the role of customers in the u.s. electricity market: past, present and future

11

Wencong Su is currently anassistant professor in the Department

of Electrical and ComputerEngineering at the University of

Michigan-Dearborn. He received aB.S. in electrical engineering (with

distinction) from ClarksonUniversity, Potsdam, New York, in

May 2008, an M.S. in electricalengineering from Virginia Tech,

Blacksburg, Virginia, in December2009, and a Ph.D. in that subject

from North Carolina StateUniversity, Raleigh, in August 2013.Dr. Su worked as a Research Aide at

Argonne National Laboratory fromJanuary to August 2012. He also

worked as an R&D engineer intern atABB U.S. Corporate Research Centerin Raleigh, NC, from May to August2009. His current research interests

include the smart grid, electricvehicles, renewable energy,

microgrids, electricity market, andpower system operations and control.

The work described in this article hasbeen supported by the New FacultyStart-up Funds at the University of

Michigan-Dearborn. The authorthanks Mr. Thomas Nudell for

editing and proofreading this article.

2 1040-6190/# 2014 Elsevier Inc. All rights rese

The Role of Customers in theU.S. Electricity Market: Past,Present and Future

The author proposes a concept called the Energy Internetas a means of allowing new participants dubbed EnergyCells and Utility Cells to fully engage in a dynamic anddiverse energy market through a distributed decision-making process in which electricity rates are determinedvia competitive and intelligent purchasing and sellingstrategies. To realize this vision, the underlyingdistribution infrastructure must change significantlyfrom today’s system.

Wencong Su

I. Introduction

The electrical grid is the largest

and most complex infrastructure

and industrial investment that

was ever built by mankind. The

U.S. National Academy of

Engineering named it as the

greatest engineering achievement

that transformed our lives in the

20th century (Schewe, 2007),

beating the automobile, the

rved., http://dx.doi.org/10.1016/j.tej.2014.07.006

Internet, highways, and many

other innovations. The entire

electrical grid in U.S. is indeed an

ultra-large-scale network for

delivering electricity from

suppliers to millions of

consumers across tens of

thousands of miles of

transmission and distribution

lines. Unlike gas supply,

electricity cannot flow directly

from one point to another through

The Electricity Journal

http://dx.doi.org/10.1016/j.tej.2014.07.006

In mostbusiness settings,the customerwillingnessdetermines theprices of goodsor services.

A

a specified path. As the

workhorse of the modern world,

electricity powers industry,

residential homes, small business,

commercial establishments,

transportation, and almost all the

sectors across the nation. Indeed,

the electric grid is the most critical

infrastructure that our nation’s

economy is built upon. Unlike any

other product, it is almost

impossible to keep a meaningful

amount of electricity in stock

under normal operating

conditions. Thus, electricity has to

be available on demand

anywhere and anytime.

Consequently, the electric

demand and supply varies

continuously. Because of

reliability and security

considerations, the generation,

transmission, and delivery of

electricity to the end-users are

regulated by federal, state, and

local agencies. In the past 130

years, the regulation of U.S.

electric utilities has gone through

a series of changes to ensure that

power grid is reliable, safe,

secure, and well organized.

Accordingly, the electricity

market is undergoing a slow but

critical change in the way we

generate, transmit, and deliver

electricity to every single U.S.

household and business. Today,

customers are playing a much

more important and interactive

role in an emerging competitive

electricity market. In the long run,

customers are expected to have a

substantial impact on the U.S.

wholesale and retail electricity

market by not only freely

ug./Sept. 2014, Vol. 27, Issue 7 10

choosing their electricity

providers but also serving

distributed energy suppliers.

II. Past

First, let’s give a brief overview

of the U.S. electric industry.

Around 1880, Thomas Edison

founded and established the first

investor-owned electric utility in

New York City (Schewe, 2007).

Initially, such small U.S. electric

utilities were allowed to operate

their power generators and serve

local consumers without any

regulation. In early 1900, the first

statewide regulation of electric

utilities emerged. In most

business settings, the customer

willingness determines the prices

of goods or services. Speaking of

economic language, the market

clears the price at the equilibrium

point where supply intersects

with demand. However, since the

very beginning of the 20th

century, electric utilities have

been regional monopolies. Hence,

the so-called cost of service

40-6190/# 2014 Elsevier Inc. All rights reserved., h

becomes the fundamental

principle to find a fair electricity

price (retail rate) that the

customers will pay. These prices

may vary with the class of

customers (e.g., residential,

commercial, and industry

customers) and intentionally give

a fair return to recover all the

associated costs for providing

service of delivering electricity. In

1935, the statewide regulation

seemed to be insufficient to

regulate large interstate holding

companies, which controlled

more than two-thirds of our

nation’s energy trading. The U.S.

