The evolving smart grid, with increased use of renewable energy generation and distributed energy management technologies, offers the potential for significant efficiency improvements through market-based transactive exchanges between energy producers and energy consumers. To enable these sorts of exchanges, however, the modernized grid will require new economic tools and processes. “Transactive energy” is the broad term used to describe this new approach.
Transactive energy (TE) can be defined as “a system of economic and control mechanisms that allows the dynamic balance of supply and demand across the entire electrical infrastructure using value as a key operational parameter.” This definition, which is the one currently used by NIST, was originally proposed by the U.S. Department of Energy’s Gridwise Architecture Council in its Transactive Energy Framework.
How is Electricity Priced? And What Does Electricity Really Cost?
Many consumers of electricity don’t realize that the cost to supply electricity actually varies minute-by-minute. For example, at times of peak demand, usually in the afternoon and early evening, the costs to provide electricity are higher. In addition to demand, many other factors also contribute to the cost of electricity at any point in time. If you want to learn more about factors involved in the cost of electricity, the U.S. Energy Information Administration’s website provides a helpful explanation.
Today’s consumers don’t experience these daily or hourly fluctuations, because the price they pay is based on the seasonal average cost of providing electricity. This economic model has worked well in the past, even though it’s much simpler than many other economic models and markets used in other areas of our lives. (Imagine, for example, if your neighborhood grocery store didn’t post any food prices or ask you to pay at a checkout line, but only sent you a bill once a month for whatever you had selected and brought home the previous month.)
The flat-rate pricing model of the past century must be updated for the smart grid that is emerging today. One reason that the economic approach is beginning to change is an increase in stresses on the electrical grid. For example, the increased use of the intermittent renewable resources (wind and solar) adds to the complexity of responding to requests for more or less power. Another example of new stresses is the increased use of roof-top solar and batteries in the distribution grid, which has traditionally not been designed to incorporate generation sources. A second major factor driving changes in economic model is the increased availability of improved technologies that are giving consumers greater price transparency, choice, and control.
State regulatory agencies in New York, California, Hawaii, and elsewhere are exploring and initiating changes to grid market structures. Other countries, including Australia and the Netherlands, are also exploring new approaches.
The transactive energy approach offers a way for producers and consumers to more closely match and balance energy supply and energy demand. If energy providers and users can agree on the value of electricity at a certain point in time and place (economists would call this “monetizing the value of energy products through a market approach”), then the producer and consumer can each make a decision if they want to proceed with the transaction at that given price.
The transactive energy approach can offer many potential benefits, both to individuals and to society (see below). However, the implications of this market-based approach must be better understood, and the tools for managing its added complexity must be developed in a way that ensures transparency, choice, and ease of use to consumers. At the same time, the operators who control and manage the electrical grid must be able to use these new tools while continuing to provide electricity safely, reliably, and efficiently.
NIST and other stakeholders are exploring the transactive energy approach from a variety of perspectives, such as:
TE’s Potential Benefits for Consumers
The transactive energy approach offers key benefits to consumers:
Here are several examples of how a consumer could take advantage of the transactive energy approach:
TE’s Potential Benefits for Society
The transactive energy approach also offers key benefits to society:
What is NIST Doing with Transactive Energy?
Additional Resources for Learning about Transactive Energy