Illinois NextGrid, platform economics, and a new working paper

Recently the Illinois Commerce Commission kicked off its “utility of the future” initiative, called NextGrid. This 18-month stakeholder study will gather ideas to map out a strategic direction for electricity in Illinois. I spoke on a panel at the kickoff event that focused on platforms and transactive energy; here’s a summary of the panel from David Unger at Midwest Energy News.

Note in particular how Unger describes the relevance of platform economics to the future utility business and regulatory models:

The concept of the power grid as a “platform” — a hub that coordinates energy transactions between various producers and consumers rather than a one-way delivery system — is central to the way Illinois is building a blueprint for its grid of the future. …

So-called “platform economics” have come to dominate many of the world’s largest industries, from banking to shopping to transportation. The concept is simple: Instead of offering consumers a discrete set of products, companies are instead increasingly developing networks or systems that enable participants to exchange information, services and products in many different directions. Think AirBnB, Uber or Amazon.

His article reminded me of a post I wrote in September 2014 (right after Jean Tirole won the Nobel Prize, in part due to his platform economics work), and what I wrote then still informs my thinking on distribution and retail electricity platforms:

As I apply these concepts to the electricity industry, I think digital technologies have two platform-related types of effects. The first is the reduction in transaction costs that were a big part of the economic drive for vertical integration in the first place — digital technologies make distributed digital sensing, monitoring, and measurement of energy flow and system status possible in ways that were inconceivable or impossibly costly before the invention of the transistor.

The second is the ability that digital technologies create for the network firm to handle more diverse and heterogenous types of agents in a two-sided market. For example, digital sensors and automated digital switches make it possible to automate rules for the interconnection of distributed generation, electric vehicles, microgrids, and other diverse users into the distribution grid in ways that can be mutually beneficial in a two-sided market sense. The old electro-mechanical sensors could not do that.

Today I am presenting a draft paper at a workshop at Tilburg University on Economic Governance in Data-Driven Markets that analyzes these themes. The paper, From Airbnb to Solar: Toward A Transaction Cost Model of an Electricity Distribution Platform, presents a model of how digital technology-induced transaction cost reductions can lead to new markets for the rental of excess capacity in assets (like rooms in your house, or energy from your solar panels). I’m looking forward to a great conversation and helpful comments!