The electricity sector is at an inflection point. The historical model of centralized, monopoly-provided electric service is under pressure from technological change, shifting market forces, evolving policy objectives, and changing consumer expectations. This transformation is accelerating. One fundamental question looms: how can power systems evolve to balance desired outcomes like reliability, resilience, affordability, and decarbonization while continuing to foster economic growth and innovation?

In Innovating Future Power Systems: From Vision to Action, a new report published by the American Enterprise Institute, the Electricity Technology, Regulation, and Market Design Working Group presents a roadmap for navigating this transformation. I was honored to convene and direct this Working Group full of thoughtful industry, policy, and academic experts with deep knowledge and long experience in power systems.

The report proposes a framework centered around six interrelated concepts: digitalization, decentralization, democratization, dependability, decarbonization, and justice. Realizing the full potential of these forces requires a rethinking of regulatory structures, business models, and investment strategies.

The Challenge of Power System Transformation

For over a century, electricity markets have operated under a regulatory framework designed for large-scale, centralized generation and transmission. This model delivered safe, reliable, and relatively affordable power, but it also created rigidities that constrain the adoption of new technologies and business models. Today, a confluence of factors is challenging this structure:

• Electrification and Decarbonization – The shift toward low-carbon energy sources and increased electrification of transportation and heating requires a more flexible and adaptive grid.
• Technological Advances – Innovations in digitalization, distributed energy resources (DERs), energy storage, and demand flexibility are reshaping grid operations and customer options for participation.
• Consumer Expectations – Households, businesses, and communities increasingly expect more control over their energy choices, including self-generation, storage, and dynamic pricing.

These shifts necessitate a regulatory and market structure that fosters innovation rather than obstructs it. But existing institutions are often slow to adapt, and legacy regulations, such as cost-of-service regulation and barriers to DER integration, impede the transition.

A Framework for the Future

To address these challenges, the report develops a framework structured around six key concepts:

1. Digitalization – The adoption of smart meters, sensors, automation, and AI-driven analytics is transforming electricity markets. Digital tools enable real-time system monitoring, facilitate decentralized energy management, and improve resilience by integrating dynamic demand response and DER coordination.
2. Decentralization – The shift from a centralized grid to one that incorporates distributed energy resources like rooftop solar, battery storage, microgrids, and virtual power plants enhances resilience and reduces reliance on large-scale generation and transmission infrastructure.
3. Democratization – Greater consumer participation in energy markets—enabled by DERs, peer-to-peer trading, and community solar—challenges the traditional utility model. Ensuring equitable access to energy innovation is key to achieving a fair transition.
4. Dependability – Traditional reliability metrics must evolve to account for increased system flexibility, price-responsive demand, and new forms of resilience. Dependability is no longer just about grid-scale generation adequacy; it also involves leveraging digital management tools to enhance system performance and consumer choice.
5. Decarbonization – The transition to a low-carbon energy future requires a mix of policy-driven and market-driven solutions. Performance-based regulation, and innovation-friendly policy frameworks can accelerate progress while preserving economic efficiency.
6. Justice – Equitable access to energy services, fair distribution of costs and benefits, and procedural justice in decision-making processes are essential for a successful and widely supported energy transition. The report emphasizes distributive, procedural, and universal (Aristotelian) justice as guiding principles.

Regulatory and Market Implications

Institutional inertia is a major barrier to innovation. Many regulatory frameworks are designed to minimize risk, which often translates into resistance to change. But as Schumpeterian economics teaches us, creative destruction is necessary for progress. If regulators and policymakers do not accommodate innovation, they risk stagnation and economic inefficiency.

The report identifies specific regulatory reforms that could foster innovation while maintaining system stability:

• Revisiting Cost-of-Service Regulation – The traditional utility business model discourages investment in efficiency-enhancing and customer-centric technologies. Performance-based regulation, market-based pricing mechanisms, and utility business model innovation can align incentives with emerging technologies.
• Expanding Data Access – Digitalization generates vast amounts of data on electricity consumption and system conditions. However, many incumbent utilities restrict access, limiting opportunities for third-party innovators and consumers. Open data policies and standardized interoperability rules can unlock new business models.
• Enabling DER Participation – While FERC Order 2222 requires wholesale market access for DERs, implementation has been slow and uneven across regional transmission organizations (RTOs). More proactive policies are needed to integrate DERs into both wholesale and distribution-level markets.
• Supporting Microgrid Development – Microgrids, capable of islanding from the main grid during outages, enhance resilience and allow local communities to develop energy autonomy. Yet, regulatory barriers and outdated tariff structures often impede their deployment.

Case Study: Winter Storm Uri and the Limits of Centralization

The report uses Winter Storm Uri, which led to widespread power outages in Texas in 2021, as a case study to illustrate the vulnerabilities of centralized power systems. The inability to rotate outages efficiently, the overreliance on large power plants, the fragility of the interdependence between the gas system and the power system, and the lack of digital consumer energy management contributed to the crisis. Decentralized solutions, such as microgrids, distributed storage, and demand flexibility, could have mitigated the storm’s impact. The case underscores the importance of regulatory and technological adaptation in the face of changing risks.

The Path Forward

The future of electricity is neither fully centralized nor fully decentralized; rather, it will be a dynamic blend of both, leveraging market forces, innovation, and regulatory modernization. The Innovating Future Power Systems report lays out a vision in which digitalization, decentralization, and market-driven approaches work together to create a cleaner, more resilient, and more consumer-centric energy system.

For policymakers, regulators, and industry stakeholders, the message is clear: adaptation is necessary. Legacy regulations must evolve, market structures must accommodate new participants, and investment must align with the realities of 21st-century electricity markets. The transition to future power systems presents challenges, but it also offers unparalleled opportunities for economic growth, technological advancement, and enhanced consumer value.

Innovation is not an option: it is a necessity. The choices we make today will determine whether future power systems unlock abundance and resilience or remain constrained by outdated institutional frameworks. The imperative is to embrace change, remove barriers, and enable a system that is not only cleaner and more efficient but also more just and prosperous for all.

This piece was originally published on Lynne’s Substack, Knowledge Problem. If you enjoyed this post, please consider subscribing here.