustomers,commercialdistributedgenerationandstorageowners,thedistributionandtransmissionownersandlessbythelegislatureandregulators.

20 “RetailAutomatedTransactiveEnergySystem(RATES)FundedbyCaliforniaEnergyCommission(CEC)EPICGrantGFO-15-311”,http://www.temix.net/images/GFO-15-311_Retail_Automated_Transactive_Energy_System.pdf.

22

Byyearfifteenofanevolution,likeCalifornia’s,IOUsandPOUswillcontinuetoowntheregulateddistributionoperators(DOs).WithTEthereisnoneedtocreatedistributionsystemoperators(DSOs)21thatactlikeISOsforthedistributiongrid.ThisgreatlysimplifiestheDObusinessmodel.

ThetransitionstoutilitybusinessmodelswithseparateandcompetitiveLSEsandregulatedDOscanbegradual.Italsowillbefacilitatedbythetransitiontosubscriptiontariffs.SubscriptiontariffsforDOsarelong-termcontractswithcustomersthatcansupportstablerevenuesfortheDOinvestmentsandbusinessmodel.Thiswillhelptominimizestrandedassets,butaswithanyindustrytechnologychangescanstrandassetsandbusinessmodel,sothesoonerautilitytransitionstolong-term,morecommercialcontractsacceptabletoboththecustomerandtheLSEorDOthebetterforall.

Whenthedistributionfeedersandsubstationsreachthepointthatcapacityincreasesineitherorbothdirectionsareneededthenthecustomersonthosefeedersshouldagreetopayfortheincreasesbypurchasingadditionaldistributiontransportsubscriptions.

OncetheTEmodelisinplace,regulatoryandpolicy-makingbodieswillbeabletofocusonpromotingcompetitionandavoidingeconomicabuses.TheTEforwardtransactionswillgreatlyreducetheincentivesformarketmanipulationofspotmarketsandwillcontributetoreliability.Theexistingwholesalemarketsprovidealiquidcompetitiveenergymarketatthetransmission/distributioninterfaceandcostofservicetwo-waydistributiontransportassuresfairmarketsforenergydeliveredandsourcesfromcustomersanddistributedassets.

DistributionMarginalPricingAsecondapproach,DistributionMarginalPricing(DMP)isbasedonintroducingpricesfortheincrementalvaluethatDERmayprovidetooperatethedistributionreliablyandmoreefficiently.Thisvalueisbasedontheapplicablelong-termandshort-termmarginalcostsofdistributioncapacityinvestmentsandcertainoperationalexpenses.

Today,retailratescombinepricesforenergy,transmission,anddistributionserviceaswellasotherutilitycostrecoveryand/orpolicybasedcharges.Thisdiscussionwillfocusonthedistributioncomponentastheenergyandtransmissioncomponents,fromatransactiveperspective,arecurrentlyrecognizedaswholesaleproductsandsubjecttothecorrespondingwholesalemarketstructureandregulatoryconstruct.TheFERC-stateregulatoryjurisdictionalrolesarenotexpectedtochangeintheU.S.through2030.

DistributionpricesintheU.S.areusuallycomprisedofthreeparts;avolumetricprice,ademandbasedprice,andafixedservicefee.Thesepricesarederivedadministrativelyfromautility’srevenuerequirementandacostofserviceanalysisthatislinkedtodistributionplanningandoperationalfactors.DistributionratesareundergoingachangeacrossthecountryreflectingthechanginguseofthegridbycustomersanddeveloperswithDERintegration.Additionally,asseveral

21P.DeMartiniandL.Kristov,DistributionSystemsinaHighDERFuture,LawrenceBerkeleyNationalLaboratory,2015

23

statesarepursuingresourcepolicieswithsignificantDERcontributions,effortsareunderwaytoaligndistributionpricingtoitsuseandcosts.Thereisamovementtowardasimpler2-partdistributionaccessfeethatiscomprisedofademandchargebasedonmaximumdemand(irrespectiveofpowerflowdirection),andafixedchargecomponent.

Thisfoundationaldistributionaccesschargeisexpectedtobeastandardretailtariffaspartofanopenaccesstypeconstruct.Aversionofthisapproachalreadyexistsinstateswithretailaccesswherebytheenergyservicesproviderpaysthedistributionchargefordeliveringthecompetitiveenergysupplytothecustomer.Or,inthecaseofaDERresourcethatisparticipatinginthewholesalemarket,theaccessfeeistotransportservicestoatransmissiondeliverypoint.

IntheDMPmodel,disaggregateddistributionaccesspricesareaugmentedwithoverlaypricesthatarebasedonthelong-runand/orshort-runmarginalcostsofthedistributiongrid.Thesemarginalcostsaredeterminedthroughdistributionplanning(long-runmarginalcost)andreal-timeoperationalneeds(short-runmarginalcosts).AnexampleinmoretraditionaltariffsistheoverlaypriceusedinCriticalPeakPrice(CPP)orPeakTimeRebate(PTR)offerings,whichprovideanadditionalincentiveontopoftheunderlyingretailrate.IntheDMPcase,forexample,thiswouldbeanaddedpricepaidforaspecificresponsefromDER(s)todefersubstationcapitalinvestment.22

Long-runDMP

California23andNewYork24arecurrentlydevelopingdistributionoperationalmarketstoenableDERstoprovideservicesasanalternativetoutilitycapitalinvestmentsandoperationalexpense.Thismarketisnotdissimilartothatforwholesalecapacity--transmissionnon-wiresalternativesandancillaryservices.Atdistribution,thepotentialtypesofservicesmayincludedistributioncapacitydeferral,steady-statevoltagemanagement,transientpowerquality,reliabilityandresiliency,anddistributionlinelossreduction.Thedistributionutilityisthebuyeroftheseservices,inlieuoftraditionalexpenditures,tomeetitsstatutoryobligationsforasafe,reliabledistributiongrid.Thedistributionplanningprocessdefinestheneedforthesegridoperationalservices.25Moreimportantly,DERservicesthatarenotneededshouldnotbesourced.

22InsertreferencetoConEdBQDMtargetedDRincentive23CaliforniaPublicUtilityCommission,DocketR.14-08-013,DistributionResourcesPlan24ConEdison,BrooklynQueensDemandManagementprogram,https://www.coned.com/energyefficiency/pdf/BQDM-program-update-briefing-08-27-2015-final.pdf25M.Esguerra,“DistributionServices,AttributesandPerformanceandMeasurementRequirements”presentationpp.34-39,July2016http://drpwg.org/wp-content/uploads/2016/07/LNBA-Working-Group-072616_FINALVERSION.pptx

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Accordingly,ifgridneedsareidentified,servicesprovidedbyDERprovidersandcustomersmaybesourcedthroughacombinationofthreecategoriesofmechanisms:

a. Prices–DERresponsethroughtime-varyingrates,tariffsandmarket-basedpricesb. Programs–DERsdevelopedthroughprogramsoperatedbytheutilityorthirdpartieswith

fundingbyutilitycustomersthroughretailratesorbythestatec. Procurements–DERservicessourcedthroughcompetitiveprocurements

Determininganoptimalmixfromthesethreecategories,plusanygridinfrastructureinvestments,requiresbothaportfoliodevelopmentapproachandameanstoestablishacomparativebasisforthesealternativesintermssuchasfirmness,responsetimeandduration,loadprofileimpacts,andvalue(netofthecoststointegrateDERsintogridoperations).AnymixofDERsourcingmethodsrequiresthatspecificoperationalneedsandcriteriabemetinorderforeconomicvaluetobeascribed.ItshouldbenotedthatthereislittleexperiencewithsourcingDERfordistributionservicestodate,althoughseverallargedemonstrationsareunderwayinCalifornia,HawaiiandNewYork.

