A smart grid is a transactive grid (Part 2 of 5)

Lynne Kiesling

One of the hallmarks of smart grid technology is how it enables and reduces the cost of two-way communication. In electricity as in other industries, digital communication technology makes it possible and easy to have two-way communication, and to use that communication capability to automate individual actions. As we have seen throughout society as communication technology has proliferated, it makes it easier and cheaper to engage in transactions. The implications of this for the electric power network: a smart grid is a rich transactional environment, a market platform, a network connecting producers and consumers who contract and negotiate their mutual exchange of value (product, service) for value (payment). A smart grid is a transactive grid.

Take a non-electricity example — personal banking. Two innovations have transformed personal banking: the ATM and the Internet. The digital communication technology that the Internet comprises enables us to do our banking online instead of going to a branch or doing bank-by-phone. The transactions in which we engage with our bank are thus easier, quicker, and cheaper for us. Furthermore, we can use this technology to automate our actions, such as scheduling recurring bill payments, or establishing trigger rules by which we receive alerts about our account status or activity. Digital communication technology enables us to bank any time, from anywhere. The value creation due to this transactive capability has been enormous, and has largely been in the form of consumer surplus (with some increases in retail banking profits before the current recession).

Digital communication technology lowers transaction costs. Transaction costs reduce the extent to which private parties engage in mutually beneficial exchange, thus as the Internet has grown and our communication capabilities have expanded, our transactiveness has also increased dramatically. Banking is just one example; think about online shopping, eBay, and all of the other economic transactions in which you engage using the Internet.

The implications of this transactive capability have been enormous; it has reshaped markets, firms, and consumer expectations. Markets are increasingly global and competitive, and we can engage in transactions with people on the other side of the world. But the most important implication of transactiveness for the electric power industry is the effect on firms. High transaction costs provide one reason for vertical integration, and have contributed to the vertically-integrated firms that have been the producers in this industry for a century — where transaction costs are high, firms make their transactions internal instead of through markets. But the transaction cost reductions arising from digital communication technology shift the margin at which it is profitable to organize transactions within a firm instead of through markets. If it’s now cheaper to transact in markets, then transactive activity should shift from within-firm to between-firm, and the boundaries of firms should change. Vertically-integrated firms exist for several reasons (not the least of which in electricity is historical path dependence!), and transaction costs provide only one reason, but lower transaction costs will contribute quickly to the increasingly stand-alone capability of both the generation and the retail portions of the electricity supply chain. In other words, digital communication technology + good smart grid regulatory policy [will discuss this on Friday -ed.] => transactive smart grid => more value creation from competitive wholesale and retail electricity markets, and from integrated wholesale and retail electricity markets.

From the consumer’s perspective, the implications of a transactive smart grid are profound. Take the personal banking experience, and imagine what that kind of transactive capability would be like with respect to your energy use. Online home energy management, remote access, the ability to automate your electricity consumption decisions, the array of new products and services that could make use of this transactive functionality. Large industrial and commercial consumers already have such capability, but as technology prices have fallen and entrepreneurs have developed new products and services, a transactive smart grid brings this functionality into the home, creating lots of value potential for consumers and for the producers and entrepreneurs who provide them the products and services they value.

A smart grid is a transactive grid.

But the reverse is also true. If a communication-rich electric power network does not take advantage of this transactive capability, we forsake all of this value creation. Sure, we still get value from the engineering-related optimization of power flows, of fault detection and repair, of distribution automation. But the engineering-related possibilities of a smart grid are only the tip of the iceberg; they are tweaks and improvements on the physical management of a closed-loop system. The true, meaningful, resilient and long-lived value proposition in smart grid is in enabling the multitudes of diverse, distributed, heterogeneous agents in the electric power network to exchange with each other for mutual benefit. It’s in enabling a neighborhood to form a microgrid and exchange among themselves. It’s in enabling me to make a choice of whether to pay my employer for allowing me to charge my plug-in vehicle, or whether to sell my employer some of my stored electricity in the battery of my plug-in vehicle. It’s in allowing consumers to choose dynamic pricing and empowering them to use the technology and the price signals to control and manage their own electricity use.

