The Transactive Energy (TE) business model is based on four simple rules:
1) There are two products: energy and transport,
2) Forward transactions are used to coordinate investment decisions and to manage risk,
3) Spot transactions are used to coordinate operating decisions, and
4) All parties act autonomously.
The TE model provides a level playing field.
Small parties have the same access to the market as large parties. Customers pay for what they need and use.
The TE business model provides a level playing field for all technologies. All ways to make or save energy can compete fairly regardless of their type, technology, size, location, and ownership. This possibility has been the dream of rate-makers and stakeholders.
Consumers can buy energy directly from sources they choose, or consumers can buy whatever type of energy they prefer if it is available: “green” or otherwise. It is as easy as telling StubHub, the event transaction platform, where you would like to sit in the baseball park.
All technologies compete fairly. The tenders and transactions agreed to by a supplier take into account the operating characteristics of the technology whether it is a combustion turbine or a smart appliance.
The TE product is a unit of energy delivered during a time period at a given place. It does not matter how the energy was produced or saved, unless of course the transaction is for a specific type of production such as renewables.
Location differences are accounted for in transport transactions. Decentralized resources pay less for transportation if they are located close to their customers. Customers pay less for transport if they are close to their suppliers.
In the TE model, energy produced by publicly-owned utilities is treated exactly the same as energy produced by privately-held producers or prosumers. Ownership of production and transport are separated so that producers and transporters compete fairly. Generation costs cannot be hidden in the cost of distribution and vice versa.
In California, the goal of electricity rate-making (pricing) is to ensure rates that are both equitable and affordable while meeting policy objectives.
California rate-making follows the following five general principles:
1) Rates should be based on marginal costs.
2) Rates should be based on cost-causation principles.
3) Rates should encourage conservation and reduce peak demand.
4) Rates should provide stability, simplicity, and customer choice.
5) Rates should encourage economically efficient decision-making.
The TE model is completely consistent with these principles. Spot transactions in the TE model reflect the marginal costs of production, storage, and transport. Spot transaction prices also rise above production costs when there is scarcity or transport congestion.
Investment and operating costs are recovered in forward and spot transactions. The TE model encourages conservation and peak demand reduction by moving demand away from expensive periods and toward inexpensive periods.
Forward transactions introduce stability into the system. The TE model is simple and it affords the ultimate in consumer choice. Retail customers play on the same level playing field with large industrial customers.
The TE model reduces risk (and therefore cost) for investment decisions. TE encourages rational trade-offs between production and conservation no matter how complicated the situation is.
Low-Income Subsidies
In some places, such as California, the legislature or another body will mandate lower prices for low-income customers. Without debating the merits of this idea, lowering the $/ kWh prices will decrease the customers incentive to be more efficient and to use energy when it is least expensive.
Subsidies can be implemented within the TE model. One way is to provide some customers with a subscription for their typical usage at a discounted monthly cost. If the low-income customer needs less, the customer’s Energy Management System will automatically sell the extra energy at current tender prices and pay the customer. If the customer uses more, the customer will pay the current tender price. And if the customer buys a more efficient air conditioner, his investment cost can be offset by selling part of his long-term subscription at forward prices. In this way, fairness and conservation can be accomplished.
Summary
In summary, the TE model meets all of the goals of California rate-making. The TE model uses forward and spot tenders and transactions to coordinate investment and operating decisions throughout the electricity ecosystem. While the implementation requires sophisticated communication and information technology (CIT), the concepts are clear and simple.
For more about the TE business model see the book, Transactive Energy: A Sustainable Business and Regulatory Model for Electricity.
The book is available for the iPad or Mac on iTunes.
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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