Pricingofdistributionservicesmaybebasedonthelong-termlocationalavoidedcostoftraditionalinvestmentstoinformapriceorrebate,orviacompetitiveprocurementsthatuseavoidedcosttoestablishaceilingprice.Alternatively,locationalavoidedcostmethodforlong-runmarginalpricemayuseamoresophisticatedoptimizationmodel.Theoptimizationmodel,asdescribedbyIntegralAnalytics,calculateslong-runDMPsviaacentralizediterativeoptimizationofthedistributionpowerflowsandtheeconomicdispatchofDERforaparticulardistributionsystem.Achallengewiththisapproachisassemblingtheoperationalandeconomicdatanecessarytoachievetheoptimization.Thisapproachupdatesthisinformationinacostcalculationbasedonbatchprocessingofgranulargriddatafromautility’sdistributionpowerflowtoolstodeterminetheOptimalPowerFlow(OPF),whichisconvertedintoavoidedcostestimatesandtheninputintoaneconomicoptimizationenginetodeterminetheDMP.ConvergentLocationalMarginalPricing

Severalstatesarelookingbeyonddistributionmarginalpricingtoincludethelocationalandsystem-widewholesalealongwiththesocietalvalueofDER.Forexample,theNewYorkPublicServiceCommission(NYPSC)introducedtheconceptofaddingadistributionprice(“D”)totheexistingNYISOlocationalmarginalprice(LMP)forwholesaleenergytocreateasingleunifiedpricingsignalforspecifictimesandlocationsonthedistributionsystem.ThisDpriceisintendedtoexposethevalueofdistributiongridtoincludecapacityconstraints,losses,reliability,voltage,andpowerquality.TheNYPSCorderedtheutilitiestodevelopLMP+Dmethodsforimplementation.26

26Case15-E-0082,ProceedingonMotionoftheCommissionastothePolicies,RequirementsandConditionsforImplementingaCommunityNetMeteringProgram,OrderEstablishingaCommunityDistributedGenerationProgramandMakingOtherFindings(issuedJuly17,2015).

25

Akeychallengeistoproperlyaligntherespectivepricecomponentsintherightvalue-stacksinordertoproperlyreflectthebenefitsandcostsacrossapowersystem.Thisrequiresproperdistributioninvestmentvaluecomponentscombinedwiththeappropriatetransmissionandgenerationpricecomponents,totheextentthelattershouldbeincluded,whilealsoaccuratelyreflectcost-causation(netdeferraloravoidance).Interactiveeffectsbetweenkeyfactorssuchasweather,loads,andpricesshouldalsobeaddressed.27

IntegralAnalytics28hasproposedanoptimizationmethodtointegrateenergy,transmissionanddistributionpricing.Intheirterms,“theDMPmethodologyproducesmarginaldistributioncostvaluesthatarelinkedtospecificDERsatspecificlocationsandincludebothforwardfixedandvariablecosts,incorporatingboththegridandtraditionalsupplydrivers.”29Thelong-runapproachisintendedtoco-optimizebothdistributiongridandsupply(generationandtransmission)costsacrossbothshort-termoperationalandlong-termplanningdimensions.Thisisaccomplishedthroughabottomsup“DistributionIRP,”which“inplanning,DMPleastcostoptimizationscanbecouchedas“mini-IRP”models,circuitbycircuit,whichcomplementtheanalysisalreadyperformedbyLMPaswellastraditionalIRPanalysis,andwhichincorporatetherichnessanddetailofwhatalreadyexistsinanLMP.”30

Theanalysisincorporatesbothsupply-sideavoidedcostsanddistribution-sideavoidedcosts,includingKVAR,powerfactor,voltageandotherinfluencesnotfoundinsupply-sideIRPswhereonlyKWandKWHarethefocus.TheDistributionIRPissimilartotraditionalIRP,withDERcosts,gridandoperationalcostsbeingjointlyco-optimized.ThisisnotunlikehowtheoptimalmixofasupplyresourcestackandDSMprogramsisdetermined,butwithatwist.Optimalcustomerbehaviorcanalsobecapturedintheoptimization.ThemathematicaloptimizationmethodsaremoreadvancedthanthoseusedfortraditionalIRPs.Theresultofthisoptimizationisa“systemlambda”orDMCvaluethatcanincludethetraditional$/kWand$/kWh,aswellas$/KVAhtointegratereactivepowerdimensions.TheDMPisthe“shadowprice”fromthemarginalcostcalculationandcanusedasapriceinmarkets.IAdescribesfourtypesofDMPsasillustratedinthefigurebelow.

27Propercorrelationofthesefactorscancapturemuchoftheinteractiveeffects,typicallythroughcovarianceanalysis.28T.OsterhusandM.Ozog,DistributedMarginalPrices(DMPs)andCostOptimization,IntegralAnalytics,201429T.Osterhus,M.Ozog,andR.Stevie,DistributionMarginalPriceMethodologyAppliedtotheValueofSolar,April2016,pg.1.30Ibid,pg.4.

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Figure2:FourMainComponentsinDistributionMarginalCosts

Thelong-runDMPsprovideforintegrationandoptimizationofDERsacrossthreedimensions:customers,thedistributiongrid,andthebulkpowersystem.Keyaspectsofthisapproachisthemarginalorincrementalcostsbids,assumptions,andconversionfactorscanbedimensionedinasingledenominatedvalue,suchas$/kWhor$/kVAh.Probabilisticelementsareincludedbasedoncovariance,toreflectuncertaintyinweather,loads,prices,andperformance,whichincreasetheaccuracyofDMPs.

Short-runDMP

TheNYPSCisalsoexploringthepotentialtodevelopavalueofDinthe“LMP+D”constructthatisbasedonshort-rundistributionmarginalvalue.31Whilethespecificsarenotyetfullydefined,thePSCispursuingdevelopmentconcurrentdistributionspotmarketsthatcloselyalignwithNYISOLMPpricingona5-15minbasis.TheDvaluewould,ineffect,reflectthecalculatedbasisdifferential(reflectingreal-timedistributionconstraintsandlosses)32betweentheLMPnodeatthetransmission-distributionsubstationandaspecificpointonthedistributionfeeder.LMP+Dwouldreflectthevalueofenergyatasingledistributionnodefordistributedresourcesproviders,LoadServingEntities(LSE)andendcustomersthroughanorganizedmarket.TheLMP+Dspotpriceswouldbeusedastheprimaryindexpricefordistributionlevelenergytransactions.Itisnotyetclearhowthisshort-runDpricewouldapplyfor

31Case15-E-0082,ProceedingonMotionoftheCommissionastothePolicies,RequirementsandConditionsforImplementingaCommunityNetMeteringProgram,OrderEstablishingaCommunityDistributedGenerationProgramandMakingOtherFindings(issuedJuly17,2015).32LMP+DandDMPrequireaccuratedistributionassetmapping,real-timedistributionstateinformationanddistributionstateestimationmodelstoperformthepricingcalculations.Theseprerequisitesdonotyetexistandarenotlikelyuntilthenextdecade.

27

gridservicessourcedbyutilities.Or,whetherthisreal-timeDpricewillprovidethemarketneedsofDERprovidersforrevenuecertaintytosupportfinancingcapitalprojectsorcorrespondinglythatofutilities’needsforfirmcommitmentstoaddresscapitaldeferralopportunities.

