Blockchain has the potential to change the business world as we know it today. Entire value chains can be shortened by it — including in the energy industry. In the field of renewables this shift can lead to new business models from peer-to-peer trading to flexibility schemes or investment incentives, just to name a few.
Start-ups and even classical utilities are increasing their efforts in developing blockchain-based applications and processes, nevertheless the number of scalable case studies is marginal right now and developers have difficulties realizing their promising ideas. With this in mind we want to explore the potential for blockchain in the energy industry and get to the bottom of the following question: How does the blockchain vision translate into the world of energy, utilities and renewables?
Brief Introduction to Blockchain
The blockchain technology is a distributed, digital transaction system that allows for securely storing data and executing smart contracts in peer-to-peer networks. Integrated sets of encrypted transaction data are verified by the network’s users, called nodes, in short intervals and thus distributed and unmutable.
Conceptually, the technology creates a ‘chain’ of security and trust, and as a result, transactions of any kind no longer need to be centrally coordinated and secured via intermediaries. Instead, they are performed peer-to-peer in near real time, as integrity and security are guaranteed by the blockchain.
From an IT perspective, blockchains solve the double spending problem — a phenomenon of the current state of the internet where a copy of each set of data is sent from server to server when information is transferred. For any transaction system, this issue needs to be eliminated, which so far has been the job of trusted institutions. By taking over this task blockchains make any intermediary superfluous and are therefore referred to as the internet of value, an evolution of the current internet of information. A next step might be the application in the energy sector as the internet of energy, which leads us to the ever-growing start-up scene around the technology.
Blockchains in Energy — What’s Happening?
Blockchain technology gained relevance for the energy sector at the beginning of 2016 with an experiment in Brooklyn, New York (Brooklyn Microgrid, BMG), when owners of PV systems sold their power in the neighborhood using the Ethereum blockchain without a utility. Barely six months later, Siemens announced its collaboration with the local start-up responsible for the project, LO3 Energy, to research blockchain microgrids. A recent survey indicates that today, around two years after the launch of LO3’s pilot, there are 122 organizations involved in blockchain technology and 40 deployed projects.
Between 1Q17 and 1Q18, over $300 million was invested in the blockchain in the energy industry. While it is still much too soon to speak of a triumph as blockchains must continue to evolve, the technology has the potential to radically change the energy industry. It provides the opportunity for new or more efficient business models and thus the opportunity for entirely new companies entering the market.
The years 2015 and 2016 were starting points for blockchain in the energy sector. The last month was marked with relevant infrastructure layers like the Tobalaba test network of the Energy Web Foundation or IOTA—a blockless distributed ledger, so in the coming years we will see numerous rollouts of new, relevant application layer and business models.
With PowerLedger, Grid+, GridSingularity, OneUp, Ponton, or Slock.it, to name but a few, there are many new players who are currently developing entirely new areas of value creation. A variety of start-ups and established utilities, such as Innogy, Fortum and Vattenfall, are working hard to test blockchain technology. Possible platforms and distributed database systems (Ethereum, Hyperledger, BigChain, Tendermint, and many more) are striving for acceptance in order to become the leading player in the decentralized world.
Following the example of over 70 banks and financial institutions and their R3 consortium, utilities could also attempt to enable a decentralized power grid and compensate for lost revenues by providing the business platform as a service via such community chains — a kind of consortium. Since the consortium’s participants are known and thus have a particular level of trust to each other, the integrated governance of these kinds of blockchains is much easier than for free accessible public blockchains. This, in turn, also leads to the advantage of a less energy intensive performance.
A Long Way to Go from Use Case to Implementation
There are many indications that blockchains will gain a foothold in the energy sector — an efficient decentralized energy world requires appropriate decentralized technologies. Blockchains could represent and execute various business processes of the energy world, and would be an ideal instrument for IoT devices to manage their transactions. Blockchains are also useful as a trust-building element to provide transaction logs for energy to manage power flows and the accounting of cellular systems, automate proof of origin, enable peer-to-peer trading or the administration of asset registers. Companies and foundations are currently developing the next generation of blockchains for the energy industry, which protect privacy, are fast enough, and have the usual interfaces.
For a wide implementation, developers still struggle to identify the specific business model for the different use cases and simultaneously comply with regulatory requirements. A tremendous regulatory hurdle is the European General Data Protection Regulation and the right to be forgotten. Blockchain is actually not designed for meeting the current state of regulation since one of its major features is immutability. Another hurdle is the handling of personal data. With peer-to-peer deliveries one can draw many conclusions on personal behavior. From this aspect, a way to aggregate and de-personalize data has to be found. In addition, energy law varies from country to country, which means that the application must be adapted to national law or national law has to assimilate to the principles of blockchain.
Euphoria and Reality
In truth, blockchain technology can barely justify the current hype around it. Blockchains are not a panacea, but should rather be seen as one of many technologies that could form the basis for next-generation service infrastructure in the energy sector. Many digital services are already possible today without blockchains. While many ideas are being developed around the technology, a clear direction of where and with what economic benefits blockchain-based applications could be used is still far from apparent.
Most of the current applications are attempting to solve fractional parts of the energy market problems, being far away from the often-named vision of a blockchain of everything. Meanwhile, research and use would clarify limitations of the technology in the state of the art, for example, limited rate of transactions, long response times between the connected network peers, or the ever-growing volume of data. We are currently experiencing a phase where the blockchain energy pilots from a few years ago are under pressure to deliver concrete results and pathways for commercialization. The blockchain euphoria alone is not sufficient to maintain the funding for projects in eternal proof of concept stage. Therefore, the priority at the moment should be to prove the existence of a viable business model by focusing on a real, existing problem that consumers or energy actors are facing.
Disruption vs Enabling
Although utilities should actively engage with blockchain technology, there is no reason to be alarmed. The technology is still young for use in the energy sector. Blockchain technologies work wherever transaction costs exceed the transaction value — for energy trading, processes in high temporal resolution (real-time energy economy) become necessary. However, both the related opportunities and risks are already apparent. They should be examined with respect to each company’s own position and strategy in order to derive strategic options. For the majority of companies, the fast-follower strategy is possibly the most appropriate one, but future proofing the business is even more important.
As with any new technology, the existing market players should invest time and resources to understand the potential and develop use cases. The incumbents can be disrupted if they stop innovating and adapting to new business models. This has been understood by a number of European utilities and they are actively researching this area.
We evaluate the potential of blockchain in the energy sector as the digital solution for a real-time energy industry to regulate supply and demand and realize real-time physical power flows with minimal transfer costs even in the smallest neighborhood markets.
Another relevant question that remains unanswered is “will blockchain enable a renewable future?” Interestingly enough, the majority of the existing projects, especially crowdfunding-focused startups, are somewhat exaggerating the greenness in their communication. Despite this, the reduction in market friction by the future blockchain application will have a positive impact on the future of renewables. The current electricity market is still struggling to integrate a high share of intermittent generation and operate the grid in a smarter way. The blockchain applications that we are seeing today could create the basis for a more digitalized and automated market where it will be easier to trade flexibility, cheaper to balance intermittent generation, or perhaps even remove the need for balancing by implementing real-time nodal pricing. Although the technology is not yet sufficiently scalable and regulatory hurdles have to be overcome, these examples set the vision for a number of passionate players to develop the market of the future.
(From left) Robert Schwarz, Sergiu Maznic and Thomas Steinberger are representatives of Pöyry.
This article was originally published by Pöyry here and was republished with permission.