Next-Generation Power Grid for the Digital Age

Welcome to Dispatch Energy! In my prior dispatch, I traced a knotty problem of coordination. Thomas Edison’s landmark achievement wasn’t merely the light bulb but the entire ecosystem around it—power generation, the network of wires, meters, the financing, and the service—woven together because each segment was nearly useless without the others. That tight interdependence, together with costly, long-lived assets, pushed market coordination toward higher costs, so the industry relied on hierarchical arrangements. The vertically integrated, regulated utility was, in part, a Coasean remedy to an Edisonian machine. 

After reforms in the 1990s separated generation from the grid in some states, distinct firms handled generation while utilities continued to own and operate transmission and distribution. That shift proved that full integration wasn’t inevitable and taught a second lesson: unbundling only works when the supporting institutions are strong. Today’s grid already looks different thanks to digital technology. This newsletter revisits a question left open: which activities should stay within the integrated utility, and which can move to markets, contracts, and platforms?

Digital technology reshapes electricity because it changes what can be measured, communicated, automated, and controlled. For most of the 20th century, the distribution grid remained mostly invisible to system operators, who understood total demand but knew little about local circuits, and customers stayed passive, flipping a switch and paying a monthly bill. The grid’s edge was an opaque terminus, a black box. 

That era is fading. Modern meters render consumption legible, while sensors and communications networks enhance visibility into distribution networks. Smart inverters enable solar panels and batteries to participate in grid services, and power electronics regulate the flow, conversion, and quality of electricity with far finer control. On the demand side, electric vehicles introduce flexible load and storage, while thermostats, water heaters, and building energy systems (including EVs and batteries) can respond autonomously to price signals. Software platforms can aggregate thousands of these small devices into resources large enough to influence how the grid behaves.

The physics of electricity remains tricky, but these technologies reduce the transaction costs of employing distributed resources—it becomes cheaper to locate them, understand their capabilities, and compensate their owners. This shift in cost turns a resource too small to coordinate into one that can participate in a market, a tariff, or a contract.

Consider, for instance, a home battery. In the old framework, a device that small, hidden behind the meter, was inconsequential to system operations because it was dispersed, hard to observe, and costly to coordinate. In a digital framework, the very same battery can be monitored, aggregated, dispatched, and compensated, reducing peak demand, offering backup power, shifting solar production, bolstering local reliability, or engaging in wholesale markets through an aggregator if market rules permit.

The physical device matters, but the institutions around it matter just as much. A battery becomes a grid asset only when rules, prices, contracts, and performance measurement render its capabilities economically legible. The same logic applies to rooftop solar, electric vehicles, and microgrids, whose value depends on context; a kilowatt-hour at noon differs from one at 7 p.m., and a resource on a congested circuit is not the same as one on an unconstrained line. Digital systems make these distinctions observable, and observable resources can be measured, priced, and coordinated through markets.

Describing the digitizing grid as “the next internet” is tempting but not entirely precise. The internet is layered, enabling edge applications to develop without approvals from every infrastructure owner. Electricity does not operate that way: Power flows according to the physics of the alternating current (AC) network, not the commercial aims of the parties in a deal, and congestion, voltage, frequency, and reliability constraints cannot be resolved by simple two-party contracts. 

Still, the analogy captures an important truth about modularity. A more digital electric system can spur more edge innovation if the right interfaces exist, allowing customers, aggregators, and device manufacturers to assemble new combinations once they can connect under clear rules. That modularity represents the institutional frontier of electricity. Coordination used to flow almost exclusively through utilities’ internal planning, but increasingly it now moves through markets, contracts, platforms, and automated devices. The system becomes less a single machine and more a layered architecture, not because physics has changed, but because the cost of coordination has.

The economics of transaction costs in this space can sound abstract, so consider the mechanism directly. Digital technologies trim six kinds of transaction costs: search costs by making resources visible, measurement costs by making performance observable, verification costs by keeping records of performance, communication costs by letting devices receive and react to signals automatically, adaptation costs by helping systems respond to changing conditions in near real time, and aggregation costs by making small resources meaningful when combined.

Those reductions add up. Without measurement, compensation is guesswork; with measurement, contracts and markets become feasible. One thermostat is not a power plant, but 10,000 thermostats, coordinated well, can deliver a measurable system service. One EV charger is a household appliance, while a fleet of chargers becomes flexible load, storage, or a tool for managing congestion.

This shrinking of transaction costs undermines the old rationale for vertical integration. If owning a resource was the sole practical way to coordinate it, ownership made sense. If coordination can instead occur through standardized interfaces, contracts, market platforms, and automated controls, integrated ownership becomes less essential.

None of this implies that vertical integration vanishes from power systems. Distribution wires remain networks. Transmission planning still grapples with land-use and permitting, and reliability still requires organizations capable of seeing and managing system-wide constraints. Yet the boundary shifts, and the question becomes more specific: Which functions still demand integrated control, and which can open to modular participation?

