Transactive Energy: An Overview

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:

• from the laws of physics to the principles of economics,
• from the nitty-gritty details of electrical engineering to the underlying personal and societal values that drive consumers’ daily decisions, and
• from the legalities of federal and state regulations to the measurement science that will help quantify and assess the many different aspects of grid operations.

TE’s Potential Benefits for Consumers

The transactive energy approach offers key benefits to consumers:

• Better utilization of grid assets (i.e., the hardware that makes up the grid—everything from transformers and switches to vehicle-charging stations and smart meters) can lower costs, especially during peak demand conditions. 
• Greater resilience and reliability in large storms will reduce the length and frequency of outages.
• Increased choice and information will give consumers greater control over personal energy use.
• Increased use of renewable energy resources will give individual consumers the satisfaction of contributing to larger, societal environmental goals.

Here are several examples of how a consumer could take advantage of the transactive energy approach:

• For appliances that use a significant amount of electricity (e.g., air conditioners, clothes dryers, dishwashers, hot water heaters), “smart” versions of these appliances could be programmed to turn the appliance on and off at the time of day that best meets the consumer’s desire for comfort and convenience, or the consumer’s desire for cost-savings, or some balance of these two competing desires.
• Electric car batteries can be charged when electricity is least expensive (e.g., the night time when most folks are sleeping, a windy day in a region with significant wind power, or a sunny afternoon in a region with significant solar power).  The charged batteries can then be used—in addition to powering the car—to provide household electricity during an outage or to sell power back to the grid when the price of electricity is high (e.g., on a hot summer day when air conditioners are in heavy use throughout the region).

TE’s Potential Benefits for Society

The transactive energy approach also offers key benefits to society:

• Customer response (by reducing energy use) when the grid is overloaded can reduce the need for building new power plants. By providing customers the tools to manage and adjust timing of energy usage, the large daily fluctuations in energy use can be smoothed out—a process called “demand response.”   If the peak demand for utilities can be reduced (e.g., on the hottest day of the year), then utilities may not need to build additional power plants.
• Increased use of cost-effective, renewable energy generation (especially from variable sources like wind and solar) will require new tools for operating the grid, and TE can provide these tools.  Utilities will be able to “ask” consumers—through price signals sent to smart devices, homes, or buildings—to increase or reduce consumption, thus providing better balance between supply and demand on a minute-by-minute or hour-by-hour basis.
• Reliability and resilience can be increased with the more-decentralized system enabled by transactive energy.  As the number of extreme weather event increases, this will be especially important.
• The use of market forces can incentivize grid-responsive technologies and grid-friendly consumer behavior, as well as drive improvements in efficiency and reliability.

What is NIST Doing with Transactive Energy?

• Researchers from NIST and other organizations are engaged in a Transactive Energy Modeling and Simulation Challenge (TE Challenge).  Through this TE Challenge, NIST is bringing researchers and companies with simulation tools together with other grid stakeholders to demonstrate modeling and simulation platforms while applying TE approaches to real grid problems.
• NIST scientists and engineers are conducting research in two new testbeds, with a focus on the local optimization of grid operations and on microgrids, especially at the distribution level.
• NIST researchers are developing new algorithms for home energy management.
• NIST is working with the Department of Energy and with industry-led groups (e.g., the Smart Grid Interoperability Panel and the Smart Electric Power Alliance) to explore the potential and increase the awareness of transactive energy.

Additional Resources for Learning about Transactive Energy

• Gridwise Architecture Council
• Transactive Energy Association
• Greentech Media’s How-To Guide
• TE Challenge Collaborative Website