Transactive Energy Techniques:
Closing the Gap between
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, Vol. 25, Issue 8 1040-6190/$–see front matter # 2012 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2012.09.016
Wholesale and Retail Markets
Although the main objective of microgrids is self-supply,
with minimal or no reliance on the distribution grid, there
are economic opportunities for microgrids to use
transactive techniques strategically to their economic
advantage while helping operational reliability of the
overall system.
Farrokh A. Rahimi and Ali Ipakchi
I. Introduction the advent of microgrids and
Smart Grid technologies in recent
The electricity restructuring years, another paradigm shift is
of the 1990s led to a paradigm on the horizon characterized by
shift away from cost-of-service to active demand-side participation
market-based pricing. This in response to environmental
resulted in the emergence of policies and electricity market
markets for different electricity- prices. Demand-side
related products (energy, participation may be through a
capacity, reserves, regulation, reduction of actual demand
and transmission rights) and during high-price periods, or the
a variety of transactive use of local sources of supply
techniques, including bidding, (e.g., rooftop solar) to reduce net
forward and spot market demand. A special case is the
auctions, bilateral and microgrid construct, where
centralized market clearing, demand-side participation
pricing, and settlements. With targets total self-supply of
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 [(Figure_1)TD$IG]

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
Figure 1: Conceptual View of Distributed Power Generation and Management operators and end-use
consumers. This is shown
schematically in Figure 1.
Figure 2 shows the
electricity, bringing its demand
from the grid to zero. Microgrids
typically have the capability for
D emand-side participation is
on the rise due a
combination of factors,
traditional pattern of power and
information flow. The main
drivers are economic and
dispatch and control of local including economic incentives reliability objectives. The flow
generation and demand provided by regulators and of power is from bulk
resources; thus they can regulate electricity suppliers faced with generation resources through
their load on the distribution grid higher costs due to environmental transmission and distribution
from otherwise normal levels to regulations, retirement of systems to end-use consumers.
zero with appropriate economic conventional generation, and The flow of information is
signals. Some microgrids may more extensive use of variable primarily from distribution
also export power to the sources of generation due to equipment to local or regional
distribution grid, depending on renewable portfolio standard control centers.
their generation and load control
capabilities.
(RPS) mandates. On-site
generation, especially solar PV, U nder the new paradigm,
environmental

[(Figure_2)TD$IG]

Figure 2: Traditional Flow of Information and Power

30 1040-6190/$–see front matter # 2012 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2012.09.016 The Electricity Journal
 [(Figure_3)TD$IG]

Figure 3: Emerging New Paradigm

requirements provide additional load control capabilities. The chargers, etc., combined with
objectives and constraints. Both customers sign up for programs distributed distribution
flow of power and information based on economic incentives/ automation switches and
are bi-directional as shown preferred rates provided by regulators, and secure two-way
schematically in Figure 3. Feed-in their utility company, or agents data communications provide
Tariffs provide for distributed such as curtailment service the framework for full
renewable resources to inject providers (CSPs), and allow the integration of demand-side
power from demand side assets. utility or CSP to control their capabilities with power system
Demand-side devices are able to consumption (cycle their A/C or operations.
both send and receive water heaters, etc.). Other
information. Information to demand response programs
demand-side assets may include count on the voluntary response II. Transactive Energy
prices or control signals. of the consumers to prices Construct

T he impact of demand-side
participation in response to
economic signals may sometimes
established either beforehand
(e.g., critical peak pricing)
or in real-time (dynamic pricing).
The idea behind so-called
transactive energy techniques
undermine the operational Due to the voluntary nature of is to allow active demand-
reliability of the system. There are such programs, it is often side participation based on
several ways to guard against this difficult to fully consider economic incentives, but also in
outcome: such programs for grid line with the operational
(1) Command and control by reliability objectives. A reliability of the system
system operators; combination of price signals and without resorting to command
(2) Incentive compatible direct load control often and control, except under
design of transactive energy provides the best results. The emergency conditions or by
mechanisms, and local control capabilities of the explicit request of the
(3) Coordinated distributed microgrids, building energy consumer.1
controls across the system. management systems, This requires information
Some demand–response communicating thermostats, exchange among many entities,
programs are based on direct plug-in electric vehicle (PEV) systems, devices, and users for

October 2012, Vol. 25, Issue 8 1040-6190/$–see front matter # 2012 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2012.09.016 31
 [(Figure_4)TD$IG]

