Lynne Kiesling: Better Grids, Better Markets, Better Choices

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Dr. Lynne Kiesling is a Visiting Associate Professor in Economics, Associate Director, Purdue University Research Center in Economics. 
She was a panelist at the DC Grid Modernization Forum hosted at the Dirksen Building on Capitol Hill on September 13, 2017

I’m writing this post on my office computer in West Lafayette, Indiana, listening to a streaming music service on my iPod, and will email this file to an editor in Arlington, Virginia when I’m finished. For most of us this is a common story. How many digital devices have you used today? What are they enabling you to achieve that would have been harder, costlier, or impossible without them? Digital technology pervades our lives; by 2015 64 percent of US adults had smartphones, 73 percent of US households had broadband in the home, and 98 percent of the US population had access to high-speed Internet.

The digitization of economy and society in the past two decades has been dramatic, a product of an environment with rich experimentation and low entry barriers. That combination of experimentation and low entry barriers has made the Internet such a vibrant, interesting, value-creating platform. These digital innovations are possible because the Internet provided a platform for “permissionless innovation”.

An economic way of thinking about digital technologies and how they affect our lives is that they reduce transaction costs, the costs of engaging in exchange through contracts and markets. Think about how Amazon’s website makes it easier and cheaper to acquire items you want to buy, or how Airbnb creates entirely new lodging opportunities and ways to experience other places that would not have been possible with only the market for conventional hotels. Those new services, new platforms for exchange, arise from entrepreneurial responses to dramatic reductions in transaction costs.

Such digital innovation and creativity is starting to affect how we produce and consume energy, and the environmental consequences of those energy choices. If our objective is a clean and prosperous future, innovation is a crucial part of the electricity story. One part of the clean technology story in electricity is the recent growth in renewable energy as production costs have fallen for solar PV panels and wind turbines – the International Energy Agency recently reported that in 2016 solar power grew more globally than any other electricity fuel source. Renewables are growing as a share of the generation portfolio in the US and around the world, at scales from the small solar rooftop installation on a home to large utility-scale solar and wind farms. These small-scale resources fall under the category of distributed generation, or distributed energy resources (DERs).

Getting the most economic and environmental benefit from renewable energy technologies involves connecting them together on the existing electricity distribution grid. DER interconnection poses considerable engineering challenges and costs, because the architecture of the distribution grid is designed for the one-way flow of energy from large-scale generators to end users who are consumers without their own generation resources (and it’s been that way since the 1890s). Enabling the two-way flow in the distribution grid that’s required for a fully distributed system will entail substantial grid investment.

With DERs interconnected on the distribution grid, DER owners can sell their excess generation to others, giving them more incentives to invest in DERs because they can make some money back. An existing regulatory approach, net metering, allows DER owners to “spin the meter backward” and pay for their net consumption of electricity; this policy has led to increased investment in residential solar, but does not account well for the costs and benefits of highly distributed energy systems. Given the real-time sensing, monitoring, and interconnection capabilities we now have thanks to digital technologies, we can do better by establishing open retail markets.

This approach to distribution-level distributed energy is called transactive energy. Transactive energy uses price signals and market processes to coordinate energy use using digital technology to automate responses to price changes. An example is the GridWise Olympic Peninsula project in 2006-2007, the first transactive energy pilot project (I was part of the research team, and summarized the results at my blog, Knowledge Problem).

The participants had two-way programmable thermostats (better technologies exist today, like the Nest or Ecobee or Honeywell thermostats). One group was a control group with only the thermostat, and three other groups had different pricing contracts: one group paid a fixed price, one paid peak-off peak high-low prices, and one paid the real-time price from the wholesale power market. Those on the real-time contract could program their preferences into their thermostat easily, and if the price went up in a market period and exceeded that homeowner’s trigger price, the thermostat would automatically adjust its settings until the price fell. In this project the average household saved 15 percent on their bill, real-time consumers saved 20 percent, net energy consumption fell, price signals helped avoid outages, and capacity utilization in the system as a whole improved.

Transactive energy harnesses transaction cost reductions to make a more distributed and interconnected network of diverse resources possible and profitable. Conventional grid architecture and command-and-control regulatory approaches struggle with the heterogeneity of different scales of solar, different preferences of diverse consumers, and how owning DERs turns consumers into a different type of actor on the network: a “prosumer”, who can be a consumer at times and a producer at times depending on their preferences and what they perceive in the system. A transactive distribution grid, with an open retail market where DER devices can make bids and offers to buy and sell and can respond autonomously to market outcomes, is a flexible and dynamic way to coordinate all of those actors and their devices. That flexibility and dynamism reduces entry barriers facing renewable energy today.

Reconciling economic prosperity with environmental quality is a fundamental public policy issue. The institutional framework in which we make choices today has resource implications in both the near and the long term. Right now, no industry is more emblematic of this challenge than electricity, which has been both a primary driver of prosperity and a major source of pollution and greenhouse gases when generated using fossil fuels. Harnessing digital technology and market processes makes it easier and cheaper for more people to choose clean energy, leading to a cleaner and prosperous future.