Congress passed the Public

Utility Holding Company Act of

1935 (PUHCA) (Public Utility

Holding Company Act, 1993) to

force the holding companies to

break up, and gave utilities a

government-sanctioned

monopoly over a limited territory.

In exchange, utilities agreed to

provide reliable electric service to

serve all customers at a regulated

rate. From the 1940s to the 1960s,

these vertically integrated

monopoly utilities seemed to

function well enough. Driven by

the oil embargo and world oil

market disruptions of mid-1970s,

the electricity price kept rising. In

response to the energy crises of

the 1970s, Congress passed the

Public Utility Regulatory Policies

Act (PURPA) (The Public Utility

Regulatory Policies Act, n.d.) in

1978 in order to promote utilities

to utilize domestic energy and

renewable energy such as

hydropower, wind, and solar.

PURPA also opened the

ttp://dx.doi.org/10.1016/j.tej.2014.07.006 113


[(Figure_1)TD$FIG]

Figure 1: Structure of the Deregulated U.S. Electric Utilities

11

wholesale markets to non-utility

power producers. Both PUHCA

and PURPA are viewed as the

starting points of national

electricity deregulation, also

known as reconstruction. Figure 1

illustrates the basic structure of

deregulated U.S. electric utilities.

G enerally speaking, the

wholesale market is

responsible for energy trading

between generators at

transmission levels, while the

retail electricity market is

responsible for short-term or real-

time delivery of electricity at

distribution levels. Around 1980,

some large-volume commercial

and industrial consumers began to

demand the right to directly

negotiate with the wholesale

power suppliers. In the past, the

local utility solely owned and

operated all the power generation,


transmission, and distribution

assets. Because of the monopoly

nature, residential customers had

little or no choice on determining

whose electricity to purchase

(Warwick, 2002). In some U.S.

markets in the early 1990s, electric

restructuring allowed consumers

to choose among a variety of

energy suppliers on the basis of

competitive prices and products.

The Energy Policy Act of 1992

(EPACT) (EPACT, 1992) reformed

the Public Utility Holding

Company Act of 1935 and

amended the Public Utility

Regulatory Policies Act of 1978.

EPACT’s goal is to increase clean

energy use and improve overall

energy efficiency in U.S. It has

significantly impacted U.S. electric

power deregulation by allowing

the Federal Energy Regulatory

Commission (FERC) to order


transmission owners to carry

power for other wholesale parties.

It is worth noting that retail

customers still lacked of ‘‘energy

choice’’ at this point. In 1994, the

California Public Utilities

Commission (CPUC) became the

first state to investigate choice for

retail customers.

I n 1996, FERC Orders 888

(Federal Energy Regulatory

Commission, n.d.-a) and 889

(Federal Energy Regulatory

Commission, n.d.-b) gave birth to

the concept of an independent

system operator (ISO) and

dramatically changed the way

electricity is generated,

transmitted, and dispatched

throughout North America. In

1996, Order 888 detailed how

transmission owners may charge

for use of their transmission lines,

and the terms under which they



Table 1: History of U.S. Electricity Deregulation.

1935 Congress passes the Public Utility Holding Company Act of 1935 (PUHCA) to require the breakup and the stringent federal oversight of

large utility holding companies. The system of federal and state regulations that resulted from this act still exists today.

1978 Congress passed the Public Utility Regulatory Policies Act (PURPA) which initiated the first step toward deregulation and competition

by opening wholesale power markets to non-utility electricity producers.

1992 Congress passed the Energy Policy Act of 1992 (EPACT), which promoted greater competition in the bulk power market. The Act

chipped away at utilities’ monopolies by expanding FERC authority to allow independent power producers equal access to the

utilities’ transmission grid.

1996 FERC implemented the intent of the Act in 1996 with Orders 888 and 889, with the stated objective to ‘‘remove impediments to

competition in wholesale trade and to bring more efficient, lower cost power to the nation’s electricity customers.’’

2005 Congress passed the Energy Policy Act of 2005, a major energy law to repeal PUHCA and decrease limitations on utility companies’

ability to merge or be owned by financial holding/non-utility companies. This led to a wave of mergers and consolidation within the

utility industry.

