A New Power Grid for a New Technological Era

How digital technology is rewiring the economics of power systems

Photo by Michael Pointner on Unsplash

In a recent article I told the story of a thorny coordination problem. Thomas Edison’s great achievement was not the light bulb but the system around it—generation, wires, meters, financing, and service—bound together because each piece was nearly worthless without the others. That tight coupling, paired with expensive, long-lived assets, made market coordination costly, so the industry coordinated through hierarchy instead. The vertically integrated, regulated utility was in part a Coasean response to an Edisonian machine.

Would Thomas Edison Recognize Today’s Grid?

After restructuring in the 1990s separated generation from wires in some states, separate firms provided generation while utilities continued to own and operate transmission and distribution. That change demonstrated that integration was not inevitable while teaching a second lesson: Unbundling succeeds only when its supporting institutions are strong. Today’s grid already looks different thanks to digital technology. This newsletter takes up the question left open: Which activities still belong inside the integrated utility, and which can move to markets, contracts, and platforms?

From Machine to Platform

Digital technology changes electricity because it changes what can be measured, communicated, automated, and controlled. For most of the 20^th century, the distribution grid was largely invisible to system operators, who knew aggregate load but little about local circuits, and customers stayed just as passive, flipping a switch and paying a bill each month. The grid edge was an opaque endpoint, a black box.

That world is disappearing. Advanced meters make consumption legible, while sensors and communications networks improve visibility into distribution systems. Smart inverters let solar panels and batteries participate in grid services, and power electronics govern the flow, conversion, and quality of electricity with far greater precision. On the demand side, electric vehicles add flexible load and storage, while thermostats, water heaters, and building energy systems (as well as EVs and batteries) can respond autonomously to prices and signals. Software platforms can aggregate thousands of these small devices into resources substantial enough to influence system conditions.

The physics of electricity remains difficult, but these technologies lower the transaction costs of using distributed resources—it becomes cheaper to know where they are, what they can do, and how to compensate their owners. This shift in cost changes a resource too small to coordinate into a resource that can participate in a market, a tariff, or a contract.

Take, for example, a household battery. In the old system, a device that small, behind a customer’s meter, was irrelevant to system operations because it was too dispersed, too hard to observe, and too costly to coordinate. In a digital system, that same battery can be monitored, aggregated, dispatched, and compensated, reducing peak demand, providing backup power, shifting solar production, supporting local reliability, or participating in wholesale markets through an aggregator, if market rules allow.

The physical device is necessary, but the institutional environment is just as important. A battery becomes a grid asset only when rules, prices, contracts, and performance measurement make its capabilities economically legible. The same logic extends 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 differs from one on an unconstrained line. Digital systems make these distinctions observable, and observable resources can be measured, priced, and coordinated through markets.

The internet analogy, used carefully

Calling the digitizing grid “the next internet” is tempting but not quite accurate. The internet is built in layers, letting applications develop at the edge without permission from every infrastructure owner. Electricity does not work that way: Power flows according to the physics of the alternating current (AC) network, not the commercial intentions of the transacting parties, and congestion, voltage, frequency, and reliability constraints cannot be solved by simple two-party contracts.

Still, the analogy captures something true about modularity. A more digital electric system can support more innovation at the edge if it has the right interfaces, letting customers, aggregators, and device manufacturers build new combinations once they can connect under clear rules. That modularity is the institutional frontier of electricity. Coordination once ran almost entirely through utilities’ internal planning, but increasingly it also runs 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 changed.

What digitalization does to transaction costs

The relevant transaction-cost economics here can sound abstract, so consider the mechanism directly. Digital technologies cut six types of transaction costs: search costs by making resources visible, measurement costs by making performance observable, verification costs by creating records of performance, communication costs by letting devices receive and respond to signals automatically, adaptation costs by helping systems respond to changing conditions in near real time, and aggregation costs by making small resources meaningful in combination.

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

This shrinking of transaction costs weakens the old case for vertical integration. If owning a resource was the only 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 necessary.

None of this means vertical integration disappears from power systems. Distribution wires are still networks. Transmission planning still involves the collective-action problems of land use and permitting. Reliability still requires organizations that can see and manage system-wide constraints. But the boundary shifts, and the question becomes more granular: Which functions still require integrated control, and which can open to modular participation?

The utility as platform, or the utility as bottleneck?

The modular grid is creating a strategic and regulatory fork in the road. One path turns the utility into a platform: maintaining and operating the distribution network, managing interconnection, sharing useful system data, sending transparent price signals, and enabling third-party innovation. The utility remains important, perhaps even more so, but its role shifts from owning all relevant resources to orchestrating a complex local network. The other path turns the utility into a bottleneck: controlling data, slowing interconnection, resisting third-party access, and treating distributed resources mainly as threats to its traditional business model. The result may look like stability in the short run, but it is institutional sclerosis, with technology advancing while rules keep potential value trapped.

