Transactive Energy Evolution in the Quadrants of Grid Modernization

By Farrokh Rahimi and Sasan Mokhtari

The electric power system is undergoing fundamental changes, due to a combination of factors. The most important of these factors are the increased penetration of distributed energy resources (DERs), the proliferation of grid-edge intelligent devices, and the increasing consumer/prosumer participation. The classical unidirectional patterns of power flow from bulk power generation through transmission and distribution grids to the end-use consumers is changing, because of the installation of active grid edge DERs and the provision of grid services from grid-edge assets. The classical information-flow pattern from field devices and meters to the utility central control systems and bulk power markets is complemented by routing of information in the opposite direction (in the form of price signals to consumers, and grid-edge devices and systems). Moreover, active consumer/prosumer production of electricity from local, privately owned resources (rooftop PV, etc.) is impacting the utility revenues, while, at the same time, it imposes operational issues for system operators in the form of reverse flows, voltage rise and so on. The classical seams between bulk power and distribution operations are getting blurred under the emerging Smart Grid/Grid Modernization. These changes require new business models and operational tools for the utilities to properly adapt. Changes in business models point to the need for new services, which utilities could offer to the increasingly savvy consumers/prosumers. The latter ones are, in turn, interested in transactive exchanges to derive maximum benefits from their investments in DERs and associated end-use control and communication technologies.

The new Distribution System Operator (DSO) construct and the emerging Transactive Energy (TE) framework provide new venues for the utilities and system operators to address business model and operational challenges. At the same time, new products and services that do not require the devoted commitment of savvy consumers/prosumers to the utility are developed and deployed.

It is helpful to explore the road map for the evolution of DSOs and TE in the face of increasing levels of DER penetration and in light of the developments in four practical areas of interest in Grid Modernization. These areas, herein referred to as the “Quadrants of Grid Modernization” are: Improved Economics, Improved Reliability, Improved Resiliency, and Improved Customer Service. To this end we consider three stages of Grid Modernization (GM) as a function of percent of DER penetration, and associated development in these 4 quadrants:

  • GM Stage 1: DER penetration between 2% and 5%
  • GM Stage 2: DER penetration between 15% and 25%
  • GM Stage 3: DER penetration more than 50%

Here, the DER percentages reflect the average, annual, expected percentage of end-use energy demand satisfied by DERs. Each stage requires an incremental improvement in the four quadrants. The Economic, Customer Service, and Resiliency quadrants become increasingly expanded from Stage 1 to Stage 3; the Reliability quadrant remains almost invariant, meaning that improved operational practices and tools are expected to be developed in each stage to maintain reliable system operation, vis a vis increasing levels of DERs.

The designation of the stages in terms of DER penetration, as suggested above, involves DER penetration gaps between stages. These gaps signify that increase in DER penetration, although the main factor, it is not exclusively critical for the transition among the various stages of GM. Regulatory factors and provisions for monetizing DER and grid-edge technology value through transactive markets play an important role in transition from one GM State to the next. Utilities in different regions or under different jurisdictions may be in different stages of GM and may proceed along somewhat different paths.

Each stage brings along a new set of opportunities for TE exchanges. New functional requirements for a Distribution System Platform (DSP), that the DSO would require, are also added, in order to operate the system effectively, while facilitating the TE Exchange Services.

We conclude by setting forth a hypothetical, but credible recipe for DSO/DSP and TE operations roadmap in a region advanced to GM Stage 3. The main ingredients of the recipe are as follows:

  1. DERs represent a substantial percentage of end-use consumption.
  2. Prevailing regulatory framework in the region under Stage 3 allows for bilateral (peer-to-peer) transactive exchanges among prosumers.
  3. A DSO and an associated DSP are in place to operate the distribution system, so as to facilitate bilateral (peer-to-peer) exchanges without adverse impacts on the rest of the consumers.
  4. The distribution utility is also the DSO (operator of the DSP), but under strict functional separation between its system/market operation and its merchant functions. Alternatively, an Independent DSO is in place if regulatory provisions require more than a firewall separation between the two arms of this utility.
  5. The utility/DSO has an approved transparent process in place for performing DER connection studies, approval of needed distribution system upgrades, and corresponding cost assessment and allocation.
  6. The process allows for graceful grid divorce by prosumers, along with provisions for a supplemental pay-as-you-go process for use of distribution facilities for peer-to-peer transactions.
  7. The utility/DSO offers distribution services (including distribution system connection and usage rights) to prosumers to support/hedge their anticipated bilateral transactions.
  8. Regulatory provisions provide the possibility of voluntary participation in DSO-facilitated spot markets by prosumers. In such markets voluntary prosumer bids and offers can be used by the DSO along with any other dispatchable resources at the DSO’s disposal to mitigate distribution constraints.
  9. Transparent DSO market rules are in place to compensate the prosumers for voluntary bids/offers and allocate re-dispatch costs based on cost causation.
  10. Prosumers are able to submit transactive bids and offers using intelligent grid-edge devices (e.g., Transactive Thermostats, water heaters, car chargers, etc.) with automatic transactive capabilities based on adjustable prosumer comfort-economy tradeoff settings.

We believe this recipe provides for a win-win framework for the utilities and prosumers/consumers.

For a downloadable copy of the June 2017 eNewsletterwhich includes this article, please visit the IEEE Smart Grid Resource Center




Farrokh Rahimi

Farrokh Rahimi is Senior Vice President of Market Design and Consulting at Open Access Technology International, Inc. (OATI). Dr. Rahimi oversees development of market design and consulting activities, and is a key contributor to OATI’s smart grid and grid modernization activities. He has over 40 years of experience in the electric power industry and holds a Ph.D. in electrical engineering from the Massachusetts Institute of Technology (MIT).




Sasan Mokhtari, IEEE senior member,  has over 32 years of experience in the North American Energy Industry. He is the CEO and President of Open Access Technology International, Inc. (OATI), which he founded in 1995. Dr. Mokhtari focuses OATI on providing innovative solutions, platforms, infrastructure, and hardware technologies that help to usher in new business paradigms in the global energy industry. He holds a doctorate in electrical engineering, power systems, from the University of Missouri-Columbia, where he also served as lecturer in the departments of electrical engineering and mathematics. 

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