2007 FERC issued Order 890, reforming the open-access regulations for electricity transmission, in order to strengthen non-discrimination

in transmission services for alternative suppliers.

2008 FERC issued Order 719 to improve the competitiveness of the wholesale electricity markets in various ways, and to enhance the role

of RTOs.

A

must give other access to them

(Electricity Regulation in the US,

2011). FERC Order 888 also

required utilities to separate their

transmission and generation

businesses, and to file open access

transmission rates through which

they provide non-discriminatory

transmission service. In the same

year (Electricity Regulation in the

US, 2011), FERC Order 889

created an open access same-time

information system (OASIS),

through which transmission

owners could post the available

capacity on their lines, so all

companies that wanted to use the

system to ship power could track

the available capacity. The growth

of ISOs creates a broader, more

competitive electricity market for

bulk independent power

producers. However, ISOs only

deal with large blocks of

aggregate load or generation on

the transmission level (the

wholesale electricity market), and


do not reach down into the

distribution systems (the retail

electricity market). In 1999, FERC

Order 2000 (Federal Energy

Regulatory Commission, n.d.-c)

led to the creation of regional

transmission organizations

(RTOs) and defined the roles of

RTOs as independent, non-profit

entities that operate utility-owned

transmission networks. FERC

Order 2000 intended to promote

wholesale market competition in

order to reduce wholesale prices.

Table 1 provides a brief timeline

of major milestones in the U.S.

electricity market deregulation.

III. Present

The U.S. electricity ownership

structure is quite complex. As of

2012, the U.S. electric power

industry consisted of

approximately 3,300 publicly

owned, investor-owned, and


cooperative utilities, more than

1,000 independent power

generators, three regional

synchronized power grids, eight

electric reliability councils, about

150 control-area operators, and

thousands of separate

engineering, economic,

environmental, and land-use

regulatory authorities (Electricity

Regulation in the US, 2011; Report

to Congress, n.d.). Figure 2 shows

U.S. electric utility industry

statistics. Publicly owned utilities

account for 61 percent of the total

number of electricity providers

and serve about 14.4 percent of

the U.S. population. Investor-

owned utilities account for 5.8

percent of the total number of

electricity providers and serve

about 68.5 percent of the U.S.

population. Cooperatives are

private nonprofit entities that are

mostly operated in rural areas.

Additionally, other non-utility

entities (e.g., federal power



[(Figure_2)TD$FIG]

Figure 2: U.S. Electric Utility Industry StatisticsSource: U.S. Energy Information Administration Forms EIA-861 and 861S, 2012

11

agencies and power marketers)

cover a few parts of the U.S. to

provide electric service.

I n another light, there are only

two types ofutilities depending

on the operational structure:

vertically integrated utilities and

distribution-only utilities. In

general, vertically integrated

utilities are responsible for

generation, transmission, and

distribution of electricity from

power sources to retail customers.

Vertically integrated utilities hold

the exclusive ownership of power

plants, transmission lines, and

distribution lines. Most use a

combination of owned resources,

contract resources, and short-term

purchases and sales to meet their

customer demands, and a

combination of their own grid


assets and other utilities’ assets to

move power from the generation

sources to the end users. Some

electric utilities may only provide

distribution service, and are

referred to as distribution-only

utilities. Distribution-only utilities

can range from small-scale

consumer-owned utilities to large-

scale investor-owned ones. In most

cases, these distribution-only

utilities buy their electricity from

upstream wholesale providers.

Some large-volume consumers

may even obtain their electricity

directly from suppliers, with the

distribution-only utilities

providing only the distribution

service.

Figure 3 shows electricity

market restructuring activity in

the U.S. as of 2010. In states that


have restructured their retail

electric markets, separate

companies exist to sell commodity

electricity to local consumers.

Some companies specialize in

selling ‘‘green’’ power from

renewable energy, while others

specialize in residential,

commercial, or industrial service.

These suppliers may own their

own power plants, buy from

entities that do, or buy from

marketers and brokers.

