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Daedalus was the mythical great architect and artificer of the classical world. Today, embedded intelligence is enabling the most profound changes in the way we create and use buildings since his day.

Building Intelligence meets the Intelligent Building. The Intelligent Building negotiates with the Intelligent Grid. How will this transform how we interact with the physical world?

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Tuesday
Dec042012

Must retail energy users be mere price takers?

A significant wedge between those seeking to maintain the current regulated prices accompanied by DR and those looking to move to transactive energy for a self-regulating grid is the notion that retail customers are all mere price takers. A price taker watches the market and either buys or does not buy; he takes the prices the market offers. Some see that this “lack of power” can only be addressed by regulating the prices offered. This leads back to today’s model.

Committed positions break this model. A retail customer who commits to buying this much power at this rate for a given time period in the future establishes a committed position. With a committed position, if the customer needs more power at any time than the commitment, then the customer must make up the difference at the spots rates. If the customer needs less power than the commitment, he can only sell back the difference at spots rates, and then only if he finds a buyer. With this assumption of position risk, the customer also gains the ability to interact fully with the market.

In today’s regulated markets, the greatest value of energy storage is as a forward hedge by the energy supplier. The entity that stores the energy on premises cannot make up the economic value required by the storage. This storage is of value as a hedge for the retailer, not as an asset for the customer. This economic imbalance reduces the value of other distributed energy assets, such as distributed generation, as well. By limiting the value of energy storage to only the hedge value for the supplier, distributed energy assets are always undervalued.

Committed forward positions change this equation. A committed forward position in power is a contract that the buyer will purchase this energy whether or not he uses it, and that the supplier will provide the power no matter the market conditions at the time contracted for delivery. (Let’s leave aside for now the issues of true emergencies, liquidated damages, etc.)

When the market allows committed positions, the buyer is rewarded for better understanding his own energy needs. A buyer who is able to plan his energy use could package a series of positions, and take bids from the suppliers. These bids can be considered in the larger context of the business, such as labor planning or the needs of seasonal manufacture. A committed forward position then provides the buyer with choice while limiting risk in price and availability.

Committed purchases enable the buyer to take full advantage of his own distributed energy resources. Energy storage becomes a way to manage purchasing commitments, sometimes using excess energy in the commitment, sometime shaving peak use to stay within the commitment. Distributed generation is managed locally, where the knowledge if value, process, and commitments is greater.

Committed purchases of power move the retail energy buyer beyond the role of a mere price taker, to that of a full market participant. This devolves considerable autonomy to the end nodes of the grid. This increases the rewards of investing in distributed energy resources for those customers that value power surety and economic arbitrage. Because such investments are made by single sites, they will help us move to normal, innovative markets in energy technology.

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