Stuart Ravens, principal research analyst, Navigant Research Customers, Energy networks, Wholesale markets, Opinion, demand response, DSR, Energy trading, grid, National Grid, transactive energy, Wholesale market

"While there are some significant barriers to TE—none more so than the fact it is not permitted in most markets—there are many compelling drivers"

I baulked when I first read the term “transactive energy” (TE). I’m rarely a fan of neologisms, and the portmanteau of transaction and active still sits uncomfortably. While the UK market prefers to talk about flexibility, the term is inescapable for anyone with a global perspective on the electricity industry, and particularly for someone who works for a US-based company. While the terminology may be here to stay, TE is not yet reality; however, its adoption might be more rapid than some expect.

There are many definitions for TE but, simply put, TE is where any customer, regardless of size, can trade electricity within a power market. Any distributed load or supply (referred to as distributed energy resources, or DER, for the remainder of this article) connected to a network has an inherent value, which changes over time depending on certain market conditions. For example, during a windy, sunny weekend, National Grid may be be faced with an oversupply of electricity and can pay customers to take electricity; conversely, when capacity is constrained, customers can be paid to turn off loads.

Demand response (DR) markets have developed over time to cash in on these opportunities. At present, only the largest DER customers can participate directly in flexibility markets, with smaller DER aggregated by the growing number of DR specialists across Europe. However, to date, these companies have mostly targeted commercial DER owners.

The residential market has largely been untapped, although some are experimenting with aggregating electricity storage (either stationary or the batteries of electric cars). TE essentially disaggregates individual loads and supplies, providing a channel for individual customers to participate in energy markets.

While there are some significant barriers to TE—none more so than the fact it is not permitted in most markets—there are many compelling drivers. TE puts the customer at the heart of the electricity value chain, allowing them to decide when, at what price, and from whom they buy their power. This customer-centricity has seen a comparatively rapid warming of global regulators’ initial coolness to TE. A market-based financial return on DER investments is an alternative to existing solar subsidies. A financial return should also encourage DER owners to participate in energy markets rather than island themselves from the grid, which is important when considering the infamous utility death spiral.

Generating power closer to the point of consumption should reduce the need for expensive infrastructure investments and sets a framework where market signals, not infrastructure investments, can be used to help integrate DER. But the biggest driver is what I call the blockchain goldrush, which has seen hundreds of millions of dollars invested in energy-related blockchain startups eager to find use cases for the technology in a conservative industry ripe for disruption.

Given TE was coined in the US, it is somewhat ironic that its adoption will likely be much faster outside American markets, except for the DER-trailblazing states of California and New York. The US remains largely unreformed, and the vertically integrated utility business that persists is not as conducive to competitive energy services as liberalised markets in Europe, Japan, Australia, and New Zealand.

TE is most likely to become a reality in just a handful of countries unless market reform becomes more widespread. Australia and Germany will likely be the first to move out of trials and into larger-scale deployments. Japan, France, and the UK are all promising, while adoption in the US will be limited to a handful of progressive states.

However, ubiquitous TE markets are still a long way off. I previously mentioned barriers: TE has to battle against vested interests, legacy infrastructure, a lack of mature technology platforms, regulations, taxation, and customer attitudes. To date, viable business models around which TE can develop do not yet exist at scale.

Current TE trials around the world should help identify various ways money can be made in the future. And while this is not a simple task, when and where TE becomes a reality, it will grow rapidly. Navigant Research anticipates that the first TE markets will appear in the next 5-10 years. By 2026, residential and commercial customers could be trading $40 billion in electricity a year, largely driven by the commercial segment.