I n some regions, highly

organized wholesale markets

in which the energy resources are

bid and dispatched in hourly and

daily auctions are operated by

RTOs and ISOs (The COMPETE

Coalition, n.d.). RTOs and ISOs

are not affiliated with any

market participant and serve



[(Figure_3)TD$FIG]

Figure 3: U.S. Electric Utility Industry Restructuring ActivitiesSource: Stephens Inc. [http://www.electricenergyonline.com/show_article.php?mag=77&article=631]

A

about two-thirds of U.S. electricity

consumers. Both RTOs and ISOs

operate and administer the

wholesale electricity markets over

a large region. However, the

functionalities of RTOs and ISOs

are slightly different. Today’s

RTOs have additional greater

short-term responsibility for the

transmission network as

established by FERC. As of

January 2014, there are currently

nine ISOs/RTOs within North

America: California ISO (CAISO),

New York ISO (NYISO), Electric

Reliability Council of Texas

(ERCOT), Midwest Independent

Transmission System Operator

(MISO), ISO New England (ISO-
[(Figure_4)TD$FIG]
Figure 4: Regional Transmission Organization(ISO) in North AmericaSource: http://www.ferc.gov/industries/electric


NE), Alberta Electric System

Operator (AESO), Independent

Electricity System Operator

(IESO) that operates the Hydro

One transmission grid for

Ontario, Canada, PJM

Interconnection (PJM), and

Southwest Power Pool (SPP).

Figure 4 shows the RTOs/ISOs in

North America. Table 2

summarizes the existing U.S.

RTOs/ISOs.

T he retail electricity market is

very different from retailers

in many other industries (Joskow,

2000), especially for residential

and small commercial customers.

For example, several traditional

retail services do not exist in

s (RTO) and Independent System Operators

/indus-act/rto.asp


today’s retail electricity market,

such as point-of-sale service to

customers, multiple brands and

complementary products,

convenient locations and opening

times. There is an urgent need to

reduce the costs of retailing

electricity through innovative

business models. Increasingly, the

diversity of buyers in the

residential electricity market can

increase competition, market

liquidity, and provide more

options for distributed generators

to mitigate the market risk,

therefore lowering wholesale

prices in the long run. In the early

1990s, several states with high

electricity prices began exploring

opening retail electric service to

competition. While customers

would choose their supplier, the

local distribution utility would

still handle the delivery of

electricity. Retail competition was

expected to result in lower retail

prices, innovative services and

pricing options. It also was

expected to shift the risks of

assuring adequate new

generation construction from

ratepayers to competitive market

providers. Since 1990s, many

regional markets have achieved

some success and the ongoing

trend continues to be toward

deregulation and introduction of

competition. However, the early

2000s major failures such as the

California electricity crisis and the

Enron debacle caused the pace of

change to slow in some regions,

while other regions saw an

increase in market regulation and

the reduction of competition as a


http://www.ferc.gov/industries/electric/indus-act/rto.asp




Table 2: Overview of RTOs and ISOs in the U.S.

RTO/ISO Acronym Serving Areas

Wholesale Market

Operations Began

California ISO CAISO California 1998

Electricity Reliability

Council of Texas

ERCOT Texas 2001

ISO New England ISONE All or parts of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and

Vermont

1999

Midwest ISO MISO All or most of North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Wisconsin,

Illinois, Indiana, Michigan and parts of Montana, Missouri, Kentucky, Arkansas,

Texas, Louisiana, and Mississippi.

2005

New York ISO NYISO New York 1999

PJM Interconnection PJM All or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey,

North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the

District of Columbia

1998

Southwest Power Pool SPP Kansas, Oklahoma, most of Nebraska, and parts of New Mexico, Texas, Louisiana,

Missouri, Mississippi and Arkansas

2007

11

result. In contrast, Texas has

successfully introduced customer

choice in retail markets since 2002.

In 2006 (Cooke, 2011), Texas

consumers in areas subject to

competition could choose from 17

providers that offered as many as

36 different rate plans. By 2008,

those customers could pick from

roughly 28 suppliers that provide

nearly 100 rate options. Around 70

percent of commercial and

industrial customers and around

40 percent of residential customers

have taken advantage of choice to

switch providers since 2000. By

2011, 15 states and the District of

Columbia had restructured retail

electric service and allowed

‘‘energy choices.’’ Retail

consumers can now choose among

competitive suppliers ofelectricity.

The retail electric providers (REPs)

include TXU, Just Energy, Con

Edison, Champion Energy,


Constellation Energy, Reliant

Energy, and many others.

A ccording to recent reports

(Joel, 2012), there is

growing evidence that shows

customers have saved a

significant amount of money as a

result of competitive electricity

market. According to the U.S.

