The Transactive Energy (TE) business model will increase innovation by:
- reducing investment risk for all players: retail, and wholesale,
- providing transparent, predictable, and actionable prices to everyone, and
- stimulating new services and technology.
We need innovation throughout the electricity ecosystem to:
- improve efficiency.
- reduce reliance on fossil fuels.
- lower costs.
Moore’s Law and the Internet will revolutionize electric power markets. The whole smart-grid paradigm is the result of innovation made possible by improvements in computation, connection, and communication. The TE business model opens up new opportunities for innovation.
The Transactive Energy (TE) business model is based on the following four simple rules:
- There are two products: energy and transport,
- Forward transactions are used to coordinate investment decisions and to manage risk,
- Spot transactions are used to coordinate operating decisions, and
- All parties act autonomously.
Innovation is bound to blossom when customers and producers can coordinate their investment and operating decisions using forward and spot transactions.
The McKinsey Global Institute has just published a survey of the benefits of disruptive technologies to the year 2025 (see Figure 5-2): “Mobile Internet, automation of knowledge work, the Internet of things, and Cloud technology are at the top of the list” (see also “Disruptive technologies: Advances that will transform life, business, and the global economy”).
“The TE model applies these technologies to electricity. Energy storage and renewable energy are on the McKinsey list as well. The success of storage and renewables depends on the items at the top of the list.
Today, where flat, $/kWh prices are paid by customers there is reduced incentive for customers to buy smart appliances and invest in energy management systems (EMSs). As a result there is little incentive for manufacturers to invent and offer appliances and devices with two-way communication. These devices are a little more expensive. Manufacturers are waiting for markets to develop so they can use economies of scale to drive down costs.
The Transactive Energy (TE) model puts the incentives in place for the innovation and disruptive technologies to facilitate energy efficiency, storage, Distributed Energy Resources (DERs), and renewables. The size of the impacts on innovation will depend on how widespread TE is implemented.
In the TE model, retail customers can do all the things that big producers can do. Customers can execute forward transactions for the energy they sell into the grid. Transactions are easy and automatic. Consumers and producers connect to the same TE Platforms and speak the same language.
The use of forward transactions by everyone in the market will allow new ways of reducing risk. It is a routine practice for large producers to use forward transactions to reduce investment risk. For example, when XYZ Incorporated wants to build a new solar facility in the California desert they first negotiate a contract with Pacific Gas and Electric, Southern California Edison, and/or San Diego Gas and Electric to purchase the energy produced at a specified price (for the next 20 years.)
XYZ’s forward transactions significantly reduce the risk of their investment. As a result, they are able to recruit investors, borrow money at lower interest rates, and increase their profits. If there is a tax loophole, or a way to reduce risk, the sophisticated parties in the production side of electric power can find them. In the TE model retail customers will be just as smart as big producers.
Large wholesale producers can also operate their facilities profitably because they know the prices of spot tenders for each of the next several 15-minute intervals. They know when it is profitable to run a combustion turbine or charge a storage device. Customers will have the same information when TE is implemented. Their smart thermostat or smart appliance will know how to operate profitably— across the entire electricity ecosystem.
We are in an era of innovation in services as well as technology. The TE business model will encourage creation of transaction platforms, intermediaries, market makers, and EMS systems. New people with new skills and expertise will bring innovation to electricity.
Certainly there is a long list of services that can be provided in innovative ways if market signals are available. As Amory Lovins says in ReInventing Fire, “.. automated controls can imperceptibly respond to price signals by adjusting appliances usage, allowing customers to minimize their costs with no hassle and with an uncompromised experience, just as ATM’s and the Internet have done in banking.” In other words, The TE business model and technology will do for electric power what ATM’s and the internet have done in banking.
Stability, fairness, and transparency support innovation. They are keys to encouraging small entrepreneurs. The TE model offers more stability, fairness, and transparency than our current top-down, centralized, complex, command and control system.
In the TE model, short- and long-term rules are clear and transparent. This will encourage rapid decision-making by entrepreneurs and reward them for doing the right things. Lower risk will inspire entrepreneurs to pursue more opportunities.
TE will increase innovation by reducing investment risk and providing better cost information to decision-makers. Forward transactions will reduce investment risk for producers and consumers alike. Spot transactions will provide entrepreneurs the incentives they need to develop smart devices of all kinds: appliances, storage devices, building energy management systems, and industrial process controllers. TE will encourage rapid decision-making and will reward the right things.
Innovation is the key to improving efficiency, lowering cost, and decreasing our reliance on fossil fuels. It is difficult to imagine a business model that is more friendly to innovation than Transactive Energy. The model enables small and large customers to transact on a level playing field with small and large producers.
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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