The Implications of Transactive Energy

“Transactive energy” may represent the new paradigm that will allow electric utilities to remain relevant in an era of ever-changing technologies and consumer behavior. The term does not have a standard definition but generally describes techniques for managing the generation, consumption or flow of electric power within an electric power system through the use of economic or market based constructs while considering grid reliability constraints. The term “transactive” comes from considering that decisions are made based on a value (source: the GridWise Architecture Council).

In a other posts on this blog and elsewhere, I have pointed to arguments that the current utility model is either dead or dying and that utility executives need to redefine their companies’ roles for the future, or perhaps go the way of dinosaurs, the Edsel or former telecom giants. Transactive energy may represent the most powerful model to enable utility executives to “get it” when it comes to redefining their organizations. More important, it may offer the best pathway forward by which utilities can leverage their existing customer base and infrastructure to create the utility of the future (one could make a strong argument that the future for utilities is here already and that the industry is really playing a desperate game of “catch up”).

Transactive energy is a nexus of existing infrastructure, new technology, consumer demands, smart grid and pricing. This last point is important: utilities – particularly investor-owned utilites – are financial entities. Innovation has been slow to occur in this sector because there have been no real financial incentives to innovate. In fact, it’s fair to say that the opposite is true. Innovation, from the utility’s perspective, often represents an expense because, unlike traditional infrastructure investment, there is no way to realize the guaranteed rate of return that investors have sought and that regulators have established.

As consumers increasingly demand innovation from everything they touch, the old utility model will change. Regulators need to create incentives for utilities to leverage existing infrastructure while enabling innovation to come to the grid. Utilities, in turn, need to focus on creating technologies and pricing models that will establish a meaningful (though transparent to the consumer) relationship between consumption and pricing. These pricing models and the technologies that will allow more dynamic pricing to take place go hand-in-hand.

Utilities are in a great position to leverage their understanding of pricing and consumer behavior. They also hold the keys to the existing grid infrastructure. Transactive energy may offer the best means by which utilities shed the old paradigm and move into a new era in which they can remain relevant.

For more on this topic, check out Martin Rosenberg’s interview with Erich Gunther, chairman and chief technology officer of EnerNex. To learn more about how STAR Group helps clients understand and plan for an uncertain future, please fill in the form on the right hand side of this page. To find out more about the Implications Wheel® process, please click here.