Transactive Energy Techniques:

Closing the Gap between

Wholesale and Retail Markets
Farrokh A. Rahimi is Vice
President of Market Design and
Consulting at Open Access
Technology International, Inc.
(OATI), where he is currently
involved in analysis and design of
power and energy markets and Smart
Grid solutions. He has a Ph.D. in
Electrical Engineering from MIT,
along with more than 40 years of
experience in energy systems, electric
power systems analysis, planning,
operations, and control, with the
most recent five years in the Smart
Grid area.
Ali Ipakchi is Vice President of
Smart Grid and Green Power at
OATI. He has more than 30 years of
experience in the application of
information technology to power
systems, energy markets, and electric
utility operations. He holds a Ph.D.
from the University of California at
Berkeley, and is co-holder of three
U.S. patents on power systems
applications and instrument
diagnostics.

October 2012,

Although the main objective of microgrids is self-supply,

with minimal or no reliance on the distribution grid, there
are economic opportunities for microgrids to use
transactive techniques strategically to their economic
advantage while helping operational reliability of the
overall system.
Farrokh A. Rahimi and Ali Ipakchi

I. Introduction
The electricity restructuring
of the 1990s led to a paradigm
shift away from cost-of-service to
market-based pricing. This
resulted in the emergence of
markets for different electricityrelated products (energy,
capacity, reserves, regulation,
and transmission rights) and
a variety of transactive
techniques, including bidding,
forward and spot market
auctions, bilateral and
centralized market clearing,
pricing, and settlements. With

the advent of microgrids and

Smart Grid technologies in recent
years, another paradigm shift is
on the horizon characterized by
active demand-side participation
in response to environmental
policies and electricity market
prices. Demand-side
participation may be through a
reduction of actual demand
during high-price periods, or the
use of local sources of supply
(e.g., rooftop solar) to reduce net
demand. A special case is the
microgrid construct, where
demand-side participation
targets total self-supply of

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29

[(Figure_1)TD$IG]

Figure 1: Conceptual View of Distributed Power Generation and Management

electricity, bringing its demand

from the grid to zero. Microgrids
typically have the capability for
dispatch and control of local
generation and demand
resources; thus they can regulate
their load on the distribution grid
from otherwise normal levels to
zero with appropriate economic
signals. Some microgrids may
also export power to the
distribution grid, depending on
their generation and load control
capabilities.

emand-side participation is
on the rise due a
combination of factors,
including economic incentives
provided by regulators and
electricity suppliers faced with
higher costs due to environmental
regulations, retirement of
conventional generation, and
more extensive use of variable
sources of generation due to
renewable portfolio standard
(RPS) mandates. On-site
generation, especially solar PV,

and building and facility

energy management systems are
also on the rise with net-zero
facilities and campuses,
providing microgriding
capabilities for these facilities.
Active demand-side management
and use of distributed generation
may result in a bi-directional
flow of power, which in turn calls
for a bidirectional information
flow between power system
operators and end-use
consumers. This is shown
schematically in Figure 1.
Figure 2 shows the
traditional pattern of power and
information flow. The main
drivers are economic and
reliability objectives. The flow
of power is from bulk
generation resources through
transmission and distribution
systems to end-use consumers.
The flow of information is
primarily from distribution
equipment to local or regional
control centers.
nder the new paradigm,
environmental

[(Figure_2)TD$IG]

Figure 2: Traditional Flow of Information and Power

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The Electricity Journal

[(Figure_3)TD$IG]

Figure 3: Emerging New Paradigm

requirements provide additional

objectives and constraints. Both
flow of power and information
are bi-directional as shown
schematically in Figure 3. Feed-in
Tariffs provide for distributed
renewable resources to inject
power from demand side assets.
Demand-side devices are able to
both send and receive
information. Information to
demand-side assets may include
prices or control signals.
he impact of demand-side
participation in response to
economic signals may sometimes
undermine the operational
reliability of the system. There are
several ways to guard against this
outcome:
(1) Command and control by
system operators;
(2) Incentive compatible
design of transactive energy
mechanisms, and
(3) Coordinated distributed
controls across the system.
Some demandresponse
programs are based on direct

