Transactive Energy

A Sustainable Business and Regulatory Model for Electricity

Stephen Barrager, Ph.D. Edward Cazalet, Ph.D.

Preface

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Preface

When You Come to a Fork in the Road,Take It! Yogi Berra1

This book is about applying fundamental business concepts to move our elec-tric power markets to a new paradigm. The heart of the new paradigm is the use of forward and spot transactions to guide investment and operating decisions.

The current paradigm is regulated cost-of-service and centralized resource optimization. This old paradigm will gradually give way to the new mod-el as the electric system evolves from centrally planned to a decentralized energy ecosystem.

The new business and regulatory model, Transactive Energy (TE), scales well. It can coordinate decisions across the full spectrum of size and tech-nology. It works equally well for central power-plant planning and for smart home-appliance operation. It supports both competitive pricing and cost-of-service pricing.

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The TE model embodies four big ideas:

• There are two products: energy and transport services.• Forward transactions are used to manage risk and coordinate investment

decisions.• Spot transactions are used to coordinate operating decisions.• All parties act autonomously.

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 pur-chases and sales. The TE model extends forward and spot transactions beyond wholesale to all corners of the market: industry, retail distributors, businesses, and homeowners.

High technology, Moore’s Law and the Internet have descended on the slow-moving, highly regulated electric power industry. The cost of solar panels and energy storage are dropping rapidly. We can now communicate everywhere and between everything, from central power plant dispatch to iPhone to home appliance. Fast computation and data storage are inexpensive and getting cheaper by the month.

We can delegate decision-making to microcomputers embedded in our vehi-cles, homes, and appliances. We don’t have to fi gure out when to set our ther-mostats back or which utility tariff is best for us. In the emerging world, our microcomputer “agents” will do these things for us.

We are fortunate that the technology has arrived. It will help us reduce our dependence on oil and decrease CO

2 emissions.

The electric power system is evolving in response to the new technology. We are seeing several new challenges and opportunities, including the following:

• Signifi cant amounts of energy supplies with variable outputs, e.g., wind and solar.• Decentralized Energy resources, e.g., rooftop PV panels, cogeneration, and on-site generation.• The need for storage and the availability of new storage options.• Microgrids: whole pieces of the market voluntarily isolating themselves and planning their own integrated energy systems.

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• More electric vehicles.

Our outdated command-and-control system is struggling to keep up. It is sti-fl ing innovation and slowing the needed improvements in effi ciency.

This book explains the Transactive Energy (TE) business and regulatory model and how we can use it to meet the future head on. We believe that the TE model is a silver bullet. It will provide incentives for investment and effi ciency that will lower costs for both producers and consumers. It is fair and transparent. The TE concept is consumer friendly and politically attractive. It will spur technical and organizational innovation across the globe.

Our aim by writing this book is to expedite TE as the normal way of doing busi-ness—globally. TE is the keystone of an effi cient, fair, and transparent elec-tric power system.

This book is for the full range of stakeholders in electric-power markets:

• Customers• Utility executives• Legislators• Environmentalists• Regulators• Economists• Energy business professionals• Investors and vendors• Systems, power, and electrical engineers• Students• Energy researchers

The authors, Stephen Barrager and Edward Cazalet, are pioneers in the design of new methods for electric-system planning. They both studied systems engi-neering and economics in the Management Science and Engineering Depart-ment at Stanford University. They have built several path-breaking companies to serve the electric power industry. You can read about their qualifi cations in Chapter 7 titled, “Our Basis for Writing This Book.”

We believe this book will provide a focus for people who are leading the move to the TE business and regulatory model worldwide. You can follow and par-ticipate in the discussion of TE with the Transactive Energy Association (http://www.tea-web.org). There you will find discussions of TE from many

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different perspectives. And you will fi nd questions and answers on implemen-tation and technical details that are beyond the scope and purpose of this book.

We are at an important turning point in history. We are at the end of an era of expanding energy use and in particular energy from fossil fuels. We have the opportunity to turn the corner faster and move to a new playing fi eld. A playing fi eld that is eminently more level than what we currently have.

¹ Yogi Berra, When You Come to a Fork in the Road, Take It!: Inspiration and Wisdom from

One of Baseball’s Greatest Heroes, Hyperion, 2002, p. 1