If a grid is not transactive, it’s not a smart grid.

Tomorrow: the end-use devices that can make this transactive vision a reality

Other posts in this series:

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12 thoughts on “A smart grid is a transactive grid (Part 2 of 5)

  1. I agree that technology without transactions aren’t smart, but don’t see why technology is a prerequisite for a transactive grid. Real time pricing requires political and regulatory reform and immediately creates incentives for differential grid utilization regardless of the hardware on the grid. Access to ISO/RTO markets is driven much more by the regulatory/commercial mechnanics of participation (size of block power trades, bonding requirements, etc.) than the communications hardware of the system. (Indeed, when ISO-NE created their FCM markets, the low cost of entry encouraged lots of people to invest in web-enabled communications hardware that was quite cost-effective and proven – but if that hardware was free, there would be no incentive for nearly as many to purchase if you had to post a $100,000 surety as a prerequisite of participation.)

    So while I agree with you that the transactive question trumps, I’m not sure I follow the logic of why the technology side is worthy of focus. Fix the regulations and you’ll get plenty of technology pull. To do otherwise strikes me as providing tax breaks on crib purchases to encourage faster birth rates…

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  4. @Sean.

    The technology side is important because it is low-cost and ubiquitous technology–embedded human “knowledge” in capital–that enables humans within the socialsphere to easily take advantage of the exchange market Lynne is speaking of. Of course, political and regulatory reform are also absolutely vital. The absence of a “rules-of-the-game” environment in which the technology may be utilized will inevitably gum up the works and impede market transactions. So I see it as more of a BOTH/AND situation and not an EITHER/OR. Both technology and regulatory reform are essential.

  5. @Sean

    I’m doing this again to correct a typographic problem. Em-dashes I inserted in the above comment were interpreted by the comment application HTML as hyphens — which made the text hard to read. Hope this is better.

    The technology side is important because it is low-cost and ubiquitous technology -– embedded human “knowledge” in capital — that enables humans within the socialsphere to easily take advantage of the exchange market Lynne is speaking of. Of course, political and regulatory reform are also absolutely vital. The absence of a “rules-of-the-game” environment in which the technology may be utilized will inevitably gum up the works and impede market transactions. So I see it as more of a BOTH/AND situation and not an EITHER/OR. Both technology and regulatory reform are essential.

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  8. Kirk,

    I’m not suggesting technological development isn’t important – just that it isn’t necessary as an area of focus, in the sense that with regulatory reform, markets will pull technologies forward. (They’ll still be developed, to be sure, it’s just that they will come from a pull rather than a push strategy.) But absent market reform, tech development is a waste of time. All the smart meters in the world won’t give regulated utilities an economic interest in energy conservation, and all the high-frequency data encryption in A/C power flows won’t do anything to affect the liquidity of merchant power markets. I’m not suggesting we don’t need a cart and a horse – simply that we don’t confuse the sequence of the two.

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  11. Uhmm… Did Lynne ever design or work on an electricity grid? Why does everyone assume it’s easy to make every grid as smooth as a fiberoptic network by just throwing more money at it? Oh it’s because they have never studied engineering that’s why.

    I am also looking forward to electricity prices jumping up to $1,000,000 per kilowatt next time we have some sort of a crisis/disaster. Instead of rushing to the grocery store to get canned food, we’ll all go home and recharge our batteries.

    The gazillion dollar question on my mind is: What is the benefit of all this? Are our household electricity costs too high? So once this smart stuff is there, I should expect to pay at most like $5 per month for electricity, right? Because if I’m still gonna pay the same $50, I am voting NO for the smart grid.

  12. Hi kman,

    If you follow the GridWise Architecture Council and Olympic Peninsula project links that I provided in the first post, you will see that I work with a team of engineers and IT folks, and we all have a lot of experience in various parts of grid architecture.

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