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Is transactive energy really such a great idea?

Transactive energy is, according to the Gridwise Architecture Council:

“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”

To some observers, this is an exciting innovation, using financial incentives to optimise performance of the energy system. It is, for example, a key component of concepts such as energy communities in capturing the full value of their generation and customer base.

But will the benefits to consumers be matched with equivalent benefits to the DSO who provide the network over which energy transactions are fulfilled? Some are concerned that it may be exploited by a minority at the expense of others.

The EU motivation in implementing energy communities was explicitly stated as encouraging citizens to participate in the provision of flexibility. In theory transactive energy could provide a more dynamic and effective alternative to the current, heavily regulated incentives for network operators.

But inappropriately applied, transactive energy may, somewhat perversely, impose unfair burdens on network operators. They will then be forced to pass on the additional burden to all consumers as a socialised cost, disproportionately affecting vulnerable consumers.

How does transactive energy work?

Transactive energy can be implemented using a variety of business models such as Peer to Peer (P2P) trading and Collective Self-Consumption (CSC).

  • Peer to Peer trading involves transactions between prosumers, that is consumers who also produce electricity (for example from their excess rooftop solar generation), and consumers who have a demand for electricity to power their homes.
  • Collective Self-Consumption is a similar concept but involves the virtual sharing of communally owned generation assets.

P2P trading is, potentially a highly disruptive concept as it disintermediates the prosumer and consumer. That is, the prosumer trades directly with the consumer without the need for a conventional energy supplier to manage the transaction. It is argued that not only will this reduce transaction costs, but it may also make the energy supplier of today obsolete.

More than just energy, transactive energy is about services

Although the transaction of energy (kWh) between participants in energy communities does capture some value, this is generally insufficient to justify the viability of an energy community.  It is for this reason that transactive energy schemes, even those ostensibly based on energy transactions, also seek to capture additional values from the provision of flexibility and other services. This approach is referred to as value stacking.

Flexibility services may include frequency response, operating reserve and capacity payments. Historically these services have been provided by generators to the transmission system operator (TSO) who is responsible for managing the overall energy system. More recently distribution system operators (DSO) have begun to contract with generators, storage and other demand responsive loads to provide services to better manage the distribution system.

If the energy community is able to provide flexibility services to the DSO, then transactive energy will be able to provide mutual value. However, there are some schemes which merely transact energy across the distribution networks and fail to reward the provider of the network. So far this has only been possible under regulatory sandbox criteria, but there is an emerging clamour for energy communities to be exempted from at least some of the use of system charges.

The EU Directives intended to encourage energy communities raise many challenges for the DSO who needs to find a fair means of providing the service, whilst retaining their own income. After all, if the DSO loses revenue, they will need to recover this from a socialised charge on all consumers, unfairly penalising those who are not able to participate in energy communities. This could lead to a repeat of the FIT situation, which was considered by many as being a tax on the poor to subsidise the rich.

The next couple of months, during which EU member states must finalise the transposition of the Renewable Energy and Energy Market Directives into national laws, will present some interesting challenges to all involved as they seek to establish market frameworks which treat both parties fairly and truly optimise the system.

To find out more about transactive energy, and our recent distribution network research, listen to the recent episode of Talking New Energy, the podcast from Delta-EE.

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