Our current system of regulation and bureaucratically managed Independent System Operators is a poster child for central planning. Central planners are holding back a tidal wave of technology and innovation. A recent report from Advanced Energy Economy (AEE) , an industry interest group shows the Advanced Energy sector of the economy is second only to the media sector and it is growing rapidly. This sector includes building efficiency, energy storage, and plug-in electric vehicles. We cannot afford to stifle this economic sector with an out-of-date business and regulatory model. We are holding back growth and it could cost American jobs.

Electric power utilities are surrounded by planners, consultants, lawyers, consumer advocates, and vendors who argue that the system can be improved incrementally to accommodate wind and solar, residential storage, and electric vehicles.  They say the current command-and-control, resource optimization business model works just fine. There is no need to move to a new paradigm. They say we can meet the challenge of new technologies by moving the command-and-control model to the distribution system. They say we can create a distribution system operator (DSO) to make decisions for the customer at the distribution system level and let energy producers play in a free market.

The debate between central planning and free enterprise is an old one. Debaters include some big names: Marx, Hegel, Hayak, Keynes, and Friedman. If we look at the past 100 years, free enterprise advocates are winning. Virtually every market in the US is unregulated or moving toward the free-market model: telecommunications, airlines, railroads, and even baseball.

The holdout is electricity. The arguments are that it is a natural monopoly; it is too complicated; or it is too critical to society to use the market approach.

In spite of what the entrenched interests say, I am going to put my money on a future where electric markets move steadily toward the free-market model. The reason is simple.  Central planners only know what electricity costs. They do not know what electricity is worth. Only the customer knows the value of electricity. The customer knows the value of electricity at every time of day and every location. If customers have honest cost information by time and location then they can make investment and operating decisions in a way that maximizes their net benefit or profit. Central planners can’t do this. With ubiquitous communication, artificial intelligence, and machine learning customers will have access to all cost information central planners have plus they will know all about customer benefit.

Economists have a different way of making the free market argument. An economist would say that the objective of our socio-political decisions is to maximize net social benefit. Net social benefit is the total value of electric energy summed across all customers minus the total cost of production and delivery.

A central planner or a central controller cannot write an algorithm to maximize Net Social Benefit. It is impossible. The central planner does not know what maximizes profit for the producer and the central planner does not know what maximizes the value for the customer.

Net Social Benefit.001

Central planners whether they are at a Public Utility Commission or an Investor-Owned Utility, only know costs. They know the cost of capital investment (central power plants) and operating costs (fuel, maintenance, insurance, etc.)  Central planners do not have enough information to maximize producer profit.  They do not have enough information to maximize customer net benefit. They never will. Only entrepreneurs know the profit and only customers know their net benefit. It is this flaw that brought the centrally-planning in the Soviet economic system to its knees.

The same flaw is the root cause of the problems we are having when we deploy direct load control and or when we try to integrate rooftop solar. The impact of direct load control on customer net benefit is only known by the customer. The  benefit of a household generating its own energy from the sun is only known by the household.

The alternative to central planning is the free market. Free markets use two-way price information to guide decision making. Free markets are not perfect but they do a good job of coordinating investment and operating decisions. In free markets investment decisions are coordinated by forward transactions,e.g., contracts and subscriptions. Forward transactions are also used to manage risk. Operating decisions are coordinated by spot prices. The system is always nudged in a direction that improves net social benefit.

In the new electric energy ecosystem we will have more privately-owned solar, wind, and storage facilities. The owners of these assets want to use forward and spot transactions to maximize their profit and minimize risk. They are not cost minimizers. They are profit maximizers. They want to do things that are good for the grid(s) and be rewarded for it.

With a little creativity, the market can be used to maintain system reliablity, power quality, and safety. For example, smart inverters can be used to make power quality adjustments if the market tells them what is needed.

In the new Transactive Energy-based ecosystem, customers will have the ability to control their devices. Customers will have access to the same weather information that central planners have. They will use this information to move their demand toward low-cost times of the day and away from high cost times.

This is what I think. Do you see it differently?