Energy Information

Administration and U.S. Bureau

of Labor Statistics data, the

Consumer Price Index (CPI) is

40.3 percent for the period

between 1998 and 2012. From

1998 to 2012, consumers in states

served by competitive wholesale

power markets have seen their

retail electricity rates increase

about 0.89 percent, compared to

an overall 4.06 percent rise in the

national average. Consumers in

states without competitive

wholesale power markets,

meanwhile, have seen their retail


electricity rates rise 9.44 percent.

Residential customers in states


power markets saw rates decline

by 1.20 percent from 1998 to 2012,

compared to an overall 2.51

percent rise in the national

average. In contrast, residential

customers in states not served by

competitive wholesale power

markets saw retail electricity rates

rise by 8.87 percent. For

commercial customers in states


power markets, rates declined

4.84 percent over the 1998–2012

time periods, contributing to an

overall 2.95 percent rate decline in

the national average. This

compares to a 0.12 percent rate

decline for commercial customers

in states without competitive

wholesale power markets. For

industrial customers, national

average rates increased by 6.12



[(Figure_5)TD$FIG]

Figure 5: U.S. Comparison of Electricity Rate Changes across Electricity Market andCustomer Sectors Between 1998 and 2012

A

percent from 1998 to 2012, while

industrial customers in states


power markets saw retail

electricity rates rise 3.51 percent.

This is compared to an 11.36

percent retail electricity rate rise

for industrial customers in states

without competitive wholesale

power markets during the same

time period. There is clear

evidence that customers from all

sectors have benefited from

competition in wholesale

markets. Figure 5 compares the

retail electricity rate changes for

various electricity markets and

customer sectors over 1998–2012.

H owever, there is no

universal agreement on the

impact of competitive electricity

market on customers. Some

reports claimed that the results of

U.S. electricity market

deregulation have not been as

successful as expected. The

results in Lenard and

McGonegal (2008) show that

RTOs have not lowered the

wholesale electricity price.

Instead, a number of factors

(e.g., fuel cost, time-specific


factors) led to higher prices in

states with RTO. The authors

claim that the results are

consistent across a wide range

of economic measures. The

authors in Caplan and Brobeck

(2012) claim that the benefits of

RTO markets have been somewhat

offset by the highly problematic

markets operated by RTOs.

The so-called smart grid is

another important topic in today’s

electricity market. From the

customer’s point of view, smart

grid technologies can enable

consumers to manage their own

electricity usage and meet their

daily load requirements in the

most economically efficient way.

In addition, smart grid will

increase the consumer’s energy

choices, and eventually reduce the

electricity price across all levels. In

turn, the transparency found in

competitive electricity markets

uniquely benefits the growth of

many smart grid technologies

such as demand-side management

(DSM) or demand response (DR).

F or example, DR programs

provide promising solution

for efficient operations of today’s


electricity market. Depending on

the control schemes, DR can be

categorized as follows (Su et al.,

2013):

(1) Price-based DR: Customers

can regulate their electricity

consumption in response to a

certain pricing arrangements.

Commonly used methods include:

� Real-time pricing (RTP),

which offers dynamic prices that

reflect the electricity cost on an

hourly or half-hourly basis.

Instead of a flat rate, utilities

charge residential customers the

real-time retail prices, which

reflect the real-time changes in

spot markets.

� Time-of-use (TOU) pricing,

which provides a flexible retail

electricity pricing structure by

predefining peak and off-peak

periods depending on the season

(e.g., summer and winter), days of

a week (e.g., weekday, weekend,

and holiday), and hours of the day.

� Critical peak pricing (CPP),

which is a hybrid of TOU and RTP.

The basic structure is identical to

TOU, but CPP is restricted to the

critical peak hours with much

higher peak prices for a limited

number of times (e.g., extreme

events) per year.

(2) Incentive-based DR: Grid

operators are allowed to directly

control some of customers’ energy

usages by rewarding interested

customers. Some incentive-based

DRs are as follows:

� Emergency demand

response program (EDRP), which

involves signing contracts with

large energy consumers (e.g.,

commercial and industrial loads)



12

that are eligible for reduced rates

or other significant incentives if

they can reduce their electricity

consumption at peak periods. As

a result, the utilities can avoid

potential electricity shortages.

� Direct load control (DLC),

where by signing a contract with

interested customers, utilities

have access to remotely control

some of customers’ appliances

(e.g., air conditioner). DLC has

been widely adopted.