The modular grid is creating a strategic and regulatory fork. One path makes the utility a platform: it maintains and operates the distribution network, handles interconnection, shares useful system data, transmits transparent price signals, and enables third-party innovation. The utility remains vital, perhaps even more so, but its role shifts from owning every relevant resource to coordinating a sophisticated local network. The other path makes the utility a bottleneck: it controls data, slows interconnection, resists third-party access, and treats distributed resources mainly as threats to the traditional business model. The result might look stable in the short run, but it risks institutional sclerosis as technology advances while rules trap potential value.

That binary framing, though stark, is useful. In the past, distribution was the quiet tail of the system: power moved down from large generators through transmission, into local wires, and then to households and businesses; distribution utilities connected customers, maintained lines, restored service after storms, and issued bills. It was essential work, but it was never conceived as a dynamic market.

Today, the distribution grid is the point where rooftop solar, batteries, electric vehicles, heat pumps, smart buildings, and flexible loads connect. Here, resilience, electrification, decarbonization, and consumer choice collide with physical network limits, and the central transaction-cost questions become crucial. Who can access the relevant data? Who can act on it? Who is compensated? Who bears reliability responsibilities? Who decides whether a distributed resource is an asset, a nuisance that disrupts the grid, or both? These inquiries center on institutional design.

A more modular grid does not equal a completely unbundled grid; modularity and integration are not mutually exclusive. Healthy modular systems still require integration, but that integration need not be tied to a single firm’s ownership. The internet works because of standards, protocols, routing frameworks, cybersecurity practices, and physical infrastructure; markets work because of law, property rights, enforcement, settlement systems, and governance. Modular electricity will demand equally strong coordination institutions.

Some functions will likely stay deeply integrated: real-time reliability requires authority and visibility for system operators, transmission needs regional planning and shared cost allocation, distribution needs engineering oversight as two-way flows and local constraints grow more important, cybersecurity requires cross-firm coordination, and consumer protection remains essential because electricity is vital and retail energy products can easily confuse people.

The aim is to revise the institutional framework as technology shifts the economics of coordination, separating activities that belong in competitive markets, performance-based contracts, or open-access platforms from those that still require monopoly provision or centralized control. Achieving that separation requires humility. The old model had strengths—reliability, universal service, capital formation, and coordinated investment. The new model shows real promise: adaptability, inventive potential, customer participation, resilience, and higher efficiency. The challenge isn’t to scorn the old system or to idolize the new one, but to recognize when the economic justifications for a legacy institution have changed.

The traditional electricity regime rested on what we might call the Edison bargain: Build the system as an integrated machine, let utilities coordinate the elements, and regulate them because customers are captive and scale economies are real. In exchange, expect reliable service, broader access, and investment in long-lived infrastructure.

That bargain accomplished remarkable feats. It electrified the nation, underpinned industrial growth, improved daily life, and made modern economic activity possible. Widespread electrification stands as one of the century’s most significant institutional achievements.

Yet institutions designed for one technological era can impede progress in another. When the system ran on large central stations, one-way power flows, passive customers, and limited information, vertical integration made economic sense. When the system encompasses distributed generation, storage, flexible load, electric vehicles, smart inverters, and granular data, the old model becomes less evidently appropriate.

The justification for utility ownership and control therefore needs greater precision. “The utility has always performed this function” isn’t an economic argument. The key question is whether internal coordination still lowers transaction costs more effectively than the alternatives. Sometimes the answer is yes; increasingly, in some areas, it will be no.

The modular grid will require new rules for data access, interoperability, interconnection, distribution planning, market participation, retail pricing, and performance measurement, in addition to fresh operating procedures for coordinating many more devices physically. Regulators will need to think less like prudence-focused accountants and more like designers shaping a complex, adaptive system. That shift is challenging, but when done prudently, regulation can create a framework that spurs innovation.

Edison’s electric system was a machine: integrated, tangible, capital-intensive, and hierarchical. The components depended on each other, and coordinating them through markets proved costly. AC power extended that machine across larger regions, increasing its reach while preserving its integrated logic, and public utility regulation stabilized the bargain.

Digital technologies are changing the conditions beneath that bargain. They render the grid more observable and responsive, and they lower the transaction costs of coordinating distributed resources enough to enable a fundamentally different system in which integration and modularity coexist, both in physical form and in institutional design.

The grid of the future will not be a swarm of autonomous devices nor a single, vertically integrated machine pushing power from central stations to passive customers. It will be layered: physical networks, digital controls, market platforms, contracts, tariffs, and standards, interacting across many scales.

The economics of electricity are shifting from the economics of vertical integration toward the economics of modular coordination. The old question was how to construct and regulate an integrated monopoly that reliably serves customers; the new question is how to design institutions that preserve reliability while enabling innovation, flexibility, and decentralized participation from a diverse set of actors and their varied devices.

Edison would recognize the ambition. But the system he created is evolving into something different—no longer a machine run from the center alone, but a platform on which many players can build. Whether that platform ends up open and inventive or closed and protective of incumbents hinges more on the rules than on the devices themselves.