Oneapproachtoshort-runlocationmarginalpricingisproposedbyIntegralAnalytics.IAproposestoadapttechniquesfromshort-runbid-baseddistributionandLMPmarketstoderiveintegratedshort-runDMPsatspecificpointsonthedistributionsystem.“DERoperationaldispatchcostsorpricesareessentiallyshort-runDMPs(hourlyor5minute)thatcanbebid-basedinthesamewaythatLMPpricesareissued.Thesecostsignalsreflectthe[short-run]incrementalresourcecostforaspecificDERatthespecificnodeorlocation.”

Anotherapproachisdescribedina2016paperbyCaramanis33.AdistributedcomputationalmethodisproposedtodevelopLMP+Dpricingthatinvolvesmarginal-cost-baseddynamicpricingofelectricityservices,includingrealpower,reactivepowerandreserves.Thisapproachextendstechniquesatwholesalethroughadistributedmethodologythatenables“transmissionanddistributionlocationalmarginalprice(T&DLMP)discoveryalongwithoptimalschedulingofcentralizedgeneration,decentralizedconventionalandflexibleloads,anddistributedenergyresources(DERs).”34Thisapproachincludesadaptationsofwholesalemodelsandnewalgorithmstoaddresstheuniquelydifferenttopologyandoperationofthedistributiongrid.Theauthorsclaimtobeabletodetermine“T&DLMPswhilecapturingthefullcomplexityofeachparticipatingDER'sintertemporalpreferencesandphysicalsystemdynamics.”35

However,theauthorsrecognizethemassivechallengeofoptimizingacrossmultiplespaceandtimescales,including:

• Wholesale:annuallong-termsystem-wideandregional,monthlynodal,day-aheadoperationalplanning,hour-aheadadjustmenttouncertainty,5-mineconomicdispatch,responseto2-4secondsregulationsignals,andreal-timefrequencycontrol.

• Distribution:annuallong-termdistributionplanningarea,annualoperationalplanning,intra-monthcircuitswitchingformaintenanceandloadbalancingandreal-timeswitchingforoutagerestorationandpowerquality.

AsignificantassumptionintheIAandCaramanismethodsabove,asnotedbytheauthors,istheexistenceofanextensivedistributiongridsensornetwork,alowlatencyandhighbandwidthcommunicationsnetwork,andacost-effectivedistributedcomputingplatformateachdistributionsubstationtoperformstateestimationalongwiththedistributionmarginalcostoptimizationcalculationsincoordinationwiththeNYISOLMPcalculations.Developingthiscapabilitymayextendwellbeyond2025.Effortshavebeeninitiatedtoachievesomeoftheseaimswithcloud-computing.

33M.Caramanis,etal.,Co-OptimizationofPowerandReservesinDynamicT&DPowerMarketsWithNondispatchableRenewableGenerationandDistributedEnergyResources,ProceedingsoftheIEEE,2016.34Ibid.35Ibid.

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DMPRoadmap

Theevolutionofdistributionmarginalpricingwillbelinkedwithchangestotheunderlyingdistributionratedesignaswemovetowardanopenaccesstariffinapost-netenergymeteringenvironmentthatmorefullyallowsmarketforcestopricethevalueofDER.DMP,asaresult,willmorefullyemergeasthemeanstopricethemarginalvalueofbothlong-runcapitalinvestmentsaswellasshort-runoperationalservices.Thecurrentmethodofdeterminingthemarginalpricebasedontheavoidedincrementallong-rundistributioncostswillbethefirststep.Thesecondstepwillbethealignmentoflong-runmarginaldistributioncostswiththelong-runresourceadequacyandtransmissioncoststodevelopaconvergedmarginalprice.Thefinalstepwillbethedevelopmentofashort-runlocationalmarginalpriceondistributionthatalignswithwholesaleenergylocationalmarginalpricing.Thefigurebelowillustratesthisevolution.

4. ComparisonsoftheTwoAlternativeRetailMarketStructuresThepurposeofthissectionistoprovidesummarycomparisonsofthetwostructureswithoutmakingjudgmentsoradvocacyforoneoveranother.Ourgoalistohelpreadersunderstandtherangeofstructuresunderdiscussionandtoprovideinformationasabasisformoreinformeddecisionsandfurtherdevelopmentofthealternatives.Theevolutionoftransactiveenergymarketsatdistributionwilllikelyadaptaspectsofwholesalemethodsandpractices,drawingonelementsofthemodelsdescribedinthischapter.Thesemodelswillneedtobeadaptedfortheuniquecharacteristicsofdistribution.Therelativesophisticationofvariousmethodswillneedtobealignedwithrequisitedistributedmarketliquidityandopportunitiestocreatenetbenefitsforallcustomers.

Table1listsasetofattributesforeachofthetwostructures.

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Table1:TEMarketAlternativesComparison

AttributesTeMix:Two-waySubscription

TariffDistributionMarginalPrice(DMP)

CaptureForwardDeferral&OtherBenefitsinPlanning

Investmentandinvestmenttimingofallpartiesusingforward

planningbypartiesiscoordinatedusingforwardtransactionsand

subscriptions

Incrementalcostbogyusedwithcompetitiveprocurementtodefineinfra-marginalcostforbilateral

contracts

DistributionOperation

DistributionOperator(DO)DistributionOperator(DO)initiallyDistributionSystemOperator(DSO)

laterCouplingBetweenShort-termMarket&Dispatch

Self-dispatchbyretailendcustomersanddistributedgenerationandstorage

Bid-InDOandISOdispatchacustomerresponsetoaugmented

retailtariffs

RetailEnergyMarketOperation

Two-waySubscriptionTariffsandforwardbilateraltransactions

coordinatedwithISOLMPmarketsforbalancing.

ForwardBi-lateralmarket+ISOLMPsettlementonresiduals

DistributionTransportService

Two-WaySubscriptionTariffsandspotpricingbyDO

DistributionAccessCharge(2-parttariff)byDO

RetailEnergyMarket

Competitiveorfranchiseretailandmunicipalmodels

Retailaccessmodel(ascurrentlyexistsisseveralstates)

SecondaryRetailProducts

Energytransactionsonshortdurationintervalsforfrequencyregulationandreserves,capacity-likeenergyoptions,andReactive

Power

Reliability,Voltage/VAR&PowerQuality

DistributionGrid&OtherRetailServices

Reliability,Resilience,&PowerQuality

Reliability,Resilience,&PowerQuality

WenotethatinitiallythetwoapproachesrelyontheuseofaDistributionOperator(DO),thoughwithabilitiestoscheduleandachievemorenuancedDERoperations(somemayadoptDistributedEnergyResourceManagementSystemsofDERMs).LatertheDMPalternativeisexpectedtouseanewDistributionSystemOperator(DSO).ADOisutilityownedanditmanagesthedistributiongridwithoutdispatchcontroloverendloadsordistributedgenerationandstorageexceptinanemergency.ADSOisaDOthatalsodispatchesbid-inendloadsanddistributedgenerationandstorage.BothDOandtheDSO

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areresponsibleforthereliabilityofthephysicaldistributiongridandenforcementofgridconstraintsonenergytransactions.

Bothtransactiveenergymodelswouldnotfocusmerelyonshortrunenergytransactionsbutcaptureforwardcapitalcostdeferralandotherbenefits.Thecouplingbetweenmarketpricesanddispatchwouldalsodifferconsiderablybetweenthetwoalternatives.TeMixemploysanearcontinuousforwardprocesswhereindistributedendload,generationandstorageareself-dispatchedbasedonspotenergytenderpricestiedtothewholesale(LMP)marketwithretailenergyaddersforenergyrelatedcostsnotintheLMPandcircuitspecificspottransporttenderpricesfromtheDO.TheresultingschedulechangesarefrequentlycommunicatedtotheISO/RTOandDO.Incontrast,inthelonger-runDMPDERsarebidintoDSOsandpricesresultinDERdispatch.AdditionallyintheDMPalternativetime-differentiatedretailtariffsaugmentdispatchedDERprices.

