Transaction cost economics and digital market platforms for electricity

Digital technologies are profoundly transforming the electricity sector, disrupting long-standing organizational and regulatory arrangements. The traditional vertically integrated utility—combining generation, transmission, and retail—was first challenged in the 1990s with the unbundling of generation and the rise of competitive wholesale markets. A second wave of change is now underway, driven by smart grid technologies, real-time data, and automation at the consumer level. Smart meters, programmable thermostats, and mobile apps allow even residential customers to respond autonomously to price signals, introducing elasticity into demand and enabling more efficient capacity utilization.

At the same time, the proliferation of distributed energy resources (DERs)—like rooftop solar, electric vehicles, and battery storage—lowers the economies of scale that once justified centralized production. These innovations alter the cost structure of the industry and decentralize energy supply, prompting a rethinking of grid design and regulation. The one-way architecture of electricity networks is giving way to bi-directional flows, requiring utilities to adapt physically and institutionally.

The decline in transaction costs opens the door for expanded retail competition, where consumers might choose among competing electricity providers much like they do in other markets. This trend suggests a further unbundling, positioning the utility as a neutral infrastructure provider—a ""wires company""—that maintains the grid and facilitates transactions. Inspired by platform economics, this model envisions utilities acting as grid service platforms, connecting diverse actors—consumers, producers, storage providers—for mutual benefit. However, regulatory frameworks lag behind, and adapting institutions to these technological shifts remains a critical challenge for the coming decade.

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