� Interruptible/curtailable

rates require customers to either

reduce energy consumption on

short notice or temporarily cut off

the energy supply from the

utilities in order to maintain

higher-priority services in return

for financial incentives. This

demand interruption or reduction

only occurs at peak times.

The deployment of DR

provides a great opportunity to

empower all customers –

including industrial, residential,

and commercial consumers – to

play a more active role in

electricity markets. There is still a

big debate about how DR and

other smart grid technologies

would really affect end customers

and electricity prices. For

example, customers may gain

lower prices with substantial

subsidies in some regulated

markets, while price-based DR

may even lead to an increase in

retail electricity prices. With the

expected growing customer

interests of DR, it becomes more

challenging to keep the real-time

balance of the aggregate supply

and demand. As a result, both


retail and wholesale market prices

can also be quite sensitive to end-

user participations.

IV. The Future

To date, there is not a

universally accepted vision of a

future electricity market.

However, we are gradually

reaching the consensus that well-

structured competitive electricity

markets can yield the greatest

benefits to our society as a whole,

in terms of cost, efficiency,

reliability, and security. More

importantly, competition in both

wholesale and retail electricity

markets enables residential

customers to shop for innovative

smart grid technology and clean

energy, enhances customer

choices, and helps lower

electricity costs in the long run. In

our opinion, two aspects will

significantly reshape the

traditional views of electricity

markets, the energy industry, the

social environment, and the

business world, namely:


(1) distributed renewable energy

and (2) residential customer

participation.

Competition encourages all

sectors, including utility,

industry, and private investors, to

promote market entry of

renewable energy which has

fewer carbon emissions and is

less dependent on

environmental-costly fossil fuels.

In our envisioned future

electricity markets, hundreds of

thousands of independently

operated producers (e.g.,

residential users) will allow far

greater amounts of distributed

renewable energy resources to be

integrated into the nation’s

electric grid. The high

participation of distributed

electricity producers and

consumers (preferably

renewable-based generation) will

lead to more efficient and

environmentally friendly

outcomes. It is important to note

that these distributed power

generators will still need to meet

local/federal regulations, such as

environmental standards and

safety requirements.

M eanwhile, we have to

confess that the majority

of the current U.S. power grid

infrastructure was built in the

1930s, and the existing U.S. power

grid infrastructure will not meet

the growing electricity demand of

the 21st century. U.S. renewable

energy sourcing is still at a level

that is among the lowest of

developed nations, an ominous

sign of a looming energy crisis.

The U.S. Energy Information



[(Figure_6)TD$FIG]

Figure 6: Paradigm Shift in Computer Industry (Information Internet) and Power Industry(Energy Internet)

A

Administration 2012 annual

report projects that the renewable

share of U.S. electric power

generation would only increase

from 10 percent in 2010 to 16

percent in 2035 (United States

Energy Information

Administration, 2012). The

majority of electricity generation

still heavily relies on the

environmentally costly fossil

fuels. It is surprising to see that we

will be depending on fossil fuels

in 2035 just as we did in 1980. The

promising smart grid

technologies will barely make an

impact if the energy used is not

‘‘green.’’ One major technical

barrier is that, in today’s power

systems, the majority of

renewable energy generation

(e.g., off-shore wind farms)

directly injects power to the bulk

power grid on the transmission

level. The centralized generators

that use renewable energy to

produce electricity are often

located in remote locations with

site-specific resources, far away

from population centers that

ultimately consume the

electricity. The renewable energy

deployment has been suffering

from the very expensive and

inefficient transmission

expansion and maintenance.

Therefore, large-scale grid

integration of distributed

renewable energy is becoming a

promising solution to

restructuring the current power

grid infrastructure and ensuring

the reliability of energy supply. In

short, there is an urgent need to

reconstruct our existing electricity


market to boost the adoption of

long-term, secure, sustainable,

and environmentally friendly

distributed renewable energy

resources. On the other hand, in

today’s power systems, the

residential customers have very

limited access to fully engage

with the retail electricity market

to choose their suppliers from

competing electricity retailers.

The utility still owns and operates

the distribution systems

exclusively and makes profit by

primarily selling electricity.

T o address these issues, we

have coined an alternative

distribution model as the ‘‘Energy

Internet’’ (Huang et al., 2011; Su

and Huang, 2014). This is a

transformative, groundbreaking

idea to develop a next-generation

power grid integrating highly

distributed and scalable


residential electricity suppliers.

