Will Blockchain Change the Energy Market?

Energy experts believe that blockchain technology can solve a maze of red tape and data management problems

Ramy Caspi
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On an electricity grid, energy generated from the sun, wind, or other renewable sources are indistinguishable from those generated by fossil fuels. To keep track of how much clean energy is produced, governments around the world have created systems based on tradable certificates.

Keeping track of renewable-energy certificates is one of dozens of potential applications of blockchain technology that could solve data management challenges in the electricity sector without disrupting business as usual. Experts believe that in the long-term, the technology could help transform the very architecture of the grid itself.

The first blockchain was developed in the financial sector to serve as the basis for the cryptocurrency “Bitcoin”. More and more new applications have recently been emerging that add to the technology’s core functionality – decentralised storage of transaction data – by integrating mechanisms that allow for the actual transactions to be effected on a decentralised basis. These mechanisms, called “smart contracts”, operate on the basis of individually defined rules (e.g. specifications as to quantity, quality, price) that enable an autonomous matching of distributed providers and their prospective customers.

When a renewable-power plant generates a unit of electricity today, a meter spits out data that gets logged in a spreadsheet. The spreadsheet is then sent to a registry provider, where the data gets entered into a new system and a certificate is created. A second set of intermediaries broker deals between buyers and sellers of these certificates, and yet another party verifies the certificates after they are purchased.

But what if the meter wrote the data directly to a blockchain instead?

In December 2017, the Harvard Business Review said that blockchain “could offer a reliable, low-cost way for financial or operational transactions to be recorded and validated across a distributed network with no central point of authority.” Blockchain ultimately could offer a revolutionary way to transform energy consumer and provider transactions, eliminating the central utility as a middleman.

Blockchain technology changes the way we transact, with the underlying transaction model shifting away from a centralised structure (banks, exchanges, trading platforms, energy companies) towards a decentralised system (end customers, energy consumers). Third-party intermediaries, whose services are needed today in most industries, are no longer required in such systems – at least according to the blockchain theory – given that transactions can be initiated and carried out directly “from peer to peer”. This can cut costs and speed up processes. As a result, the entire system becomes more flexible, as many previously manual work tasks are now carried out automatically through smart contracts.

In a peer-to-peer (P2P) energy market running on a blockchain, all members of a network could enter directly into energy exchanges with any other member without restrictions or oversight from a centralized authority. The blockchain expands on the typical capacities of a P2P market, allowing for the creation of “smart contracts,” in which energy transactions are immediate, automated, and flexible based on supply and demand in the system. Unlike a P2P energy market, in existing energy markets, all energy consumers are typically connected to a macrogrid and purchase their electricity at prices given by a single central utility; in the existing market they are also unable to make personal decisions on the type of energy that powers their home.

In a blockchain P2P energy market, however, if Network Member B wanted energy from a specific source– i.e. solar–then Network Member B could directly purchase energy from Network Member A, who is producing solar-power, rather than from the central utility. However, if Network Member B, C and D all demand a higher quantity of solar than there is a supply of, they could bid up the price of purchasing that power to a much higher price than the one that Network Member A would receive through standard net-metering with the central utility.

Many energy experts are convinced that blockchain technology has the potential to touch off a fundamental transformation of modern energy grids.

Blockchain technology dramatically simplifies the system, delivering transparency and trust to the marketplace. Meters connect directly to a blockchain that acts as a common, public ledger, establishing a shared set of data. Market intermediaries disappear as accreditation and validation functions are integrated into transaction protocols. Encryption guarantees data integrity.

Decentralised processing and storage protects data from attack and manipulation. Online transactions are settled instantaneously, with little need for working capital or counterparty credit. Reporting is automated, verifiable, and immediate.

Aggregation and disaggregation of customers and products is seamlessly executed according to expressed preferences and targeted markets. Lowered costs and eased access enhance market participation.

What does this mean for electricity transactions? According to Basden and Cottrell in HBR, blockchain technology “may one day enable the development of an integrated trading system that would permit businesses to trade their option to use electricity during a given time frame. For example, a factory could sell five minutes of unused power during a down time to a different factory that needs the additional power. Trading grid flexibility in this way could provide large efficiency benefits for grid operators.”

