It is no secret to readers that I think we can best balance energy supply and demand using pure economic transactions. Whatever you feel about flash trading, those markets with millions of 14 millisecond transactions prove that we know how to run markets fast enough to manage even the most demanding decision making on smart grids. Free energy, that is energy markets unencumbered price and reliability arbitrage, is certainly the fastest path to the technologies we need to balance supply with the increasingly volatile supple we foresee. But today’s utilities serve a social justice purpose that I have been unable to reconcile in my mind with free energy until now.

We need free energy because we need to unbundle two of the most significant services provided alongside today’s energy delivery; availability risk arbitrage and price risk arbitrage. These services create a moral hazard we can no longer afford. Availability risk arbitrage removes performance incentives for end nodes to install systems for energy storage and generation. Price risk arbitrage reserves all economic incentives for energy storage and generation to the grid, where it is too expensive and innovation adoption is, of necessity, to slow to support the type of venture creation we have seen in high tech.

The basic problem is that our electric grid operates with lower margins for error than it ever has before, and current policy is to reduce them further. No community is clamoring for more power lines in its back yard even as our houses are filled with ever more energy consuming equipment for computing, telecommunications, and entertainment. It is becoming too expensive, in generation costs, infrastructure capacity, and social will to maintain constant oversupply of traditional energy. We wish to use new energy sources that are unpredictable and episodic. Attempts to smooth out supply volatility at the grid re too expensive or too few. (Ask me some time why natural gas sales went up when gas generation was replaced by wind in Colorado.) The ability of the grid to supply availability arbitrage is failing.

With fixed prices, the economic incentives for end nodes to participate in energy generation and storage are non-existent. The most basic market rule is buy low and sell high. Without dynamic pricing, the rule for homes and commercial buildings is sell low (wholesale) and buy high (retail). Efforts by local regulators to repeal that rule are as artificial as efforts to repeal gravity.

Dynamic pricing changes all that. With the volatility of energy supply fully exposed, end nodes will buy technologies to manage their risk. With the volatility of energy prices fully exposed, end nodes will find the business case to manage their power purchases. Bottlenecks in the power grid will result in local congestion pricing, letting the true costs neighborhood infrastructure decisions to be seen by the public.

Utilities today must play not to lose rather than to win. They cannot adapt new technologies quickly because they must always be reliable. Market actors that cannot accept risk, cannot afford to innovate. End nodes can voluntarily accept risk, and so can afford to adopt new technology. If Denver, where we met this month to form the Smart Grid Interoperability Panel (SGIP), is plunged into darkness for a week, it is a dire outcome; if my home fails for a week, is provides entertainment to my neighbors. The difference between grid-level innovation and end-node innovation is the difference between tragedy and comedy.

Smart grids will transfer risk to their end nodes. Economic agents which assume risk will expect to be paid for it. These payments will be the fertilizer for an untold number of new technologies. The best way to transfer risk and payments together is self-balancing, self organizing free markets in energy. Systems that can participate in these markets for us as well as systems that can store or generate energy on-site, will be the reward.