OECD on Competition and New Electricity Business Models

This article in the OECD Observer by Chris Pike provides a concise overview of some of the current issues and challenges that innovation is creating for existing business and regulatory models in electricity (and cites Kiesling & Munson 2016, thank you for that!). The main argument is that digital innovation is disrupting the traditional regulated retail business model, which itself arises out of regulatory institutions in the industry. The article sets up the idea of peer-to-peer energy and blockchain’s potential as a technology platform that enables decentralized trust among strangers and thus facilitates market processes, and then lays out some alternative means by which distribution network participants can pay for their use of the grid.

This question of who pays for the distribution grid and how is already a pressing one, and will become more important as distributed generation increases, electric vehicle penetration grows, and more microgrids are set up. Although he provides some examples, Pike does not explore what I think is the most promising change to pricing the network/grid portion of the supply chain: reframe the distribution utility as providing grid services to interconnected users, and use digital sensors and monitoring technology to charge service fees to grid users. This pricing method is a logical extension of the type of pricing that Uber and Airbnb charge for their platform facilitation services.

For example, consider a retail market for energy that enables a solar PV owner to purchase energy when the PV array is not generating and sell (excess) energy when it is. This homeowner could use a smart inverter to connect the PV to the distribution grid, as well as using it as a home energy management system to automate the responses of devices to price signals from the retail market — the homeowner can specify a within-home willingness to pay to use the energy from the PV, the same or a higher willingness to accept to sell the energy to someone else, and a willingness to pay for energy from someone else. The market algorithm (in my mind, a double auction with simultaneous bids and offers during a predetermined time period) determines the market clearing price, which initiates changes in the homeowners’ device settings to use more or less energy or to buy or sell energy.

For those transactions to be possible, let alone mutually beneficial, people (more precisely, peoples’ devices) have to be interconnected on the distribution grid into a physical delivery network as well as a market communications network. That’s how the distribution grid assets can be used to create value in a decentralized network with distributed resources. To do that, the distribution grid owner (and let’s say owner and assume for the present that this function will be a regulated monopoly function) has to employ this asset infrastructure to provide a set of services: energy delivery in a two-way flow network, supply-demand balancing, voltage and frequency regulation, reserves for backup support, to name the most important ones. Some of these services occur typically on a per-transaction basis (transaction fee), some vary with the amount of energy delivered (delivery fee), and some are incurred but not directly connected with a transaction (fixed fee).

At this point the devil is in the details (Should each fee be charged separately? Should they be rolled together into one delivery fee? Should it be a two-part tariff, as economic theory suggests?), but the simple point is that pricing grid services that the grid owner provides using grid assets is a way to think about this problem that gets out of some messy arguments (e.g., fixed charges and demand charges for distributed solar under net metering regulations) and highlights the benefits of a platform business model.