October 2012,

load control capabilities. The

customers sign up for programs
based on economic incentives/
preferred rates provided by
their utility company, or agents
such as curtailment service
providers (CSPs), and allow the
utility or CSP to control their
consumption (cycle their A/C or
water heaters, etc.). Other
demand response programs
count on the voluntary response
of the consumers to prices
established either beforehand
(e.g., critical peak pricing)
or in real-time (dynamic pricing).
Due to the voluntary nature of
such programs, it is often
difficult to fully consider
such programs for grid
reliability objectives. A
combination of price signals and
direct load control often
provides the best results. The
local control capabilities of
microgrids, building energy
management systems,
communicating thermostats,
plug-in electric vehicle (PEV)

chargers, etc., combined with

distributed distribution
automation switches and
regulators, and secure two-way
data communications provide
the framework for full
integration of demand-side
capabilities with power system
operations.

II. Transactive Energy

Construct
The idea behind so-called
transactive energy techniques
is to allow active demandside participation based on
economic incentives, but also in
line with the operational
reliability of the system
without resorting to command
and control, except under
emergency conditions or by
the explicit request of the
consumer.1
This requires information
exchange among many entities,
systems, devices, and users for

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31

[(Figure_4)TD$IG]

Figure 4: End-to-End Transactions of Information, Prices and Power

enrollment (nomination),
scheduling, monitoring, and
control processes. It involves
information exchange between
demand response resources,
intermittent renewable
generation, storage devices, grid
monitoring and control devices,
and microgrids. It also requires
information exchange among
markets, utility operations,
customers, and service providers.
The traditional separation of bulk
power and distribution
operations narrows down
under this new paradigm; the
same is true of the gap between
wholesale and retail energy
markets.
Figure 4 shows schematically
the interactions (exchange of
power, information, prices, and
controls) among various
business/operation layers under
the new paradigm.
32

III. Extension of
Transactive Techniques
from Wholesale to Retail
As stated earlier, a number
of transactive techniques
developed for bulk power
system operation and wholesale
markets can be extended to
retail markets, microgrids,
and distribution operations.
These are briefly summarized
below.
A. Price-based resource
scheduling and dispatch
Scheduling and dispatch of
resources based on market
clearing of price-based bids
and offers is prevalent in
wholesale markets. With
active demand-side
participation, demand-side
resources are now part of the

resource mix. Demand-side

assets may be aggregated into
virtual power plants (VPPs) and
offered and scheduled/
dispatched similar to
conventional resources. At the
microgrid level, any excess
energy can be transacted and
scheduled as a price taker, offered
with a strike price, or traded
bilaterally.
B. Congestion management
Congestion management in the
bulk power system is based on
either transmission reservation
(on OASIS) or bids and offers.
Transmission constraints are
mainly based on a combination of
thermal, voltage, and stability
limits. At the distribution level,
the notion of distribution capacity
reservation does not exist today.
However, there is no reason why

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The Electricity Journal

transactive techniques cannot be

used at distribution level,
allowing for a combination of
distribution transformer or feeder
capacity subscription or actual
bids and offers for the use of
limited distribution capacity. This
is particularly relevant if one
considers the potential increase in
PEVs.
C. Transmission/distribution
capacity auction
Transmission Rights can be
offered and secured in wholesale
markets through annual and
monthly auctions. Such auctions
do not currently exist at the
distribution level. However, it is
quite conceivable to provide for
the forward auction of
potentially desirable distribution
capacity. Due to the local nature
of demand and supply for
distribution capacity, such
auctions may have to be

supplemented by position limits.

Alternatively, a use it or lose it
provision may be envisaged.
D. Market-clearing and
pricing
Wholesale market product
prices are either negotiated
bilaterally or determined as
part of the market-clearing
process. At the retail/
distribution level prices may be
established based on a number of
arrangements between parties.
These include (1) bilateral
arrangements through price
tenders (bids and offers); (2)
establishment of locational
marginal prices (LMPs) at the
distribution level through
coordinated peer-to-peer
information exchange among
parties; or (3) Wholesale LMPs
with additional price adders for
distribution losses and
congestion.

