IEEE Power & Energy Magazine - May/June 2016 - 67

Grid architecture offers some important insights that point
to the layered optimization paradigm as the preferred design
for the high-DER T-D interface.

bulk electric system that markets, controls, and integrated
market-control structures all have their places and contribute
to the well functioning of the whole system. A well-known
example of an integrated market-control structure is regulation service in an ISO/RTO market. The market optimization procures a target amount of generation capacity that has
been certified to provide regulation. The procured generation receives a capacity payment in exchange for agreeing
to receive and respond to four-second signals from the ISO/
RTO's automatic generation control system.
Some parties to the transactive energy (TE) discussions
assert that "getting the prices right" and sending the appropriate "prices to devices" would be effective in achieving
economic efficiency and reliable operation of the system,
without the need for a centralized optimization or controls.
We are not aware of any actual large-scale complex system
in which this assertion has been successfully demonstrated.
This article is too brief for a fuller exploration of this topic;
suffice to say that one must not assume that locational prices
in themselves are an effective way, much less the best way,
to coordinate the behavior of diverse DERs on a high-DER
distribution system to maintain reliable operation and meet
the needs of end-use customers and other grid users.

behind customer meters, as these too may participate in market
constructs. Moreover, regarding temporal granularity, the TE
system encompasses the entire electric system life cycle from
long-term resource and infrastructure planning to microsecond
control mechanisms to maintain frequency and voltage. Figure 1 provides a whole-system TE model for the electricity grid.
The final observation in this section is that peer-to-peer
transactions, which are generally posited to be a mainstay
of a TE future, can be fully realized under either the grand
central or the layered decentralized optimization paradigm.
DERs and third-party DER aggregators could provide services to the transmission grid, the distribution grid, end-use
customers, and other DERs under either model. The only
difference will be whether the DERs interact directly with
the TSO for wholesale market transactions and for obtaining transmission service to support inter-LDA transactions
or engage in such transactions indirectly via the distributionlevel markets operated by the total DSO. Most importantly,
the layered optimization or total DSO paradigm, which is
preferred from the perspectives of grid architecture and
control theory, will not inhibit or limit the ability of DERs
to participate in economic transactions, given a regulatory
framework that is designed to support such transactions.

Transactive Energy Markets

A Regulatory Framework for
a Transactive Energy System

The GridWise Architecture Council offers the following
definition of TE: "a system of economic and control mechanisms that allows the dynamic balance of supply and demand
across the entire electrical infrastructure using value as a
key operational parameter."
The first observation to be drawn from this definition is
that the wholesale markets in ISO/RTO regions are already
TE systems. The application of "economic and control mechanisms" to manage flows on the distribution system simply
extends the scope of TE to encompass DERs and everything
else below the T-D interfaces. The second observation is that
the definition does not require the exclusive use of economic
or market-based mechanisms. In fact, as discussed in the
last section, a well-functioning TE system would necessarily
involve integrated economic-control structures. Spot market
mechanisms such as LMP are just one option to determine
economic value in such a system.
Thus we arrive at a TE concept that, with a high penetration of DERs, encompasses the entire electric system from the
level of the regional interconnection to the end-use customer
meters and even the meters on individual devices located
may/june 2016

The TE system envisioned in the preceding sections will
require several new regulatory framework elements. First,
the layered optimization does require sufficient DER penetration and market liquidity within the LDA to enable the
total DSO to balance the local system. For these conditions to
develop, there must be broad interest by customers and DER
developers, supported by an enabling regulatory framework
governing that provides for open access in a manner comparable to the federal rules for ISOs and RTOs. Open access
and transparency principles must apply to the interconnection process, distribution infrastructure planning, real-time
operating procedures, rules for aggregating wholesale market bids from DERs within each LDA into a composite bid
for the LDA as a whole, and rules for disaggregating and
conveying instructions back to the appropriate DERs when
the ISO market clears the composite bid.
A second key regulatory element will be to allow states
to regulate total DSOs and DSO-operated markets within
the territories of their jurisdictional distribution utilities.
These distribution-level markets will include sales for resale
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