A business model determines how investment and operating decisions are made. Ultimately it is people who make these decisions, not things. We need to think about the “grid” of people as well as the “grid of things” as we move toward a new electricity business model.

Electricity demand is treated  as a given in the current system. A sample of the electric demand for one year is shown above. Until recently it was the job of utilities to meet this demand as cost effectively as they could. With the advent of Decentralized Energy Resources (DERs) this demand is now met in many new ways, e.g., solar panels on rooftops. Customers are also changing the demand curve by investing in greater efficiency, storage, and smart appliances.

TE ground rules.007In our energy ecosystem there are investment decisions followed by operating decisions. Total cost is the outcome of both decisions. The investment decisions are tricky because things like future demand and fuel costs are uncertain. The operating decisions are tricky because weather is unpredictable from day to day, hour to hour, and minute to minute. Weather drives most of the variation in demand. The decision sequence is shown in the decision diagram on the left.

 

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The decision diagram changes with the advent of DERs.  The investment decisions are made not only by producers but also by customers and prosumers. Operating decisions are also made by customers. Customers and prosumers are the ultimate decision makers. They determine what the hourly demand curve looks like.

Traditionally, the investment risks are assumed by utilities and their stockholders.  A significant portion of the supply risk is now being passed to the people who buy solar, storage, efficiency improvements, and a variety of DER’s. How will customer’s manage the risks of technology failure, fuel cost changes, regulatory changes, and weather?

TE ground rules.009In the Transactive Energy business model everyone can manage investment risk using forward transactions. Producers will continue to use forward transactions like advanced fuel purchases and long-term contracts to manage risk. Forward transactions will also be available to customers to manage their risk. (Advanced airline ticket purchases are a familiar form of forward transaction available to airline customers.)  In the Transactive Energy model all customers can buy and sell energy in advance of delivery. This allows everyone to reduce uncertainty in future costs and benefits.

Forward transactions also provide the market signals needed to coordinate system-wide investment and operating decisions.  — producer, customer, and prosumer. This is important as we invest in more storage technologies. The benefit of storage devices is dependent not only on what they can do but where they are in the ecosystem.

Spot transactions are used in the Transitive Energy model to coordinate operating decisions by both producers and consumers. This is shown in the figure above. The TE Platform provides the economic framework for the forward and spot transactions to happen.

Theoretically we want to make investment and operating decisions in a way that maximizes social welfare. The TE model is consistent with this goal. The familiar command and control,  cost minimization model is not. The commend-and-control model will not work in the new DER world because it is cost based, not benefit based. Central planners and operators do not know what customers want year by year, day by day, and minute by minute. Only the customers know. The TE business model gives everyone the information they need to optimize their net benefit.

For more about the Transactive Energy see our eBook, Transactive Energy: A Sustainable Business and Regulatory Model for Electricity.

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The book is available for the iPad or Mac on iTunes.

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It is available for the Kindle and PC on Amazon.

To follow industry developments in TE visit the Transactive Energy Association group on LinkedIn.

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