IV. End-to-End
Transactive Solutions
Closing the Gap Between
Wholesale and Retail
The extension of transactive
techniques to retail markets and
distribution systems, provides not
only new mechanisms for active
participation of demand-side
resources (and microgrids) in
economic transactions, but also
provides solutions for emerging
bulk power operational problems
in the face of the proliferation of
variable generation resources.
Increased use of variable
generation induces the need for
higher levels of services, such as
regulation, and new products
such as ramping/load following
to address the variability of
renewable resources. As stated
earlier, demand-side assets can be
aggregated into VPPs that can be
scheduled and dispatched
similarly to conventional

[(Figure_5)TD$IG]

Figure 5: Virtual Power Plants Closing the Gap between Retail and Wholesale Operations

October 2012,

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33

[(Figure_6)TD$IG]

Figure 6: Demand Response and a Dancing Partner of Variable Energy Resources

generation resources to provide

services such as regulation,
balancing energy, and ramping/
load following.
Figure 5 shows the VPP concept
schematically, bridging the gap
between wholesale and retail
domains.

Figure 6 schematically shows

the framework of an end-to-end
solution using distributed
resources to address variable
generation management.
Demand-side capabilities,
especially demand response,
thermal storage, electric storage

(e.g., PEVs) and distributed

generation, can provide some,
and perhaps all, balancing and
shaping service needed in
support of variable generation.
The local generation and control
capabilities of microgrids can be
leveraged for this purpose.

[(Figure_7)TD$IG]

Figure 7: Typical Balancing Energy Requirements of a Region with High Wind Power Generation under Hourly Scheduling Practices
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[(Figure_8)TD$IG]

V. Conclusions

Figure 8: Reduction of Balancing Energy Requirements under Sub-Hourly Scheduling

he use of VPPs can go handin-hand with other

measures adopted to address
variable energy resource
issues. These include FERC
Order 764 on sub-hourly
scheduling. Figures 7 and 8 show
the impact of sub-hourly
scheduling in reducing the
ramping and balancing energy
needs to mitigate variable
generation. Figure 7 shows the
levels of balancing energy
requirements associated with the
current hourly scheduling
practice.
Figure 8 shows the impact
of sub-hourly scheduling
on reduction of balancing
energy and ramping
requirements in the face of
high penetration of variable
energy resources.
Under both hourly and subhourly scheduling, demand-side
resources (including microgrids
capable of two-way
communication and power
import/export) can be used
effectively to provide the
needed ramping and
balancing energy needs in the

October 2012,

face of increased variable

generation.
n summary, provided the
availability of two-way data
communications and local
control capabilities, demandside resources can provide shortterm balancing (and load
following) capabilities. Local
control and management of load,
storage, and generation
resources are becoming a
common capability of modern
buildings, campuses, and
commercial and industrial
facilities. Great economic,
environmental, and reliability
benefits can be gained when the
operation of such facilities are
coordinated with the bulk power
and grid operation. The
aggregation of such resources as
virtual power plants,
determination of the virtual
power plants capabilities, e.g.,
capacity for increasing and
decreasing load, and updating
and communicating such
parameters on an ongoing
basis, and response to dispatch
signals can provide significant
value.

Microgrids have the ability of

local control of their demand and
distributed supply. Although
their main objective is self-supply
with minimal or no reliance on the
distribution grid, there are
economic opportunities for
microgrids to use transactive
techniques strategically to their
economic advantage while
helping operational reliability of
the overall system. Economic
opportunities include the ability
to engage in emerging retail
markets for energy and other
tradable products. Also, a number
of microgrids can collectively
provide their capability to control
demand and supply as virtual
power plants that enable them to
provide bulk power level tradable
products such as ramping,
balancing energy, and ancillary
services. The Transactive
techniques developed during the
last couple of decades since the
advent of Electricity
Restructuring in bulk power and
wholesale markets, can be used at
the retail and distribution levels to
augment such capabilities and
align economic objectives of
microgrids and other demand
side participating entities with
system operational reliability.&

Endnote:
1. Some consumers enrolled in
specific demand response programs,
may prefer to have the utility control
their consumption (e.g., cycle their A/
C or water heater) during high price
periods to avoid inadvertent high
consumption and high bills.

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35