IntheTeMixalternative,retailenergymarketoperationsareachievedbyLSEenergy(tiedtoISOLMPs)andDOtransportforwardandspottendersintheTeMixalternative.IntheDMPcaseenergydispatchcontinuetobeadministeredaspartofISOmarketoperations.IntheTeMixalternativeenergyisnotclearedbytheDObecausethatwouldrequirealevelofliquidityindistributedgenerationandstoragethatdoesnotexistandawillingnessofenduserstobid-incomplexoffercurvesandwaitforDSOorISOdispatch.

Atthedistributiontransportlevel,TeMixwouldrelyontheTwo-waySubscriptionTariffandspottendersfromtheDO.TheDMPalternativewoulduseDSOincrementalbidpricesbyparticipants,notunlikeanISO/RTO.ScheduledtransactionsinmodernISOs/RTOsmustsubmitincrementalbidsforcongestionpricing,whichseemanalogousforDSOoperationstoscheduleDERservices.

Bothapproachesuseforwardplanningofdistributioninvestments.Inthisregard,bothalternativesrelyonplanningprocesses(thataddressinvestmentdeferral)bytheDO/LSEandmarketparticipants.IntheTeMixthisincludescoordinatedforwardtransactionsincludingtheTwo-wayRetailSubscriptions.DMPusesaplanningprocesstodeterminetheforwardcapitalcostdeferralvalue.Ifcompetitivebiddingisusedtodeferdistributioncapitalprojects,theDMPattheplanninglevelwouldbetheceilingprice,cloakedinconfidentialitytoavoidgamingandfuturespeculation.TherespectivewinningbidpriceswoulddeterminethebasisforDMPpricingforthebilateralcontracts.

Otherretailproducts,suchasfrequencyregulation,reservesandvolt/VARservice,muchlikeancillaryservicesinISO/RTOmarkets,arecharacterizedintheTeMixalternativeasforwardoptionsonenergy,reactiveenergyasaseparateenergyproduct,andshort-durationenergytransactionsforfrequencyregulation.IntheDMPalternativetheDSOwilloffertheseotherretailproductsasseparatelydefinedproductsbasedonacompetitiveprocurement,possiblywithconfidentialreferencetorelatedavoidedcostandtherealoptionalityofservicessuchasvoltagemanagement.

PowerqualityistheresponsibilityoftheDOintheTeMixalternativeandtheDO/DSOintheDMPalternative.ReliabilityofthedistributionwiresdeliveryserviceisalsotheresponsibilityoftheDOintheTeMixalternativeandtheDO/DSOintheDMPalternative.AsendcustomersbecomeprosumersorparticipateinmicrogridsmoreofthetraditionalresourceadequacyresponsiblyofLSEswillbetakenon

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bytheendcustomers.Inbothalternativesresiliencytosurviveindisastersandportfoliodiversificationseemlikelytobethejointresponsibilityofthemarketparticipants,LSE,DOorDSO,legislatorsandregulators.

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Chapter3:BusinessModelsforTransactiveEnergy

ThischapterdescribesthenewelectricpowerindustrybusinessmodelsthatcouldemergeorevolvetocreatevaluefromatransformationtoTransactiveEnergy(TE).Asnotedinthefirstchapter,onewidely-useddefinitionofTEis:

Asystemofeconomicandcontrolmechanismsthatallowsthedynamicbalanceofsupplyanddemandacrosstheentireelectricalinfrastructureusingvalueasakeyoperationalparameter.

Fromtheperspectiveofdefiningbusinessmodels,thekeywordinthisdefinitionis“value.”TheobjectiveofTEistobringDERintotheelectricsystembasedonitsvaluetoconsumersandtheelectricsystemasdeterminedbymarketprices.TEisseenasawaytoempowerconsumers,lowercosts,increaseresiliencyandrealizeenvironmentalbenefits.Suchelectricitymarketswouldhavedifferentbusinessmodelsthantoday’selectricityindustry.Businesseswouldneedtocreatevalueforprosumersandconsumersalikeandtocaptureenoughofthattotalvalueforthemselvestobefinanciallyviable.

Newtypesofbusinesseswillbeneededtoserveprosumersandtherolesofsomeexistingorganizationsmaychange.ForaTEmarkettosucceed,thesebusinessandorganizationsmusthaveviablebusinessmodels.Abusinessmodelistheoverallplanofanorganizationtoachieveitsgoals.Itishowtheorganizationgeneratesrevenuesandcreatesamargin(excessofrevenuesovercosts)fromoperations(aprofit,ifitisafor-profitentity),includingthereasonwhycustomerswouldseevalueinbuyingitsservices(thevalueproposition).Allorganizations,evennon-profitsandgovernments,musthavesustainablebusinessmodels.Otherwise,theycouldnotbeviableeconomicentities.AsmarketsarecreatedthatenabletheparticipationofDERoverthedistributionsystem,adiversesetofbusinessmodelswillevolvereflectingspecificmarketandregulatoryconditionsandbusinessstrategiesineachmarket.Businessmodelsservingretailcustomersindifferentwaysarelikelytoco-existandevolveindifferent—andperhapsunexpected—ways.

1. CurrentElectricityBusinessModels ThepreponderanceofelectricityproducedintheUnitedStatesisnowsoldand/ordistributedtoend-useconsumersbythreetypesofelectricutilities:state-regulated,investor-ownedelectricutilities;electricdistributioncooperativeutilities;andpublicpowerutilities.Inaddition,marketforcesarealreadybeingfeltinstateswithretailcompetitionforatleastsomeelectricityconsumers,andcompetitivebusinessmodelshavealreadyemergedinthosestates.

Traditionalbusinessmodelsforregulatedutilitiesinclude:

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• Regulated, vertically-integrated, investor-owned electric utilities are subject to cost-of-serviceregulation by states for their retail functions and by FERC forwholesalemarket activities. Thesehavehistorically been themost common typeof entity serving end-use customers. Today, somevertically-integratedutilitiesareinregionswherethereisnoIndependentSystemOperator(ISO)orRegional TransmissionOperator (RTO) but others are in regionswhere ISOs or RTOs operate thewholesale electric market. The actual business models of vertically integrated utilities are quitevaried. Someareownedbyholding companies that alsoownunregulatedaffiliates thatperformother functions in theelectricpowerorenergy industries. Still, in termsofmeeting theneedsoftheirretailcustomersinregulatedmarkets,theyhavemuchthesamevalueproposition.

Valueproposition:Economiesofscopeandscalereducecostswhilecost-of-serviceutilityregulationbybothstatesandthefederalgovernmentensurescostcontrolandfairness.

• Electricdistributioncooperativeutilitiesareoneoftwobasictypesofruralelectriccooperatives(theother being Generation and Transmission (G&T) cooperatives that sell wholesale power to theelectric distribution cooperatives that are theirmembers). Distribution cooperatives perform thepowerdistribution function and serveend-use customers that are theirmembers,mostly in ruralareas,butalsoincreasinglyserveexpandingsuburbanareas.Mostdistributioncooperativesareverysmall.Thereareover800distributioncooperativesintheUnitedStates.

Valueproposition:Electriccooperativesarenot-for-profitenergyserviceprovidersthatworkforthebenefitoftheirmembersand,assuch,haveanincentivetoadopttechnologiessuchasDERthatbenefittheirmembers.Membersgainaccesstoelectricityatalowercostthanwouldotherwisebeavailablebyworkingtogetherandaccessingcapitalatalower-than-commercialratefromthefederalgovernment.Distributioncooperativesarelocally-controlledbyconsumers.

