Making Sense of Blockchain in the Energy World
My previous posting introduced blockchain concepts. Now we look in detail at the impacts of this technology on energy markets (specifically, the supply, distribution, and demand of electricity and natural gas). This part of the article introduces a couple of useful frameworks, provides a number of examples in key markets, then talks about risks and next steps.
How to approach blockchain
As we saw in 1999, a technology gets hot and everyone rushes in, sometimes with great ideas and sometimes with duds. So before talking about use cases for blockchain in the energy world, let’s set up a couple of frameworks to think it through.
A new shared economy
In the last few years, we’ve become comfortable with sharing physical assets (e.g. cars and homes). Now we’ll be asked to share information assets. The diagram below walks you through this transition (it has a fair amount of text and is best viewed on a bigger screen, like a laptop or pad).
We’re all familiar with bilateral contracts since they govern much of our personal and business lives. The challenge, of course, is that each side executes separately on the contract, requiring constant monitoring and reconciliation. A contract with a utility or energy retailer is a great case in point, where tariffs, volume, timing, and payment are all subject to dispute.
Energy markets are particularly prone to the middle model, where a third party puts buyer and seller together in some way. Why? First, there’s a high degree of regulation so the third party is needed to impose rules, and second, the parties often have misaligned incentives.
A great example is the Demand Response (DR) market, where utilities and generators are looking for return on assets, while customers want great service: the aggregator intervenes to meet the needs of both parties. A good aggregator runs the execution logic for all and provides a home for reconciliation; the challenge is in the ongoing monitoring, and in the persistent questions about whether the aggregator also has conflicts of interest
The blockchain vision moves us to the next model, where the shared ledger runs the contract, ensures consensus, creates an immutable and single version of the truth. According to Jesse Morris of Rocky Mountain Institute, the markets for Renewable Energy Credits (RECs) are “basically screaming at the top of their lungs for a blockchain-based solution.” There’s some hyperbole here, but tracking renewable generation has all the right elements: multiple copies of manually entered data, high audit costs, the need for immutable truth, and smart devices (check out IDEO’s simple pilot).
Conditions for blockchain success
Now that we can understand the transition from bilateral contracts to distributed ledgers, let’s look at what conditions need to be in place for this transition to happen. I’ve identified eight conditions below.
These conditions will have different weightings for different markets and participants. An important exercise for each market is to weight the conditions so you can build the correct set of requirements. Let me know if I can help in this exercise.
Energy Use Cases
According to IDC, a recent survey of German energy firms identified 107 blockchain use cases. By some counts, we’re now past 200 use cases. So the list below is not exhaustive and it puts many ideas together in buckets, but at least you’ll get a sense of what’s out there. The fragmented US regulatory scene makes it hard to proceed with new technology, so “the hotbed is in Europe, predominantly Germany and Denmark,” notes Steve Callahan, VP of Energy and Utilities at IBM.
For each use case, I describe the blockchain value, who’s threatened, and some current examples. To be honest, some of these examples seem more real to me than others, but I’ll refrain from passing judgment.
Wholesale energy trading
- Blockchain value. Utilities and other large-scale energy buyers avoid brokers and exchanges by submitting buy/sell orders and executing trades on a distributed ledger. This applies to the spot and forward markets. Deloitte describes this well.
- Who’s threatened. Any organization that depends on the volume of standard transactions is likely to see cuts in revenue. There’s still a role for organizations in creating initial trust and in managing non-standard transactions.
- Examples. The first blockchain-based exchange happened at the EMART energy trading conference in Amsterdam in November 2016. Enerchain is now expecting to conduct a full trial with 23 major European utilities starting in August 2017. A 12-week pilot with BP and Wien Energie just completed on BTL’s Interbit platform.
Customer-customer energy trading (aka peer-to-peer or P2P)
- Blockchain value. Energy users can trade among themselves within the same distribution grid without having to work with the utility. Solar generators with excess production can sell to neighbors who need it. Facilities that can cut back in peak periods can sell capacity to facilities who need peak power.
- Who’s threatened. Utilities and distribution system operators (DSOs) currently manage all grid traffic. Local energy markets would challenge revenue streams and capacity planning.
- Examples. In Brooklyn in New York, LO3 Energy, Siemens, and Consensys are running a pilot where neighbors can sell solar energy to one another. Drift is also active in NYC. Power Ledger is doing the same in Western Australia. Conjoule and Grid Singularity are very active in Germany/Austria. Alliander has a full scale pilot on the island of Texel, while Vector in New Zealand is also running a trial.
- Blockchain value. Energy consumers (e.g. buildings, factories) can respond to grid signals and get paid in close to real-time on an immutable distributed ledger. Consumers get efficiency, transparency and liquidity. This is obviously related to the P2P use case, except that the buyer of Demand Response is the grid operator.
- Who’s threatened. DR aggregators currently get a piece of every transaction but their role is being changed. It’s still important to create and manage a de-risked portfolio that provides capacity in the market.
- Examples. Finnish utility Fortum has a year-old pilot to manage household devices on the blockchain. In the UK, Electron is pursuing the same goal. University College in London is looking for a PhD student to investigate.
EV charging and grid participation
- Blockchain value. Car owners pay for electric charging and receive grid and car-sharing fees on a distributed ledger. In this case, the car has an autonomous eWallet instead of the user transacting through credit cards, charging cards, and bank accounts. Also, the eWallet manages more than energy transactions.
- Who’s threatened. Several vendors have set up incompatible charging networks that depend on the driver rather than the car. They’re also not linked to other car revenue such as sharing or delivery.
