“the Evolution Of Energy Markets: Integrating Renewables And Gas” – New technologies are changing the relationship that electricity consumers have with their utility providers. What started as a one-way interaction of providing electricity to consumers has become a two-way relationship. Digital technologies such as smart thermostats and energy meters give consumers more control over how they use electricity by providing information on total electricity consumption and breaking down the use of each appliance in the home. Energy generation and storage technologies such as electric vehicle batteries and rooftop solar installations allow consumers to generate and consume electricity in their homes.

Consumers are adopting these technologies because they are becoming cheaper and this shift represents an opportunity to move towards a low-carbon, automated and decentralized energy future.

“the Evolution Of Energy Markets: Integrating Renewables And Gas”

Digital technologies facilitate the coordination of energy sales between consumers in a different way than in the past. In these new transactional energy systems, digital devices such as smart energy meters are programmed to buy and sell electricity from other households or traditional electricity suppliers. This is a dramatically different system than the current utility-based model, which has an electricity supplier that all customers buy from.

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This research first examines the potential of digital technologies to provide new services to consumers. The paper discusses how current usability regulations hinder the use and growth of digital technologies. Finally, it suggests policy changes to promote the use of digital energy technologies.

Moving towards an energy system that deals with a broader scale will take time. However, several policy changes could clear the way for continued innovation in decentralized energy markets. Policymakers should consider the following changes as first steps:

Regulators must embrace those changes to encourage continued innovation in how consumers generate and consume the electricity that powers their homes and lives. If regulators do, innovative digital technologies can improve people’s lives by making electricity more affordable and cleaner.

An energy technology transition is underway as digital technologies and low-carbon energy technologies fall in cost and proliferate in the power system. Solar and wind power, once unaffordable and uncommon, now account for more than 8% of electricity generation and are poised to rise further.

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United States Energy Information Association. “What is U.S. electricity generation by energy source?” Available at https://www.eia.gov/tools/faqs/faq.php?id=427&t=3. Many states have net metering regulations that allow rooftop solar owners to participate in the electric grid as distributed and decentralized energy producers. Although stalled at the federal level, policies at the state level require utilities to transition from fossil fuels to clean energy. As of 2018, 29 states had some form of “renewable portfolio standard,” while others had energy efficiency mandates or green energy options. Sales of electric and hybrid vehicles, which accounted for about 5% of 2017 vehicle sales in California, also affected transportation.

Bellon, Rebecca. “The Grim State of Electric Vehicle Adoption in the US.” CityLab, October 15, 2018. Available at https://www.citylab.com/ transportation/2018/10/where-americas-charge-towards-electric-vehicles-stands-today/572857/

These changes are affecting an industry that has been a vertically integrated regulated monopoly for over a century, and this transition will have significant implications for the value propositions available to consumers, the utility’s business model and the regulatory framework. A 20th-century regulated utility sent power in a unidirectional flow from generators to customers (as seen in Figure 1), controlling the distribution and reliability of basic electric service from a centralized control room. A utility is the sole provider of grid services such as voltage regulation required for distribution and grid balancing. Its profits depend on volume-based pricing determined administratively through regulatory processes rather than markets. In this design, demand is assumed to be “dumb” and inelastic. Today’s innovations affect all aspects of the status quo.

Parallel to the technological changes in distributed energy resources (DERs) are changes in digital technologies and automation. In 2002, 62% of American adults owned a cell phone. In 2018, 96% of people own at least one, with 81% owning a smartphone.

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Pew Research Center Mobile Fact Sheet. Available at https://www.pewinternet.org/fact-sheet/mobile/. With the proliferation of cell phones, many new devices attempt to connect other aspects of consumers’ lives through technology. Launched just five years ago, smart speakers are now owned by one in six Americans.

Perez, Sarah. “39 Million Americans Now Own a Smart Speaker, Report Says.” TechCrunch, January 12, 2018 Available at https://techcrunch.com/2018/01/12/39-million-americans-now-own-a-smart-speaker-report-claims/. Smart home systems and devices seek to bring technology into even more everyday activities, with options to automate and remotely control lighting, heating and home security. Adoption of these new technologies is fueled by affordability. These technology trends suggest that the future of energy will be lower carbon, more digital, more automated and more decentralized. As digitalization reduces transaction costs, it is likely to involve more market processes to enable and implement coordination in an increasingly decentralized system.

For example, consider a homeowner (let’s call her Anna) with rooftop solar and an electric vehicle (EV), two DERs. Anna’s solar panels primarily meet her own consumption, including charging her EV. Anna is a “pro” Sometimes, the solar panels produce more energy than Anna needs. Current net energy metering rules pay for the energy she puts into the grid, but from a system perspective that flow is not timed properly, so when all net metering customers put their excess energy into the grid, it depresses grid operations. The distribution grid is not designed for such uncoordinated two-way flow. In this situation, Anna’s pure distributed power disrupts the grid, rather than being a valuable resource supporting grid operations and balance. Decentralized local energy markets and grid services markets allow Anna to generate income by selling her excess capacity in coordination with others and with grid conditions, turning her solar excess capacity into a real resource.

Now think about Anna’s electric vehicle. Owning an EV is actually a more profound change to the distribution system because it is an intertemporal resource—it uses energy to charge a battery and stores energy to discharge later. EVs are capable of becoming a bi-directional resource, with EV owners setting bid prices for charging the battery and prices for discharging using automation in local fuel markets. The combination of distributed solar and storage makes Anna resources flexible, one of the key capabilities in a decentralized distributed grid that requires real-time physical balancing. From a distribution system perspective an EV acts as a sponge that provides flexibility and resilience by charging and discharging while benefiting Anna and others around the distribution grid and those operating the grid.

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How can she know that her DERs are a valuable resource for others and for grid balance? A robust framework for communicating that message to her and others is a pricing system—decentralized markets that connect DER owners and allow them to provide energy and grid services when they are most valuable, rather than when the sun is shining. (Here the role of storage is crucial for flexibility.) As needs and available resources change over minutes, hours and days, those changes show up in the prices that emerge from the market for a range of energy and grid services. Anna’s home energy management system uses algorithms to automate the submission of her bids and offers to the market, and the market’s algorithm establishes a market-clearing price and sends a message to her system telling her what actions to take. Note how different this scenario and these opportunities are from the current regulated monopoly context.

The analysis presented here illustrates how digitization of the power system can make this scenario possible and mutually beneficial. DER owners can realize the full potential of their assets through their own consumption and participation in local energy markets and create value for others in the distribution system, by selling their DERs for energy and grid services. Enabling this capability will impact the architecture of the distribution grid, utility business models and regulatory frameworks in the near future and in the long term.

The falling costs of DERs and digital technologies that interconnect them to the distribution grid and automate their operations are driving this energy transition, leading to a more diverse power system as shown in Figure 2.

Digital and DER technologies enable the transition to a more decentralized distribution grid that can take advantage of small-scale low-carbon resources. The wider implications of these possibilities include the electrification of transportation, automation in building systems in commercial and residential buildings, and the ability of homeowners to use their water heater tank as a flexible energy storage resource. These examples illustrate how digital and DER innovations are changing the potential opportunities for value creation in and around the distribution grid. “I flip the switch and the light comes on” is no longer the value proposition of electricity distribution and retail offering to residential customers.

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This analysis provides a primer on DER innovation and digitalization to lay the groundwork for thinking about the institutional implications of technological change. The dynamic nature of these changes makes detailed recommendations difficult, so instead I offer an analytical framework

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