• Public power distribution utilities include municipal utilities and public power districts. Theseutilitiesareownedbythegovernmentjurisdictionwhosecitizensandbusinessestheyserve.Thesearenottheonlytypesofpublicpowerutilities. Forexample,somepublicpowerutilitiesarefullyintegrated from generation through distribution, but many are distribution only. Others onlyperformthegenerationfunctionoronlyhavegenerationandtransmissionfunctions. Distributionpublicpowerutilitiesarediscussedinthischapterbecause,likedistributioncooperatives,theyserveend-useconsumersandwouldbemostdirectlyaffectedbychangesintheretailelectricitymarketdesign.

Valueproposition:Publicpowerutilitiesareoperatedbylocalgovernmentstoprovidetheircitizensandcommunitieswithreliable,responsive,not-for-profitelectricservice.Theseutilitiesaredirectlyaccountabletothepeopletheyservethroughlocalelectedorappointedofficials.

Thebusinessmodelsthathaveemergedincompetitiveretailmarketsare,toanextent,harbingersofwhatcouldemergeunderTEmarketframeworks.Theyvarybystateduelargelytodifferencesinthelawsandregulationsgoverningretailcompetition.Competitiononpricehasevolvedtodifferentiatedservicestargetedataddressingspecificconsumerpreferencessuchasriskmanagement,renewable

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purchasesandspecialbillingandpaymentoptions.AlthoughtheylikelywouldchangeinafutureTEmarketplace,severalbusinessmodelshaveemergedinthesemarkets:

• Utilitytransmissionanddistribution(T&D)andretailsalesbusinessmodelsaremostlymodificationsof vertically-integrated investor-ownedbusinessmodels in stateswith competitive retailmarkets.These utilities are organized to comply with limitations on utilitymarketing efforts and, in somejurisdictions,requirementsforgenerationassetdivestiture. Whereconsumershavenotchosentopurchase their electricity from retail power marketers (see below), these companies may servethoseconsumersasaProviderofLastResort(POLR)ataregulatedelectricrate.

Valueproposition:T&Dremainsaregulatedmonopolyservicesubjecttofederalandstatecommissionregulation.Perceivedcompetitivepricingwithothersuppliersisofferedalongwitheaseofstayingwiththeincumbentutility.

• Retailpowermarketerscompetetoprovideelectricservicestoconsumers.Theemergenceofretailpower marketers has not only provided for competition based on price, it has also createdinnovationsintheservicesofferedtoelectriccustomers.

Valueproposition:Thepowermarketerprovideslowercostelectricityand,ifrequested,energyfromrenewableresources.

Fivebusinessmodelsarenotlimitedtocompetitiveretailelectricmarketsandalreadyprovidewaysforconsumerstocompeteinelectricitymarkets:

• CombinedHeatandPower(CHP)isthesimultaneousproductionanduseofelectricityandthermalenergy ina single integrated facility,usuallyata consumer’s site. Utilitieshavebeen required topurchasepowerfromqualifiedCHPfacilitiessince1978.

Valueproposition:Forfacilitieswithanappropriatebalanceofelectricandthermalloadsandsubstantialenergycosts,CHPofferslessexpensivethermalandelectricenergywithlowerpriceriskandgreaterself-relianceforreliability.Forsomeindustrialfacilities,theCHPfacilitymakesuseofacombustiblewasteproductasafuel.

• Demand response aggregator combines the performance of end-use customers to provide largerand higher-value demand response services to electricmarkets. Demand response aggregation isalreadybeingprovidedincompetitivewholesalemarkets.

Valueproposition:Consumerscanmakemoneybyreducingloadorself-generatinginresponsetorequests.Theaggregatorcandothismoreeasilyand/orprofitablythanthecustomeractingalone.

• Community choice aggregation (CCA) is a local government purchasing electricity on behalf of itsresidentsandbusinessesinordertoreducecostsandoftentoensuretheacquisitionofrenewableenergy.

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Valueproposition:PowerpurchasedthroughtheCCAcanbelowercostduetogreatermarketpowerandabilitytonegotiate,powerthatismorelocallyproducedandcontrolled,and/orgreenpower.

• Community solar consists of a solar-electric system that, through a voluntary program, providespower and/or financial benefit to, or is owned by, multiple community members. Severalcommunity solar business models have been implemented, including utility-sponsored projects,special-purposeentities,andnon-profitmodels.

Valueproposition:Communitysolarenablesmultipleenergyconsumerstoshareinthebenefitsofalocalsolarfacilitythatcantakeadvantageofeconomiesofscaleandenableinvestors,someofwhommaybecustomersfortheoutput,torealizetaxbenefits.

• EnergyServiceCompanies (ESCOs)workwithenergyconsumers to reduce theirenergyandutilitybills(oftenincludingnaturalgasandwater).

Valueproposition:Consumerscanreducetheirenergybills(whichmayincludeelectricity,naturalgas,andoil)andenvironmentalimpactsthroughenergyefficiencyprogramsoperatedbytheESCO.SomeESCOsservinglargercustomersmayhelpwiththeprocurementofenergyorriskmanagement.

• Distributed Solar PV Developers install, maintain and/or finance solar photovoltaic (PV) solarequipment. Three basic variants of this businessmodel are used to provide this equipment andtheseservices.Thesevariantsareleasingwiththirdpartyownership,sitehostownershipandsolarprojectdevelopment.

Valuepropositionsvarywiththebusinessmodel:

- Leasingwith thirdpartyownership. Thecustomercangenerateandconsumesolarpowerwithnomoneydownand then lease thePVsystemwithamonthlypayment that is lowerthan thecostofbuyingelectricity fromthe localutility. SolarPV isahedgeagainst risingelectricityrates.

- Sitehostownership.Thecustomercanreceiveallthedirectfinancialbenefitsofownership,ifthecustomerqualifies. SolarPVprovidesahedgeagainstrisingelectricityrates. Ontheotherhand,thecustomermustfinancethePVinstallation. FavorablefinancingtermsmaybeavailablethroughthedistributedSolarPVdeveloperorotherfinancialinstitutions.

- Solarprojectdevelopers. Dependingonthecustomer,theelectricitypurchasedwill fulfillaregulatorymandate such as a RPS, or a business or personal commitment to sustainableenergy.Thecustomermayalso,dependingonthespecific financialarrangementswiththedeveloper,becomeafullorpartownerofthePVfacilityandobtainashareofthefinancialincentives.

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2. BusinessModelsforFutureMarkets TEmarketswilllikelyalterthebehaviorofmanyelectricityconsumersandthuschangethebusinessmodelsoftheorganizationsintheelectricmarketplace.Formost,revenueswillnolongerbebasedoncostofservicebutratherontheabilitytocreateandcapturevalue.Theneeds,prioritiesanddecision-makingcharacteristicsofconsumerswilldeterminetheirwillingnessandabilitytoparticipateinelectricitymarketsasprosumersinaggregationsofconsumers.Effectivebusinessmodelswillthusneedtoanticipateandberesponsivetoongoingpatternsofvaluecreationanddestruction,howtheydifferamongcustomers,andhowthesebehaviorschangeasmarketsevolve.

Somebusinessmodelsmayevolvefromlong-standingcurrentbusinessmodels;othersmaybecreatedspecificallyfortransactivemarkets;andstillothersmayhavestartedinearlierstagesoftheelectricmarkets,butmayblossominTEmarkets.Inaddition,withTEmarkets,electricdistributionwouldchangeconsiderably—andinmorewaysthanjustfacilitatingthetwo-wayflowofelectrons.Severalnewandas-yethypotheticalbusinessmodelswouldalsobeessentialtotheoperationofatransactivemarketplacedependingonthemarketdesign.

