Transactive Energy: A Sustainable Business and Regulatory Model for Electricity

1. Transactive Energy A Sustainable Business and Regulatory Model for Electricity November, 2015 Stephen Barrager, Ph.D. Baker Street Publishing, LLC steve@bakerstreetpublishing.com Edward Cazalet, Ph.D. TeMix, Inc ed@temix.com

2. © 2015 Baker Street Publishing, LLC. All Rights Reserved. The Transactive Energy business model. The electric energy ecosystem of the future will be much different than what we have today. The changes are driven by technology and the need to wean ourselves from fossil fuels for environmental and political reasons. This document introduces a business and regulatory model for the future. The model is based on fundamental economic principles.The model is enabled by the tidal wave of communication and computing technology that is sweeping over us.

3. © 2015 Baker Street Publishing, LLC. All Rights Reserved. We are moving into an era where all ways to make or save energy will get to compete fairly, at honest prices, regardless of their type, technology, size, location, and ownership. Amory Lovins, Rocky Mountain Institute, in Utility Fortnightly interview

5. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Renewables Storage Storage Storage Renewables Storage ProsumersHomes Factories Generators Transmission Grid Distribution Grids Storage Decentralized Energy Resources In 2020 the “Grid of Things” will have decentralized energy resources, solar, wind, distributed storage, and two-way energy ﬂows. Commercial Buildings Storage Storage Microgrids Renewables Renewables

6. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Renewables Storage Storage Storage Renewables Storage ProsumersHomes Factories Generators Transmission Grid Distribution Grids Storage Decentralized Energy Resources Commercial Buildings Storage Storage Microgrids Renewables Renewables Distributed Energy Resources (DERs) will be virtually everywhere: PV panels, back-up generators, and a host of technologies we have not even thought of yet. Energy storage will be distributed everywhere: in homes, in vehicles, in neighborhoods, and in commercial buildings. Some of the storage will be electrical, some will be thermal. Renewables, especially wind and solar, will play a much bigger role. The building stock will be more efficient. Energy will flow between central stations and customers. It will also flow between customers. In 2020 the “Grid of Things” will have decentralized energy resources, solar, wind, distributed storage, and two-way energy flows.

7. © 2015 Baker Street Publishing, LLC. All Rights Reserved. The “Grid of People” includes Energy Services Parties and Transport services parties. Energy Services Parties Transport Services Parties -Consumers -Producers -Prosumers -Storage Owners -Transmission Owners -Distribution Owners

8. © 2015 Baker Street Publishing, LLC. All Rights Reserved. $ $ Buy Tenders: Forward and Spot In the Transactive Energy business model people use tenders and transactions to meet their needs. There are two kinds of transactions: forward and spot. Sell Tenders: Forward and Spot Transactions: Forward and Spot Delivery Consumer Prosumer Producer Regulators

9. © 2015 Baker Street Publishing, LLC. All Rights Reserved. $ $ Buy Tenders: Forward and Spot Long-term purchase contracts or subscriptions for service are examples of forward transactions. Spot transactions are used to ﬁll the gap between forecasted and actual needs. Sell Tenders: Forward and Spot Transactions: Forward and Spot Delivery Consumer Prosumer Producer Regulators

10. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Tenders and transactions are recorded on transaction platforms in the Transactive Energy (TE) business model. Energy Services Parties Transport Services Parties Transaction Platform Providers -Consumers -Producers TE Service Interface Transaction Database -Prosumers -Storage Owners -Transmission Owners -Distribution Owners Tenders and Transactions

11. © 2015 Baker Street Publishing, LLC. All Rights Reserved. A set of intermediaries enable the “Grid of People” and the “Grid of Things” to work together. Energy Services Parties Intermediaries Transport Services Parties Transaction Platform Providers -Consumers -Producers TE Service Interface Tenders and Transactions Transaction Database - Exchanges - Marketers - Retailers - System Operators -Prosumers -Storage Owners -Transmission Owners -Distribution Owners Tenders and Transactions

12. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Regulators oversee the system to prevent abuse. The system is transparent. Energy Services Parties Intermediaries Transport Services Parties Transaction Platform Providers -Consumers -Producers Regulators TE Service Interface Tenders and Transactions Transaction Database - Exchanges - Marketers - Retailers - System Operators -Prosumers -Storage Owners -Transmission Owners -Distribution Owners Tenders and Transactions

13. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Buildings will have a TE Service Interface. Many control algorithms will reside in the Cloud. TE Service Interface 0321 Energy Management System (EMS) HVAC System Water Heater Battery Smart Appliances Intermediaries Distribution Grid Transactive Energy Platforms

14. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Standardized platforms can be local or span large regions: neighborhood, substation, municipality, region, balanciing area, NERC Area, or nation. There can be energy transaction platforms and transport transaction platforms. Energy Services Parties Intermediaries Transport Services Parties Transactive Energy Platforms Neighborhood Substation City/Town Region Balancing Area NERC Area

15. © 2015 Baker Street Publishing, LLC. All Rights Reserved. The Transactive Energy (TE) model embodies the following four “big” ideas: 1) There are two products: energy and transport; 2) Forward transactions are used to coordinate investments and manage risk; 3) Spot transactions are used to coordinate operating decisions; and 4) All parties act autonomously.

16. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Rule 1) There are two products: energy and transport. The energy product is an amount of energy measured at a speciﬁc location and speciﬁc time period on the “Grid of Things”. The transport product moves energy from one location to another; for example, from a transmission substation to a building on the distribution grid. Separating energy and transport allows a regulatory model where energy can be produced and consumed in a free market. Simultaneously, transport can be a cost-based, regulated product. Energy Transport Delivery

17. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Rule 2) Forward transactions are used to coordinate investments and manage risk. In the TE model, all parties have access to forward contracting to make investment decisions. Today only large investors like utilities and private power producers can manage their risk using future contracts for energy sales and fuel purchases. The TE model affords this risk management mechanism to everyone, large and small. Regulators are being faced with a pletora of tough decisions. Who should own or lease solar panels? Is it better to locate them centrally in the desert or dispersed on rooftops? Is it better to invest in efficiency or more supply? Is it better to have central storage or decentralized storage? Where is the best place to locate storage in the grid? In the TE model these decisions are made on a level playing field by both producers and consumers. Small producers and consumers will have access to forward transactions to manage risk. The result will be a capital stock that maximizes net social benefit and affords risk management for all.

18. © 2015 Baker Street Publishing, LLC. All Rights Reserved. The Transactive Energy Platform provides a level playing field for consumer and producer investment decisions. Transactive Energy Platform Net Benefit Outcome Decision Uncertainty Influence Capital Stock Forward Tenders and Transactions Investment Decisions - Consumer - Producer Operating Decisions - Consumer - Producer Spot Tenders and Transactions Climate Change Technology Regulation Weather Customer Demand Solar Output Wind Output

19. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Rule 3) Spot transactions are used to coordinate operating decisions. Every storage operator needs minute to minute and forward energy and transport prices to make charging and discharging decisions. By the year 2020 every electric vehicle will have an Energy Management System on board that will make the charging and discharging decisions. The vehicle systems will need actionable, dynamic price information to make smart decisions. There will be thousands of electric vehicle owners each with different lifestyles and driving needs. “Optimizing” the operation of this system is beyond the capability of our current command-and-control business model. We need a business model that responds and adapts naturally to changing technology and consumer needs. The TE model meets this need by using constantly changing forward transactions and spot prices. Spot prices are used by decision makers to make adjustments between what they predicted demand would be and what it actually is. Operating decisions are coordinated system-wide when all operators have access to the same spot price market.

20. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Rule 4) All parties act autonomously. Customers are able to decide what maximizes their net beneﬁt if they are given the right prices for energy and transport. Only the individual producer or consumer knows what is in their best interest. Customers will have access to the same weather and price formation that Independent System Operators have in the TE business model. They can use that information to decide what is best for them. While individuals act in their best interest the system is constantly guided toward the state that maximizes overall social net beneﬁt. Rule 4 can be called the “Plug and Play” rule. Any technical device or customer should be able to plug into the electricity system and begin working without dealing with layers of bureaucracy.

21. © 2015 Baker Street Publishing, LLC. All Rights Reserved. The Transactive Energy model follows all four rules. Energy and transport markets are separated. Central station, DER, and customer investments are coordinated by forward transactions. The forward transactions enable everyone to manage risk associated with uncertainty in future prices, technology, and weather. Investment dollars go where they produce the most social beneﬁt. Producer and consumer operating decisions are coordinated by spot transactions. There is no need for "peak" or "time-of-use" pricing. Price signals to everyone will be time-varying and location dependent. All customers and producers act autonomously subject to regulatory guidelines.

22. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Example of how a retail Transactive Energy tariff works for a typical consumer. All the decision making is handled by an algorithm in my energy management system. The energy management system is my agent. • Based on my forecasted usage, I transact with a supplier for delivery of a ﬁxed quantity of energy in each hour of the year(s) for a ﬁxed monthly payment (subscription.) • If I use less than I subscribed for in each hour then I am paid for the difference at the hourly spot price. • If I use more than I subscribed for then I pay for the difference at the hourly spot price. • As my needs change I can automatically buy or sell a quantity of energy at the current spot price tendered by my supplier(s).

23. © 2015 Baker Street Publishing, LLC. All Rights Reserved. We have all the connections we need. Home, ofﬁce, mobile. People, devices, data. You can buy a thermostat at the Apple Store that is remotely programable with your iPhone. The thermostat knows where you are, how you behave when you are at home, and what the weather forecast is.