The vision of Energy Internet is

inspired by the paradigm shift in

the computer industry 30 years

ago. Figure 6 illustrates the

similarities of the paradigm shift

in the computer industry

(Information Internet) and the

power industry (Energy Internet).

The competitive information

technology (IT) industry is

thriving and evolving while

providing a wide range of

innovative services and products.

The boom of the IT industry also

provides great opportunities for

our nation’s economic growth,

cost reduction, and job creation.

During a relatively short period of

time, the centralized computer

mainframes gave way to a

distributed computing

infrastructure which allowed

individual users access via the



12

Worldwide Web. In the computer

industry, user participation is a

major factor that has resulted in

exponentially increasing

innovation and ingenuity in the IT

sector (e.g., Amazon, eBay, and

Facebook). The Information

Internet innovations have

completely reshaped the

traditional view of our social

environment and business world.

In a similar paradigm shift, highly

distributed and scalable

renewable energy resources will

play the primary role that

centralized bulk power plants are

currently serving. In the

envisioned Energy Internet, every

single residential customer,

referred to as an Energy Cell,

should be not only an electricity

consumer but can also be an

electricity supplier by locally

managing her own distributed

generators (DGs), distributed

energy storage devices (DESDs),

and dispatchable loads.

Residential customers can offset

their electric cost, or even make

additional income, by selling

excess self-generated power back

to the utility grid or

neighborhood. Some customers

may still purchase electricity from

various competitive utilities (i.e.,

Utility Cells) under standard

services. The Energy Internet

provides residential customers

with significant economic

incentives for self-installation of

distributed renewable generators

(e.g., local-scale wind turbines or

rooftop photovoltaic panels).

Eventually, the competitive retail

electricity market will offer


various advantages to local green

energy providers, and ultimately

enable green energy generation to

thrive. Residential customers can

choose from a variety of

distributed electricity providers

(i.e., Energy Cells) that may offer

sustainable energy sources.

Meanwhile, the fundamental

science, breakthroughs, and

enabling technologies have

substantially reduced costs of

local-scale renewable energy

generators and storage devices,

which allow residential

customers to play a more

interactive role in tomorrow’s

electricity market.

T he vision we promote will

require the equivalent of a

Manhattan Project for energy, as

suggested in Thomas Friedman’s

book, The World Is Flat. We believe

that the next-generation power

grid is a level playing field in

terms of electricity transactions,

where all customers (especially

residential customers) have an

equal opportunity. The Energy

Internet requires that our society

move away from, or at least


supplement, the traditional

centralized generation,

distribution, and consumption

business model to one where

every user can actively participate

into the retail electricity market.

In a new market structure, the

distribution and transmission

remain regulated on a cost-of-

service basis in order to maintain

the system reliability and

security. However, the generation

cost of utility and local provider

will be naturally reflected in the

wholesale markets. As a result, an

ultra-large-scale pool of

customers will be exposed to

competitive electricity prices

across all levels, from wholesale

to retail electricity markets.

A s of today, without

government tax incentives,

high capital costs remain as a big

challenge to the massive market

introduction of distributed

renewable energy generators. The

pervasiveness of distributed

renewable energy generator is

severely limited by lack of

economic incentives for

installation, especially in the U.S.

In our envisioned Energy

Internet, since individual

residential customers, or a group

of entities organized as an Energy

Cell, can offset their electric cost

or even make additional income

by selling excess self-generated

power back to utility grid or

neighborhood, they are self-

motivated to install and operate

local-scale renewable energy

generators. This scalable Energy

Cell can be as large as a town and

as small as a single-family house.



A

Hundreds of thousands of Energy

Cells are physically connected

with each other in an Internet-like

structure. Some Energy Cells may

only serve as passive energy

consumers while some may

actively participate into

residential-level electricity

trading. The new electricity

market will be exposed to a great

number of uncertainties. For

example, traditional power

system operations rely on

deterministic optimization

methods, given the fact that

utility-level load forecasts have

sufficient accuracy and the

forecasting errors are usually well

bounded. In the Energy Internet,

customer behaviors and their

electricity usage/generation

profiles will be much more

difficult to predict.