EachoftheretailTEmarketstructuresdescribedinChapter2willenablesomewhatdifferentsetsofbusinessmodels.TheTeMixretailmarketwithitstwo-waysubscriptiontariffandautomatedbilateraltransactionplatformisdesignedtoenablepeer-to-peertransactions,andthebusinessmodelsthateitherenableorcanparticipateinsuchtransactionswillemerge.BoththeLMP+DandDMPapproachesinvolvebiddingintoacentralizedmarketoperatedbyaDistributionSystemOperator(seebelow)withvariablepricingbasedonmodelsand/ormarkets.Entitiesthatcanbestnavigatethesecomplexcommodity-typemarketswillbestthriveinthem.The3P’smarketplacewillcreatebusinessesthatarestructuredtorespondtoandcontractunderthevariouspricing,programsandprocurementsthatwillbecreatedunderthismarketstructure.

NewbusinessmodelswillemergetoserveconsumerneedsinTEmarketsandothersmaychangetomeettheneedsofthosemarkets.Somenewmarketparticipantswilllikelybecustomersoraggregationsofcustomersthatsupplyelectricservicestothetransactivemarketplace:

• Prosumerswouldbethemostfundamentalbuildingblockofthetransactivemarketplace.Theseareend-use electricity consumers who both buy and sell electricity while interconnected to thedistribution system. In most cases, they would generate power through distributed generation.Somecouldalsohaveenergystorage.

Valueproposition:Participationbyprosumerswillresultinanelectricsystemthatislowercost,moreresilientandcleaner.Whobenefitsasadirectcustomeroftheprosumerwilldependon

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thedesignoftheTEmarketplace,specificallywhetherthereisacentrally-operatedmarketorbilateraltransactions.

• Distributed Energy Storage is a category of prosumer whose primary resource is energy storage.Onevariantmaybeownersofelectricvehicles.

Valueproposition:Energystoragewouldreducecostsandincreasethereliabilityofelectricservicetotheprosumer.Distributedstoragehasthecapabilityofprovidingaflexibleresourcethatcanbeusedforavarietyofapplicationsbalancingelectricitysupplyanddemandonthedistributiongrid.

Prosumerscancombinedtheiroperationsinvaryingdegreesofaggregationandintegration.Inincreasingorderoftightnessofintegration,thesewouldbe:

• Prosumeraggregatorssimplycombinetheresourcesofdifferentprosumerstogetabetterdealaspartofalargergroupandtakeafeeforthisservice.

Valueproposition:Prosumerscanreceiveahigherpricefortheiroutputaspartofagroup.Aggregatorscanbetterensurecorrectpaymentandknowledgablyrelievetheprosumerofanyadministrativeburdens.Thisalsomaymakeiteasierforbuyerswhoneedtodealwithfewersellers.

• VirtualPowerPlantOperatorscoordinatedispatchofthedisparateprosumerresources.Bymakingandkeepingcommitmentsofavailabilitytothegridoperator,thevirtualpowerplantoperatormayalsocreatevaluethatmayberecognizedthroughacapacitypayment.

Valuepropositions:ToownersoroperatorsofDER:greatervaluecanbereceivedbybeingpartofaVPP.Towholesalemarketcustomers:VPPscanappeartobeasingleresourcetothetransmissionoperatorandwholesalepowermarket.TheVPPcanprovidereliablewholesalepowerproductscompetitivewiththoseofrealpowerplants.

• Microgrids will probably be the most complex and varied of all these new business models.Microgrids combine a group of interconnected loads and supply and demand resources withinclearly-defined electrical boundaries that operate as a unified system. Microgrids are typicallydesigned specifically for the host site and vary greatly in their internal loads and the supply anddemandresources.Themicrogridisoperatedasanintegratedsystemandhastheabilitytooperateeither in a grid-connectedor islandedmode. In addition toproviding services to loadswithin themicrogrid system, microgrids may also provide electric services to the broader distribution ortransmissiongrids.Thisgivesthemicrogridtheabilitytocontinueoperatingwhenthedistributiongrid is interrupted. Advancedmicrogridscontainall theessentialelementsof the large-scalegrid,includingtheabilitytobalanceelectricaldemandwithsources,schedulethedispatchofresources,andpreservegridreliability,andcanoperateasanintegralpartoftheoverallelectricgrid.Nestedmicrogridswouldoperateincloseproximitytoeachotheronthedistributionnetworkandcouldbemutually-supportive, possibly with the ability to reconfigure the interconnections of loads and

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resourcesamongthemicrogrids,adding further resiliency to the total systemandto thegridasawhole.

Valueproposition:Microgridcustomerswillhavemorereliableandresilientelectricity.Advancedandnestedmicrogridsmayprovidefurtherresilienceforinternalloadsandthegrid,includingcompensatingforvariableresourcesandprovidingancillaryservicestothegrid.Microgridsaremostcommonlyimplementedwhereresiliencyishighlyvalued,forexample,militarybasesortoprovidevitalcommunityfunctions.Cleanenergyandcostreductionmayalsoaddvalue.Someserveislandorremotecommunities,forexample,inAlaska.

WiththeemergenceofTEmarkets,electricdistributionwouldchangeconsiderably—andinmorewaysthanjustfacilitatingthetwo-wayflowofelectrons.Itwouldinvolvenewfunctionsandpossiblytheallocationoffunctionstodifferententitiesdependinguponthemarketdesign.Eachoftheseentitieswouldneedaviablebusinessmodel.Thesemayinclude:

• TransactionPlatformProviderprovidesanelectronicplatformtocommunicatebuyandselloffersintheTeMixmarketsaswellasrecordthetransactionsamongtheparties, includingpayments. Thetransaction platform provider may also optionally provide a market clearing and settlementsfunction.Morethanonetransactionplatformprovidermayoperateinamarket.

Valueproposition:Thetransactionplatformproviderprovidesaconvenientandcost-effectiveelectronicvenuetofindbuyerandsellercounterpartiesonthedistributiongrid,makeandrecordtransactionswiththem,andcoordinatewiththedistributionsystemandintermediaries.

• MarketMakerwould be an independent entity that providesmarket clearing and settlements topartiesthatbuyandsellinthetransactivemarketplace.ThistypeofentitymayormaynotemergeintheLMP+DorDMPmarketsdependinguponhowtheyarestructured.

Valueproposition:Paymentbybuyerstosellersisassuredandpossiblylaterliquidityandriskmanagementmaybealsoassuredinapeer-to-peermarket.Liquiditycouldonlybeassuredonceadequatevolumeisreached.

• Distribution System Operator (DSO) is analogous to the ISO or RTO in an organized wholesaleelectricmarket.Thisislikelytobearegulatedentitythatwouldbefundedbasedonfeeschargedtomarket participants. The DSO in some market designs may be different from the DistributionSystemOwner.

Valueproposition:TheDSOwilloperatethetransactiveenergymarketandotherfunctionsassignedtoitinanondiscriminatory,transparentandeffectivemannerthatwillbenefitallthosewhobuyandsellinthetransactiveenergymarketplace.

• Distribution System Owner (DO) plans, owns, operates and maintains the distribution system inmarketdesignsinwhichtheDSOdoesnotalsoownthedistributionsystem.

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Valueproposition:Asaregulatedbusinessindependentofallotherinterests,theDOwillconductbusinessservingcustomersinafair,effectiveandleast-costmannerasregulatedbystatepublicutilitycommissions.

