From Airbnb to Solar: Toward a Transaction Cost Model of a Retail Electricity Distribution Platform

Lynne Kiesling, Purdue University

Digitalization, decentralization, and decarbonization are economic factors poised to disrupt many aspects of the utility business model. The International Energy Agency’s recent (2017) report on digitalization in energy suggests that digital smart grid technologies have already changed operations in the electricity industry, and that further advances in consumer-facing devices and systems and in data analytics will bring about a more decentralized, automated, and thus transactive energy system. At the same time, unprecedented reductions have occurred in the costs of solar photovoltaic modules, and digital “smart” inverters have developed – in the United States, for example, in the first quarter of 2017 utility-scale solar costs fell by 30 percent compared to Q1 2016, commercial-scale solar costs fell by 15 percent, and residential-scale solar costs fell by 6 percent (Fu et. al. NREL 2017). These innovations catalyze the move toward a more decentralized, customer-focused electricity system in which consumers can also be producers, and can change roles based on market conditions.

One possible evolution of the distribution utility business model in light of these factors is a market platform and a transactive grid services platform. The growth of digital platform business models such as Airbnb and Uber has attracted both popular and scholarly attention, and platform business models are increasingly part of policy debates in electricity distribution and retail due to the proliferation of smart grid and distributed energy resource (DER) technologies. In this paper we apply the new institutional economics work of Coase (Economica 1937) and others (summarized in Kiesling (Smart Grid Handbook 2015)) to argue that digital technologies dramatically reduce transaction costs, leading to the emergence of new market platforms that enable the exchange of excess capacity in assets that had been impossible before (Munger, Tomorrow 3.0, Cambridge Press 2018).

We develop a transaction cost model of a retail electricity distribution platform. The formal model derives the effects of a decrease in transaction costs, enabling the emergence of a retail market that allows residential DER owners to transact over the use of excess capacity in DER assets. We base our model on Horton and Zeckhauser’s (NBER 2016) model of ownership and rental of excess capacity in the sharing economy, and we extend their model by incorporating as an outside option the opportunity for agents to purchase energy from grid-based suppliers.

After deriving empirical predictions from the model about the extent to which non-owners rent the excess capacity in the rooftop solar assets, we use the model and its predictions to propose and analyze designs for transactive retail electricity platforms that enable owners of distributed energy resources to rent excess capacity to others, in the form of selling excess energy generated by rooftop solar photovoltaic systems, with the wires company operating as a grid services platform company and receiving service fees in payment for their provision of grid services.

Keywords:  electricity, retail, competition, peer-to-peer, transactive energy, platform, grid services