In New York state, neighbours are testing their ability to sell solar energy to one another using blockchain technology. In Austria, the country’s largest utility conglomerate, Wien Energie, iis taking part in a blockchain trial focused on energy trading with two other utilities. Meanwhile in Germany, the power company Innogy is running a pilot to see if blockchain technology can authenticate and manage the billing process for autonomous electric-vehicle charging stations.

In Australia, Perth-based start-up Power Ledger — a blockchain-based peer-to-peer energy trading platform — enables consumers and businesses to sell their surplus solar power to their neighbours without an intermediary.

“This is in response to a decentralization of energy trading — it’s becoming increasingly untenable to have a centralized system, which is incredibly expensive because of infrastructure,” environment scientist Paul Donovan, who is invested in Power Ledger, tells Australia’s ABC News.

What is more likely to happen is that blockchain will become part of the answer to updating and improving centralized, legacy systems with a distributed hybrid system made up of a patchwork of both large power plants and microgrids powered by distributed energy resources such as solar power. Such a decentralized energy system would be capable of delivering efficient, reliable, and, in many cases, renewable energy.

A Singapore company called Electrify has been running a price comparison marketplace as the country liberalizes its electricity market. Electrify plans to launch a blockchain-based exchange for all consumers and producers next year, and is talking to one of Japan’s biggest utilities about doing something similar there.

The Ministry of Science & ICT and the Korea Electric Power Corporation (KEPCO) announced in December 2017, that they established a blockchain-based system for neighborhood electricity trading and electric vehicle (EV) charging. The neighborhood electricity trading is an innovative electric power trading method by which prosumers can sell their surplus power to neighbors via the KEPCO. Houses, stores and buildings consuming and generating electricity at the same time can trade it by the method.

Grid+, a U.S. startup, will launch its first retail device next year in Texas, using the Ethereum blockchain to allow users, whether they’re traditional consumers or owners of solar panels and batteries, to buy and sell electricity at wholesale prices.

More projects are on the way. Energy startups will have raised about $200 million from initial coin offerings this year alone, with a dozen more planned next year, according to data collected by Reuters, while legacy energy companies are also testing to see what the hype is all about.

The World Energy Council predicts (pdf) that such decentralized or distributed energy will grow from 5 percent of the market today to 25 percent in 2025.

Germany’s E.ON and Italy’s Enel traded electricity for the first time via a new marketplace that uses blockchain technology. In May this year, the partners founded the ‘Enerchain’ initiative together with other European energy companies.

In June 2017, BP, Eni Trading & Shipping and Austria’s Wien Energie, successfully completed a pilot for an energy trading confirmation solution on a blockchain platform developed by BTL. A 6-month go-to production phase follows, where BTL and participating companies are working to launch a live, commercial version of the energy trading solution.

A scaling problem? Today’s blockchains cannot support the addition of more than a few hundred certificates or trades (we’ll call them both “transactions”) per second. This is because blockchain servers need to agree on the contents of each block, despite server and communication failure and the presence of malicious servers. This is the well-known and difficult “consensus problem.” Because of this problem, the scale needed to support hundreds of millions of solar panels is beyond the reach of current blockchain technology.

Blockchain is an excellent tool for the power space, streamlining transactions that have long required manual work and enabling new types of transactions that would be impractical otherwise. Much of the compatibility between blockchain and power transactions is related to the ease of measuring electricity with metering infrastructure, which allows data and markets to coordinate in a robust way.

Overall, peer-to-peer applications provide the greatest value over alternatives, but are held back by regulatory barriers and a limited market size for the time being. Blockchain has a lot of potential to modernize wholesale transaction systems, but it faces an uphill battle from influential, conservative stakeholders. Meanwhile, with low barriers to blockchain adoption but also relatively low value that can be gained, REC markets are already seeing some adoption, but are unlikely to feel much impact from the technology.

According to experts, significant barriers still remain in blockchain adoption, not only in energy but in other industries as well. One is the lack of common industry standards, and that it is a largely unproven technology that has not yet reached maturity and is still under development.