3. HowBusinessModelsWillChange TEwillnotmaterializeovernightandneitherwillallthebusinessmodelsthatsupportandoperateinthesemarkets.Rather,theywillemergeasconditionsthatenablethemarecreatedalongthreemutually-supportivepathways:technologypenetration,governmentpolicyandregulation,andeconomics.Emergenceofthesemarketswillchangetherisksfacedbythosewhoconductbusinessintheelectricsector,creatingrisksforsomeandreducingitforothers.

Manyfactorsarelikelytoinfluencebusinessmodeldecisions,butthisisunchartedterritoryinahighly-complex,capital-intensiveandvitalindustry.Developingviableindustrystructuresandbusinessmodelstosupporttheseintricatenewmarketswilltaketimeandexperimentation.

Developmentsalongeachpathwaycreatetheconditionsthatenablemarketsandbusinessmodels:

• TechnologyPenetration.A fundamentalquestion iswhether consumerswill invest in andoperateDERtechnologiesaswellasparticipate ina transactivemarket. Enoughmarketparticipantsmustuse the technologies to be buyers or sellers in a reasonably liquidmarket and theymust receiveenough benefits to continue market participation. This will not happen all at once andsimultaneouslythroughoutthecountry.Unevenprogressmaygivecompetitiveadvantagestothosethat successfully compete in early markets and use these markets as a base for entering latermarkets.

• PolicyandRegulation.Manypolicyandregulatoryquestionswillneedtoberesolvedstatebystate.Stateswill likelymakedifferentchoices increatingamarketat thedistribution level, ifatall. Nostateasyethasamarketthatcantrulybecalledtransactive.Marketdesignsandregulationsneedtoaccommodatechangeovertimetoimprovemarketperformance,toincreaseparticipationandtoensureadequatefunctionalityasneededimprovementsareidentified.

• Economics.Transactiveenergymarketsareintendedtocreatethebasisforelectricityproductsandservicestobeboughtandsoldbasedonvaluetotheultimateconsumers.Pricesareintendedtobedeterminedbysupplyanddemandandtoprovideclearvalueincentives,andthemarketconditionsdeterminedinpartbymarketdesignsmustpermitthis.Thesemarketswouldneedtoincentbotheconomically-efficient investment in DER and their cost-effective operation. Further, theseincentivesshouldrelatefairlytoincentivesforlarge-scalefacilitiesonthetransmissionsystem.Thisimplies a need for both long-termmarket signals for efficient investments throughout the entireelectricsysteminadditiontoshort-termmarketsignalsfordispatch.

Thebusinessmodelspresentedinthischapterarenotmeanttobedefinitive.Othersmayemergeasmarketsareactuallyimplemented,perhapsevenhybridsofthosepresentedhere.RatherthesebusinessmodelconceptsareintendedtobeginaconversationonhowviableeconomicentitieswillactuallyflourishinTEmarkets.

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Chapter4:TransactiveEnergyModelsOverseas

Anumberofforeigncountrieshavebeenexploringtheirownversionsoftransactiveenergymodels.Thefollowingareexamplesofsomewhohavedonesignificantworkinthisarea:

1. Denmark In2010,theDanishgovernmentestablishedtheSmartGridNetwork,whichwastaskedwithpreparingasetofrecommendationsthatwouldenableitselectricalgridtohandle50%windpowerby2020.Areportwasreleasedthefollowingyearwhichprovided35recommendationsformakingthistransitionpossible.Together,theserecommendationscomprisedavisionfortheevolutionofa“marketforflexibility”whichwillencouragethirdparties(electricitycustomers)toprovidedistributedenergyresources,whenneeded,inresponsetomarketsignals.Thiswillbeatransactionalelectricitygrid,inwhich“flexibilityproducts”willdisplacetheneedforconventionalgridreinforcements.Suchproductswillessentiallyconsistofreal-timedemandresponse,alongwithon-demandelectricitysupplyandancillaryservicesbeingprovidedatthedistributionsystemlevel,frombehindthecustomers’electricitymeters.

Rolesandresponsibilitieswithinthistransactionalgridwillessentiallybedividedamongthreesetsofprincipalplayers:1)“Privateplayers”,whichwillincludeconventionalsmallandlargeretailelectricitycustomers,alongwithindustrialcustomersandelectricityproducers,whowillprovideflexibilityproductsandservicesfromCHPunits,solarorwindresources,electricvehiclechargingdevices,heatpumps,back-upgenerators,anddemandresponse(includingautomateddemandresponseattheappliancelevel).2)“Commercialplayers”,consistingof“balance-responsibleparties”(BRPs),conventionalwholesaleelectricityproviders,andaggregators,whowillessentiallyactasintermediariesbetweenthesmallerprivateplayerswhoareprovidingflexibilityservices,andtheentitiesresponsibleforoverallsystemoperation.3)Theseaforementionedentities,the“Systemoperators”,willincludeEnerginet.DK,theorganizationwhichcurrentlyownsandrunsthetransmissiongrid,andthelocaldistributioncompanies,whichwillstillbearresponsibilityforensuringsystemreliability.

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TheSmartGridNetworkplanenvisionsthattheevolutionofanewmarketforflexibilitywilloccurinthreephases:

1. BilateralAgreements:Initially,onlyafewcustomerswillofferflexibilityresources,andbecauseoftheabsenceofafully-developedmarket,theseserviceswillbeprovidedindividually,inindividually-tailoredratherthanstandardizedcontracts

2. EstablishmentofMarketplace:Eventually,amarketwillevolvewherelocaldistributioncompaniescanposttheirflexibilityrequirements,withtheassurancethattheserequirementswillbemet.Thismarketplaceforflexibility,however,isnotenvisionedtooperatelikethetraditionalelectricitymarketsinDenmark(andorganizedelectricitymarketsintheU.S.),wheremostparticipantssupplybidsforsupplyanddemandtoacentralbody,whichthendeterminesamarket-clearingpriceforallsales.Becauseofthediversityofflexibilityproductsoffered,andthediversityofneedsatthedistributionlevel,itisanticipatedthatthemarketforflexibilitywillbeabilateralone,withnocentralclearinghouse,butratheramarketinwhichalltransactionsoccurbetweenindividualparties.

3. StandardizationofMarket:Inthefinalphase,well-definedandstandardizedservicesandcontractswillhaveevolved,whichwillenabletheefficienttradingofahighvolumeofflexibilityservices.

Theplanincludesrecommendationsforotherchangeswhichwillsupportthistransition,suchasaredefinitionoftheregulatorycompactwithlocaldistributioncompaniesthatwillencourageinvestmentinsmartgridtechnologies,andtheestablishmentofnewelectricitytariffsthatwillenablehourlypricingandcontractsettlement.Thecurrenttimelinefortheevolutionofthisnewsystemistargetingcompletionofalltechnologicalupgradesandimplementationofsupportingsystemsby2019.

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2. Canada InOntario,Canada,avarietyofdemandresponseprogramsareinplacewhichtogetherconstituteatransactiveenergyprogramwidelyavailabletoallcustomers.Largercustomersandaggregatorscanactivelyparticipateindemandresponsebyofferingdispatchableloads,whicharecurtailedwhenreal-timepricesexceedsomepre-specifiedlevel.Verylargecompaniesandinstitutions(i.e.,withelectricityusagegreaterthan250,000kWhperyear)paythehourlymarketpriceforelectricity,andreacttoswingsinpricebyadjustingtheirloads.Residentialandsmallbusinesscustomers,too,reacttopricedifferentialsthroughtime-of-userates,withhigherpricesduringpeakperiodsandlowerpricesduringoff-peakperiods.Residentialcustomersalsohavetheoptiontoparticipateinaspecialprograminwhichtheirairconditioningandwaterheatingloadsarecycleddownduringperiodsofpeakdemand.TheexistingOntarioprogramhashadatangibleimpactoncustomerusage,asevidencedbyarecentsurveyinwhich70%ofOntarianssaidthattheyhadmodifiedtheirelectricityusageasaresultofhavingtime-of-userates.Goingforward,Ontario’sIndependentElectricitySystemOperator(IESO)isengagedintwentydemandresponsepilotprojectswithfivecompaniestoexplorehowthiswidevarietyofresources–whichtogethercompriseatotalof85MWofsystemload–couldeachbestbeusedtobalancesupplyanddemand.TheIESOalsobegan,inlate2015,toholddemandresponseauctions,whichwillenabletheestablishmentofmoreflexible,market-determineddemandresponsecommitments.