That binary framing is stark but useful. Historically, distribution was the quiet end of the system: Power flowed down from large generators through transmission networks into local wires and then into homes and businesses, and distribution utilities connected customers, maintained wires, restored service after storms, and sent bills. It was essential work, but never imagined or designed as a dynamic market.

The distribution grid is now where rooftop solar, batteries, electric vehicles, heat pumps, smart buildings, and flexible loads connect. Here, resilience, electrification, decarbonization, and customer choice meet physical network constraints, and the most important transaction-cost questions arise. Who can see the relevant data? Who can act on it? Who gets compensated? Who bears reliability obligations? Who decides whether a distributed resource is an asset, a nuisance that introduces disturbances to the grid, or both? These are questions of institutional design.

The continuing need for integration

A more modular grid is not a fully unbundled grid; modularity and integration are not opposites. Healthy modular systems still require integration, but such integration no longer necessitates a single firm’s ownership. The internet depends on technical standards, protocols, routing systems, cybersecurity practices, and physical infrastructure; markets depend on law, property rights, enforcement, settlement systems, and governance. Modular electricity will require equally strong coordination institutions.

Some functions will likely remain deeply integrated: Real-time reliability needs system operators with authority and visibility, transmission needs regional planning and cost allocation, distribution needs engineering oversight as two-way flows and local constraints grow more important, cybersecurity needs coordination across firms and devices, and consumer protection remains necessary because electricity is essential and retail energy products can confuse people quickly.

The point is to update the institutional architecture as technology changes the economics of coordination, sorting the activities that now belong in competitive markets, performance-based contracts, or open-access platforms from the activities that still require monopoly provision or centralized control. That sorting requires humility. The old model had real strengths: reliability, universal service, capital formation, and coordinated investment. The new model has real promise: flexibility, innovation, customer participation, resilience, and greater efficiency. The challenge is neither to sneer at the old system nor to romanticize the new one, but to recognize when the economic conditions that justified a legacy institution have changed.

The end of the Edison bargain?

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

That bargain did extraordinary things. It electrified the country, supported industrial growth, improved household life, and made modern economic activity possible. Widespread electrification counts among the great institutional achievements of the 20^th century.

But institutions built for one technological era can become obstacles in another. When the system ran on large central stations, one-way power flows, passive customers, and limited information, vertical integration made strong economic sense. When the system includes distributed generation, storage, flexible load, electric vehicles, smart inverters, and granular data, the old model becomes less obviously appropriate.

The rationale for utility ownership and control must therefore become more precise. “The utility has always performed this function” is not an economic argument. The relevant question is whether internal coordination still economizes on transaction costs better than the alternatives. Sometimes the answer will be yes. Increasingly, in some domains, it will be no.

The modular grid will need new rules for data access, interoperability, interconnection, distribution planning, market participation, retail pricing, and performance measurement, in addition to new operating procedures for coordinating far more devices physically. It will need regulators who think less like accountants reviewing the prudence of capital expenditures and more like institutional designers shaping the rules of a complex adaptive system. That shift is difficult, but done judiciously, regulation can provide a framework for innovation.

The technology is not enough

Edison’s electric system was a machine: integrated, physical, capital-intensive, hierarchical. The pieces needed one another, and coordinating them through markets cost too much. AC power expanded that machine across larger territories, making it more powerful while preserving its integrated logic, and public utility regulation stabilized the bargain.

Digital technologies are changing the conditions underneath that bargain. They make the grid more observable and more responsive, and they lower the transaction costs of coordinating distributed resources enough to make a genuinely different system possible in which integration and modularity coexist, both physically and institutionally.

The future grid will be neither a swarm of autonomous devices nor a vertically integrated machine pushing power one way 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 to include the economics of modular coordination. The old question was how to build and regulate an integrated monopoly capable of delivering reliable service; the new question is how to design institutions that preserve reliability while allowing innovation, flexibility, and decentralized participation from multiple diverse parties and their heterogeneous devices.

Edison would recognize the ambition. But the system he built is becoming something different—no longer only a machine operated from the center, but a platform on which many actors can build. Whether that platform becomes open and innovative, or closed and protective of incumbent control, depends less on the devices than on the rules.

Originally published in the Dispatch Energy newsletter at https://thedispatch.com/newsletter/dispatch-energy/power-grid-system-digitalization-costs-edison/