Screenshot 2014-07-05 12.25.26Gary Ackerman is President of Foothill Services, and a long time observer of the electric energy scene in the western United States, especially California. He publishes a newsletter titled, The Burrito. Here is his review of our book, Transactive Energy: A Sustainable Business and Regulatory Model for Electricity. His review is in blue type. I’ve bolded a few things for emphasis.

This book touches upon a topic I wrote about a few Burritos ago … the oncoming consumer revolution in energy usage, especially electricity due to advances in Internet technology. The authors. Drs. Stephen Barrager and Ed Cazalet set their sights on advancing the ball on this topic. Ed asked me to look at the preface and the first chapter, which I gladly did. Here is what I learned and what I hope you will learn if you make an effort to buy the e-monograph and give it a read.

The first question on my mind was what was different about the application of granular real-time prices to manage a modern-day electricity grid. The answer provided by Barrager and Cazalet was: “Forward transactions for energy and transport are used in the wholesale part of electric power markets today. These transactions take the form of long-term contracts for inputs and outputs. Similarly, power-system operators use spot transactions to make adjustments between predicted and actual purchases and sales. The Transactive Energy (TE) model extends forward and spot transactions beyond wholesale to all corners of the market: industry, retail distributors, businesses, and homeowners.” So the book is addressing the consumer side of the meter and, therefore, the discussion could be useful in re-initiating amongst regulators and policymakers the retail access debate that has gone semi-dormant in California, save a handful of exceptions such as Marin Clean Energy’s community choice aggregation effort.

But more importantly, the TE model espoused in this book points to the freedom of individual consumers to make consumption choices based on immediate pricing and possibly carbon-emission information. Little need to talk about customer aggregators or alternative energy suppliers. Think of a future world where individuals make the necessary telecommunication investments and then program their preferences regarding heating, cooling, lighting, etc. based on externally provided grid data. Think of a world where individuals can either buy or sell electricity by the hour, the day, on the spot market or on forward bilateral platforms.

The next question I asked myself was what would happen, and almost certainly happen if regulators and utilities refuse to acknowledge the oncoming wave of individual choice? The authors state the answer explicitly, “Our outdated command-and-control system is struggling to keep up. It is stifling innovation and slowing the needed
improvements in efficiency.” Amen. And I expect that sluggish trend will continue for some time unless the impending wave alluded to overwhelms the regulators and utilities such that the acceptance will come about notwithstanding. Harken back to Kuhn’s treatise on the Structure of Scientific Revolutions (1962, University of Chicago Press) … the old ways and its advocates die out and are replaced by a new paradigm that is gradually accepted. The smarties among you should try and project how far out that new world in retail electricity may be; a decade away, five years, thirty years? “The complexity of the electric market is beginning to over-whelm regulators, planners, and operators. The large investor-owned utilities (IOUs) are struggling to meet political mandates and their commitments to customers. Municipal and other utilities face many of the same struggles although their regulatory model is different.”

The authors introduce a new term of art: prosumers. Clever, that, because households and businesses that both consume electricity and produce it via distributed energy technologies (where do we put behind-the-meter storage?) are prosumers.

Where do we go from here? What can Transactive Energy do to improve efficiency? The authors give an example how both spot and forward energy deals can be transacted using current-day Internet technology. “The TE process can operate in several ways and it will be mostly carried out by automated agents for the parties … Producers signal to the customers that they have energy to sell by offering sell tenders. Consumers decide if they want to accept a portion of a sell tender at a tendered price, wait for a better tender, or not use as much energy. For example, a sell tender might be: ‘I offer to sell 10 mega-watts (MW) of electricity at my plant in Modesto, California, between 9 and 10 a.m. on Monday, January 2016. My sell price is $75 per MWh.’ This means 10 MW for 1 hour or 10 megawatt-hours (MWh) of energy is available. If a consumer agrees to buy 2 MW of the 10 MW tender, then there is a transaction recorded between the buyer and the seller.” It makes sense, but of course my mind started wondering about credit quality, billing, dispute resolution, scheduling, consequences for non-delivery, etc. All the fun stuff we run into regarding wholesale power markets—and utilities even run into today with retail customers. Nonetheless, I am sure there are answers to these administrative problems, but they take time to establish. The authors have also thought about these issue: “Producers, consumers, and prosumers can transact bilaterally or autonomously on the TE Platforms. The transactions are recorded and the energy is delivered. Balancing parties stand by to make alternate delivery for any transactions that producers fail to make and absorb deliveries that customers fail to use.”

I wholeheartedly agree with the authors that the evolution towards TE is inevitable. It’s simply a question about how the entrenched parties with something to lose will be successful in slowing down the evolutionary process. And what are the societal benefits of TE? There are obvious answers and a few that require some noodling. For example, prices for electricity will tend towards marginal costs rather than cost-of-service averages that mask the societal value of the commodity. I don’t think I need to explain the efficiency argument here, but if you feel lost on that comment, review your Economics 101 textbook that is sitting in a box in your garage or attic. Second, innovation in new technologies will be boosted. For example, the Nest Thermostat (I am a happy customer of Nest) is a perfect example of innovation independent of heavy- handed regulation. Third, the authors claim that TE will ease the integration of renewable energy investments into the grid. Fourth, and this point is undeniable, price signals as envisioned in TE will make demand response and conservation choices meaningful, more effective, and thereby reduce the need for centralized electric generation to “fill the gap.” Fifth, although not explicitly mentioned in the text will be the ability of consumers to shift consumption to times, say, when negative real-time prices are in effect. Instead of exporting our problematic over-generation, maybe customers inside the grid can jump on energy deals for which they are paid to consume. I think the first, fourth and fifth points will dominate the discussion.

The book is available as an iBook on Apple iTunes in 51 countries.  It is also available on Amazon for the Kindle and PC’s. Ongoing discussions of TE can be followed at the Transactive Energy Association on LinkedIn. An index to these discussions and technical references for TE can be found on Transactive Energy Association (TEA) website at