3. Japan Japanrecentlycompletedaseriesofelectricitymarketreformsthathasunbundledtransmissionanddistributionfromgenerationandretailservices,andliberalizedtheretailservicessectorbyopeningituptocompetition.WhilethesemovesmaymerelyresultinasystemcomparabletotheorganizedelectricitymarketsintheU.S.,itappearsthatthereformshavealreadyproducedaninterestinthesalesofelectricitybysmallsuppliers,manyormostofwhomwillrelyuponclean,distributedenergyresourcessuchassolarorwind.Asoflatelastyear,nearly800companieshavesuccessfullyregisteredtobecomeelectricitysellerstolargecommercialcustomers(>50MW),and48havesuccessfullyregisteredasretailproviderstoresidentialandsmallercommercialcustomers.Othercompanies,suchasrealestatebusinesses,areexploringnewbusinessmodelsinwhichhomeswillbesoldwithrooftopsolar,storage,and/orhomeenergymanagementsystemsincluded,andpowerwillbeaggregatedandresoldfromlarger-scaledistributedenergyresources.Consumercooperativesarealsodevelopinglocally-generatedcleanenergypowersystemsfortheircustomers.Thoughtheydidnotdirectlyresultinatransactiveenergysystem,itappearsthatJapan’srecentelectricityreformsislayingthegroundworkfortheeventualevolutiontosuchasystem.

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4. Germany InGermany,“virtualpowerplants”havebecomewidespreadassourcesofdistributedpowergeneration.A“virtualpowerplant”isasetofindependentelectricityresourcesandcurtailableloadsthatarelinkedtogetherthroughacomputerizedcontroltechnologyandthencollectivelyusedtoprovideservicestothegeneralgrid.TheGermanelectriccompanyRWEDeutschlandAGhasbeensellingtheservicesofavirtualpowerplantintotheEnergyExchange(EEX)locatedinLeipzig.NextKraftwerke,anIT-energycompany,hasavirtualpowerplantconsistingofthousandsofrenewableenergysources,andusesittosellbalancingenergytoTransmissionServiceOperatorsinGermany.Othercompanies,suchasLichtBlick,aredevelopingvirtualpowerplantsthatcombineelectricitystoragewithintermittentrenewableenergysources,thusenablingthemtofunctionasprice-responsivedispatchableresources.

5. Australia CompaniesinAustraliaarealsoengagedinthedevelopmentofsystemsthatcombineintermittentrenewableelectricitysourceswithstorage,andoneutility,ErgonEnergyRetail,isexperimentingwiththeconceptofusingthesetocreateavirtualpowerplant.TheAustralianelectricindustryingeneralisparticipatinginthedevelopmentofalong-termplanforgridmodernization,motivated,amongotherthings,bythefactthattherearenownearlytwomillionsmall-scalerenewableenergyfacilitiesontheirsystems.Theindustryenvisionsfouralternativefuturesforthegridby2050:1)a“setandforget”environmentinwhichthecentralizedmodelstillpredominates,thoughwithmoredistributedandrenewableresourcesonthesystem,2)acustomer-centric,prosumer-driven,decentralizedandtransactivegrid,3)completeabandonmentofthegridbycustomerswhonowproducetheirownelectricityorgetitfromlocalsources,and4)asystemwithaheavypenetrationofrenewableresources,thoughmostofthesearelargescale,andcanbeoperatedwithacentralizedsystem.Whilenotselectinganyparticularoutcomeasdefinitiveorevenmostlikely,theindustrybelievesthatsometrendswilloccurinanycase.Thesystemwillbecomemorecustomer-centric,decentralized,decarbonized,andderegulated,butthegridwillprobablycontinuetoplayacritical,thoughevolved,role.

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Chapter5:ConclusionsandNextSteps

Thepurposeofthispaperhasbeentodiscussthetransactiveenergyphenomenon,includingthedriversthathavebeensupportingitsemergence,theprincipalmodelsthathaveemergedthatcouldserveasplatformsforcreatingworkabletransactiveenergysystemsintheU.S.,andthebusinessplansthatwouldprovidesuitableincentivesforallofthenecessaryentitiestoparticipateinthesesystems.Thetwotransactiveenergymodelsdiscussedinthispaperrepresentalternativemeansofmanagingasignificantpresenceofdistributedenergyresourcesontheelectricitygrid.Whichofthese,ifeither,willbeadopted,willbecontingentuponanumberoffactors.Thefirst,andprobablymostimportant,factorwillbetheactualsaturationlevelandsaturationrateoftheseresources.Atpresent,independently-ownedresourcesarealmostexclusivelyeithersmallscalesourcesofelectricity,suchassolarpanels,orcombinedheatandpowerfacilities.Ifthesecontinuetobeeffectivelymanagedunderthetraditionalregulateddistributionutilityparadigm,withperhapssomeupgradesincommunicationsandcontroltechnologiestobetterfacilitatethismanagement,thentheperceivedneedforatransactionalparadigmwillbeminimal,anditscostdifficulttojustify.Withinanycontrolareawherethisisthecase,onlyapronouncedcommitmentonthepartofthestateregulatoryand/orlegislativebodieswillmaketheadoptionofatransactiveenergysystempossible.Manysuchorganizationsthathavebeenengagedinexploringthesesystemshavebeguntodiscoverthatthe“devilisinthedetails”whentryingtodevelopconcreteimplementationplans.However,thearchitectsofthesesystemsarecontinuingtoimprovetheirtenabilitybybothdevelopingmoredetailedandtangibleroadmapsonhowto“getfromheretothere”,andalsobyincorporatingnewtechnologiesthatmakethesesystemsmoremanageable,andlessexpensivetodoso,bothintermsofcapitalandoperatingcosts.Anotherfactorthatwillcontributetomakingtheadoptionofthesesystemsmorefeasibleisthe“grassroots”developmentofislandsoftransactiveenergy,mostnotablymicrogrids.Aggressivecleanenergygoalswillalsoprovideatangibleboosttotheattractivenessoftheiradoption.Andfinally,acriticalcatalystformorewidespreadadoptionwilloccurwhensomestate(orperhapssomeforeigncountry)actuallysucceedsinputtingoneofthesesystemsintoplace,andthendemonstratesitsviability.TheevolutionofAmerica’selectricitysystem–particularlyitslegislativeandmarketmodels–hasalwaysbeenspurredbytheexistenceoffiftyindependentstate“laboratories”,withcertainstatestakingtheleadinexploringandimplementingnewdesigns,andwhenthesedesignshavebeenproventobesuccessful,theybecometemplatesforsimilarinnovationsandeventransformationsinotherstates.

Acriticalelementthatwasnotdiscussedindetailinthispaperistheregulatorysystems–bothfederalandstate–thatwillberequiredtoeffectivelysupporttransactiveenergyplatforms.ThiselementwillbediscussedatlengthinPartIIofthiswork.