- Examples. Innogy, a subsidiary of Germany’s RWE, has added 100s of EV chargers to a blockchain powered by Ethereum. Drivers use Mobility Tokens on their phone app to pay. Oxygen Initiative is bringing the same technology to the US. TenneT, sonnen, Vandebron, and IBM are launching a pilot project in the Netherlands to use electric vehicles to help ease grid imbalances. The distributed ledger brings together the car, rooftop solar, and the grid operator.
Renewable Energy Credits.
- Blockchain value. A REC gives you the right to say, “Because of my financial support, this unit of renewable energy was supplied to the grid.” The compliance and voluntary markets work somewhat differently, but there is a complex process of trading and auditing to establish ownership and to count the number of RECs generated. A distributed ledger ensures provenance, clarifies ownership, and creates an immutable record of volumes generated.
- Who’s threatened. There is a large industry of REC auditing, especially Green-e. REC brokers could also be disintermediated (sorry, the ghost of 1999 speaks). The REC exchanges in each compliance market are subject to the same forces as the energy trading exchanges.
- Examples. Volt Markets in the US aims to use Ethereum smart contracts to issue and track RECs. China’s Energy-Blockchain Labs is working with IBM to extend coverage to carbon credits as the country launches its carbon trading market this year.
Payments in crypto-currency
- Blockchain value. Currencies like Bitcoin and Ether facilitate payments without the overhead of the banking system. That’s especially useful for cross-border payments. Extending the idea further, some organizations have issued value tokens that are energy-specific so they are less subject to the investor-driven volatility of BTC and ETH.
- Who’s threatened. This may be a case where no-one is really threatened except for the amorphous banking system. In the same way that the Internet created entirely new value streams like Task Rabbit, crypto-currencies may allow exchanges that were simply not contemplated before.
- Examples. BAS Nederland has been accepting Bitcoins for energy supply since 2014. Enercity in Germany, Elegant in Belgium, Switch in Austria and Marubeni in Japan have also rolled out bitcoin bill pay. (Ironically, because of the way Bitcoin establishes consensus, it can take up to 176 kWh of energy to finalize each transaction.) Bankymoon of South Africa (possibly my favorite company name ever) allows you to pay for energy or water for schools and households by sending Bitcoin directly to the meter from anywhere in the world. Finally, SolarCoin is a new currency that rewards solar generators for each MWh that they generate.
Unlike the use cases above, I’ve not seen any of the following ideas explored for blockchain but they meet some of the conditions specified above.
- Energy performance contracts. Measurement and verification is the devil in the details of EPCs. An immutable ledger seems like a good solution, especially if it allows the ESCO to sell projects into grid markets.
- Utility incentives for custom projects. Again M&V is the real challenge here, especially with multiple interested parties (customers, implementers, utilities, regulators). A distributed ledger would ensure transparency and accuracy.
- Verified green content of delivered energy. RECs establish the claim on renewable generation, but as the grid gets more complex, it’ll be harder and harder to confirm the actual renewable content of delivered electricity. The provenance attribute of distributed ledgers seems especially promising.
Where to look for risks
Given the relative newness of the technology, risks abound. There’s the obvious execution risk of any startup (internal or standalone), but putting that aside, what other questions are important in the energy space?
- Regulations. The blockchain action in energy is really happening in Europe, where different regulatory structures have encouraged innovation (see the number of European firms in the list of use cases above). In the US, will regulators accept the distributed ledger as an accurate record? Generally, how will privacy regulators control personally identifiable information as it moves around the distributed network? (See Baker McKenzie’s thorough review of these issues.)
- Legal rulings. Will arbitrators and courts admit the shared contract and binding execution logic as evidence if there is a dispute? If the contract is encoded in some form of programming language, how will non-programmers be able to interpret that language? If there is a bug in the encoded contract, who is responsible?
- Technology implementation. Will the new technology stand up to the rigors of daily use and will it scale effectively? Crypto-currencies like Bitcoin have seen long delays in transactions, so how will energy blockchains overcome that? Does the software manage the distributed ledger to avoid bloated chains at the nodes? Will constant updates to the ledger consume all available computing resources?
- Security. While it’s harder to hack distributed systems than it is to break central databases, it’s still possible. As hackers get more creative, how well will blockchain networks distribute security updates to multiple devices?
- Market acceptance. At the grid level, there is a trade-off between (a) a market with lower cost of interaction and single source of truth, and (b) a central point of accountability. How will grid operators deal with this? At the consumer level, blockchain success is linked to AI success. Given continued opposition to smart meters in some quarters and uncertainty about smart appliances, will blockchain devices be opposed by advocates who want to retain control of those devices?
There’s no doubt that blockchain is a BIG DEAL in financial markets. All of the major banks have invested in R3 or the Ethereum Enterprise Alliance. We’ll likely see significant developments in the next 12 months.
In the energy world, there are plenty of pilots. At Greentech Media’s Grid Edge World Forum, blockchain panelists were neutral about the adoption timeline, but their predictions about 10 years to wide adoption brought Bill Gates to mind. His quote seems like a good way to end this article:
We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.
Some useful web resources
- Richard Corda’s blog on Distributed Ledgers versus Distributed Databases
- Harvard Business Review’s take on blockchain from a utility perspective
- The Energy Web Foundation’s news page
- Greentech Media’s June 2017 podcast on blockchain
- The Event Horizon conference in February 2017 includes some interesting videos and makes me wish I lived in Europe