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

enrollment (nomination), III. Extension of resource mix. Demand-side

scheduling, monitoring, and Transactive Techniques assets may be aggregated into
control processes. It involves from Wholesale to Retail virtual power plants (VPPs) and
information exchange between offered and scheduled/
demand response resources, As stated earlier, a number dispatched similar to
intermittent renewable of transactive techniques conventional resources. At the
generation, storage devices, grid developed for bulk power microgrid level, any excess
monitoring and control devices, system operation and wholesale energy can be transacted and
and microgrids. It also requires markets can be extended to scheduled as a price taker, offered
information exchange among retail markets, microgrids, with a strike price, or traded
markets, utility operations, and distribution operations. bilaterally.
customers, and service providers. These are briefly summarized
The traditional separation of bulk below. B. Congestion management
power and distribution
operations narrows down A. Price-based resource Congestion management in the
under this new paradigm; the scheduling and dispatch bulk power system is based on
same is true of the gap between either transmission reservation
wholesale and retail energy Scheduling and dispatch of (on OASIS) or bids and offers.
markets. resources based on market Transmission constraints are
Figure 4 shows schematically clearing of price-based bids mainly based on a combination of
the interactions (exchange of and offers is prevalent in thermal, voltage, and stability
power, information, prices, and wholesale markets. With limits. At the distribution level,
controls) among various active demand-side the notion of distribution capacity
business/operation layers under participation, demand-side reservation does not exist today.
the new paradigm. resources are now part of the However, there is no reason why

32 1040-6190/$–see front matter # 2012 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2012.09.016 The Electricity Journal
 transactive techniques cannot be supplemented by position limits. IV. End-to-End
used at distribution level, Alternatively, a ‘‘use it or lose it’’ Transactive Solutions
allowing for a combination of provision may be envisaged. Closing the Gap Between
distribution transformer or feeder Wholesale and Retail
capacity subscription or actual D. Market-clearing and
bids and offers for the use of pricing The extension of transactive
limited distribution capacity. This techniques to retail markets and
is particularly relevant if one Wholesale market product distribution systems, provides not
considers the potential increase in prices are either negotiated only new mechanisms for active
PEVs. bilaterally or determined as participation of demand-side
part of the market-clearing resources (and microgrids) in
C. Transmission/distribution process. At the retail/ economic transactions, but also
capacity auction distribution level prices may be provides solutions for emerging
established based on a number of bulk power operational problems
Transmission Rights can be arrangements between parties. in the face of the proliferation of
offered and secured in wholesale These include (1) bilateral variable generation resources.
markets through annual and arrangements through price Increased use of variable
monthly auctions. Such auctions tenders (bids and offers); (2) generation induces the need for
do not currently exist at the establishment of locational higher levels of services, such as
distribution level. However, it is marginal prices (LMPs) at the regulation, and new products
quite conceivable to provide for distribution level through such as ramping/load following
the forward auction of coordinated peer-to-peer to address the variability of
potentially desirable distribution information exchange among renewable resources. As stated
capacity. Due to the local nature parties; or (3) Wholesale LMPs earlier, demand-side assets can be
of demand and supply for with additional price adders for aggregated into VPPs that can be
distribution capacity, such distribution losses and scheduled and dispatched
auctions may have to be congestion. similarly to conventional

[(Figure_5)TD$IG]

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

October 2012, Vol. 25, Issue 8 1040-6190/$–see front matter # 2012 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2012.09.016 33
 [(Figure_6)TD$IG]

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

generation resources to provide Figure 6 schematically shows (e.g., PEVs) and distributed
services such as regulation, the framework of an end-to-end generation, can provide some,
balancing energy, and ramping/ solution using distributed and perhaps all, balancing and
load following. resources to address variable shaping service needed in
Figure 5 shows the VPP concept generation management. support of variable generation.
schematically, bridging the gap Demand-side capabilities, The local generation and control
between wholesale and retail especially demand response, capabilities of microgrids can be
domains. thermal storage, electric storage 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

34 1040-6190/$–see front matter # 2012 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2012.09.016 The Electricity Journal
 [(Figure_8)TD$IG]
Figure 8: Reduction of Balancing Energy Requirements under Sub-Hourly Scheduling
T he use of VPPs can go hand-
in-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 sub-
hourly 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, Vol. 25, Issue 8 1040-6190/$–see front matter # 2012 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2012.09.016
face of increased variable
generation.
I n summary, provided the
availability of two-way data
communications and local
control capabilities, demand-
side resources can provide short-
term 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 plant’s 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.
V. Conclusions
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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