W e must also be aware that

today’s utilities make

profits and recover the cost of

their investment from captive

ratepayers. The power industry is

solely driven by cost/benefit

analysis and reliability concerns

in nature. They are very

conservative about any

investment decisions (e.g.,

transmission and distribution line

expansion) and have little

incentive to put significant

investment to revolutionize the

legacy power grids and electricity

market. Without a reasonable

economic model, utilities,

referred as Utility Cells, have no

motivation to facilitate the

growing market share of Energy

Cells. For example, the Energy

Internet makes it possible for


customers to reduce energy cost

by fully utilizing distributed

renewable energy resource and

shifting the load demand. In the

absence of a transformative retail

electricity market framework,

utilities would certainly make

money by selling less electricity

while customer-owned

generation would account for a

noticeable portion of total

electricity transaction. On the

other hand, the utilities will need

to invest a lot of money to

upgrade the existing distribution

system, including

communication infrastructure

and control centers. Therefore,

there is a conflicting interest in

that the utilities have a common

interest to grow their customer

base to make more money. It is

important to note that utilities

still own most of the distribution

infrastructure (e.g., distribution

lines, transformers and

substations). Therefore, in our

envisioned Energy Internet,

utilities are expected to make

notable profits from ‘‘renting

out’’ their residential


distribution infrastructure to

fulfill an electricity transaction

among and between Energy Cells.

In comparison with the topology

of the bulk power system, which is

relatively static, the Energy

Internet with a number of

heterogeneous Energy Cells is

indeed a highly dynamic and

complex system. Therefore,

utilities will be playing a more

important role in ensuring the

residential distribution system

security and reliability. In other

words, utilities are expected to

make more profit on providing

ancillary services – including

scheduling and dispatch, reactive

power and voltage control, loss

compensation, systems protection,

and energy imbalance – in

addition to traditional electricity

transactions.

Figure 7 illustrates the future

electricity market with high

participation of distributed

renewable energy sources and

residential energy consumers/

producers (Utility Cells and

Energy Cells).

W e feel the Energy Internet

is a promising concept

that allows those new participants

(Energy Cells and Utility Cells) to

fully engage with a dynamic and

diverse energy market through a

distributed decision-making

process. The electricity rate is the

result of competitive and

intelligent purchasing/selling

strategies. However, the needed

market clearing strategy is still in

its infancy to provide a clear,

timely, and transparent price

signal for distributed electricity



[(Figure_7)TD$FIG]

Figure 7: Envisioned Customer Participation in Future Electricity Market

12

producers and consumers. To

realize the vision of the

aforementioned Energy Internet,

the underlying distribution

infrastructure must change

significantly from today’s system.

The new grid must support large

amounts of plug-and-play

activity (some of these are a result

of the Energy Cell’s market and

business decisions) in a highly

distributed generation

penetration scenario. On the other

hand, there is a long way to

convince the policymakers (e.g.,

the Federal Energy Regulatory

Commission, and state and

regional authorities) to make the

right decision on any necessary

improvement in electricity market

design in a timely manner.

V. Conclusion

As discussed above, over the

last 130 plus years U.S. electricity


markets have gone through a

series of fundamental changes

(Boisvert et al., 2002).

Competition in electricity

markets provides significant

environmental benefits with

reduced carbon emissions and

increased market share of

renewables, in addition to

financial benefits from increased

operating efficiencies.

A lthough the electricity

market deregulation has

been underway for more than 20

years, competitive forces in the

U.S. retail electricity markets have

been completely silent since the

early-2000s California electricity

crisis. In today’s power system,

the residential customers have

very limited ‘‘energy choice.’’

However, the roles of residential

customers are changing

dramatically as smart grid

technologies evolve. A well-

justified business model is a

critical component that can


facilitate the real-world

deployment of next-generation

retail electricity market with high-

participation of residential

customers. The introduction of

new players like residential

electricity producers (Energy

Cells) will revolutionize the way

we use electricity, a model that

has remained unchanged in past

decades. This transformative

paradigm shift and complete

reconstruction of the electricity

industry cannot be achieved by a

one-step-at-a-time approach. The

regulated monopoly structure of

retail electricity market worked

well for a long time and is still

expected to have its place in the

next few years. There is a

significant amount of research

and investigation to be done

before the full vision of the

environed next-generation retail

electricity market comes to

fruition. If successful, we believe

that the future competitive

structure of residential retail

electricity market will provide

visible benefits that we have all

been expecting.&

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wind power system’’

CHUNYOU WU

XIAOLING WANG

JATIN NATHWANI

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al Science Foundation of China

research project called ‘Interna-

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the role of customers in the u.s. electricity market: past, present and future

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