24. © 2015 Baker Street Publishing, LLC. All Rights Reserved. The three pillars of Transactive Energy are protocols, connections, and systems. Physical System Transaction System Regulatory System Systems PeopleHome Things Data Mobile Office Connections Protocols American National Standards Institute Organization for the Advancement of Structured Information Standards TeMix Energy Market Information Exchange (EMIX) Energy Inter- operation Services These 2 pieces are ready to go. These two pieces are ready to go. The physical and regulatory systems are in place. The Transaction Systems need to be piloted and deployed.

25. © 2015 Baker Street Publishing, LLC. All Rights Reserved. TheTeMix protocol covers the required process and content. American National Standards Institute Organization for the Advancement of Structured Information Standards TeMix Energy Market Information Exchange (EMIX) Energy Inter- operation Services Content Process

26. © 2015 Baker Street Publishing, LLC. All Rights Reserved. Transactive Energy is a “Silver Bullet.” • It will spur innovation. • It will provide incentives for efﬁciency. • It is fair and transparent. • It has the support of vendors, customers, suppliers, economists and environmentalists.

27. © 2015 Baker Street Publishing, LLC. All Rights Reserved. What are the impacts on the stakeholders? Ultimately everyone will win. This business model will raise efﬁciency and lower fossil fuel consumption. It will enable innovation in technology and market design.

28. © 2015 Baker Street Publishing, LLC. All Rights Reserved. What are the impacts on the customer? Customers will have more choices and less risk. They will be able to use forward transactions to manage risk and stabilize bills in the same way big producers and consumers do today. They will move usage away from high cost time periods and toward low cost time periods and renewables. They will capture the beneﬁt of the service they provide to the grid. This will stimulate efﬁciency and cost reduction. The cost of electricity will go down and we will use less of it.

29. © 2015 Baker Street Publishing, LLC. All Rights Reserved. What are the impacts on the utilities? Utilities will win if they actively participate in the transition to TE. They have an advantage in developing some of the TE platforms.They have existing relationships with millions of customers. TE will enable them to retain these customers.     Utilities can also provide many intermediary services to maintain safety and reliability. They have a natural advantage in transmission and distribution. Most of their rate-base is in transport. In the long run they will probably retain their position as transport service providers. Their unregulated afﬁliates will probably become competitive energy service providers.    Importantly, by employing forward retail contracts and subscriptions utilities can better secure cost recovery from customers and prosumers. Many customers who have alternatives will still agree to purchase and sell with the utility on a long-term basis. Why do some of us stay with AT&T when we have many choices?

30. © 2015 Baker Street Publishing, LLC. All Rights Reserved. What are the impacts on the storage owners and the renewables industry? Renewable industry value chain will flourish. Everyone will have more choices. Market forces will determine what, where, and when technologies are deployed. Usage will move toward low cost supplies, i.e., renewables. Independent power producers will also have more choices. They will be able to capture more of the benefit they provide to the grid because of their location flexibility.They will be able to transact directly with customers. Storage owners. The TE model will enable storage owners to capture the benefit of their mobility and operating flexibility. Storage will be installed in the right places. Electric vehicle owners will be able to capitalize on their mobility and charging flexibility.

31. © 2015 Baker Street Publishing, LLC. All Rights Reserved. What are the impacts on policy making bodies and planners? Regulatory and policy-making bodies will be able to focus on promoting innovation and avoiding economic abuses.The TE forward transactions will greatly reduce the incentives for market manipulation of spot markets and will contribute to reliability.The TE Platforms will help automate rules to mitigate market abuse. Planners will be relieved of an impossible task. The energy ecosystem of the future is too complicated for a central command- and-control approach. Central planners can not optimize resources because they do not know the beneﬁt of energy use or efﬁciency, they only know the cost.

32. © 2015 Baker Street Publishing, LLC. All Rights Reserved. The California State Legislature and the Public Utilities Commission will have to do the following to enable Transactive Energy: • Encourage Transactive Energy pilot projects and monitor results. • Separate energy and transport charges to the customer. • Provide storage and renewable owners with access to wholesale energy markets. • Transition existing retail tariffs to long-term (forward) and spot transactions. • Deploy transaction platforms to facilitate buying and selling of energy and transport by commercial and retail customers.

33. © 2015 Baker Street Publishing, LLC. All Rights Reserved. We have pieces of the TE business model in our current system. Wholesale producers and consumers use forward transactions to buy and sell energy and transmission. They use long-term contracts to maximize proﬁt and manage risk. Long-term contracts are a form of forward transaction. Wholesale producers and consumers also use some psuedo-spot transactions to do short term selling and buying of energy. This is done in command-and-control mode by the California Independent System Operator. These mechanisms can be extended to commercial and residential customers so they can maximize net beneﬁt and manage risk.

34. © 2015 Baker Street Publishing, LLC. All Rights Reserved. The Transactive Energy concepts are developed in our new eBook. Click here to buy the iBook for the iPad and Mac. Click here to go to Amazon and buy the eBook for the Kindle.