Blockchain has been in the news a lot lately. Much of the noise is a result of the soaring valuation of the digital currencies it supports like Bitcoin and Ethereum. However, digital currencies are just one application for blockchain technology. Innovators and developers are capitalizing on investor interest in anything blockchain, pushing the boundaries of how the underlying technology can be used. Blockchain has become a buzzword in executive boardrooms spanning dozens of industries, including finance, law, healthcare, supply chain management, conservation, and—more recently—energy.
The energy industry is a relative latecomer to the blockchain space and only a small fraction of all blockchain projects are energy-focused. However, activity is picking up quickly. About 70% of energy-related blockchain initiatives launched between 2016 and 2017. Startups, tech companies, and consortia are exploring everything from back office applications like energy trading and settlement platforms to more consumer-facing solutions like transactive energy (TE), EV charging, and demand response (DR).
At its core, a blockchain is a tamper-resistant distributed database of cryptographically linked transactions stored across many computers in a network rather than in one central location. The network governs the database and its contents by consensus, according to shared, transparent rules encoded in the network’s protocols. In effect, blockchain architectures were designed to enable parties in a transaction to place their trust in computer code and verifiable mathematics rather than in intermediary organizations. Blockchain promises to lower friction and transaction costs by cutting out the middleman—and the energy industry has a lot of middlemen.
Some Parts of the Energy Industry Are Sold on Blockchain, but Utilities Are Not So Sure
It can be difficult to see why utilities should be interested in blockchain at all. Utilities are often the middleman between electricity generators and the end consumer, and are not enchanted by disintermediation. Blockchain-based TE startups like LO3 Energy and Power Ledger envision a world where customers with behind-the-meter generation and storage capacity can sell electricity to their neighbors in a local energy marketplace—a vision that threatens utilities’ traditional volume-based business models.
Unsurprisingly, most utilities do not enjoy the prospect of a future where their role is relegated to maintenance of the grid’s pipes and wires. Utilities have not been absent on the blockchain scene, but they also are not bankrolling the energy revolution. Although a handful of projects have been highly successful at raising capital (some through traditional fundraising methods and others through largely unregulated initial coin offerings), relatively little of the money flowing into the space comes from utilities.
Some startups view utilities as competitors and believe that successful trials will generate momentum from the bottom up, prompting utilities to fall in line or fall off the map. Others see them as essential partners in bringing about an industrywide transformation to a more decentralized, distributed, and interconnected energy system. The latter model is the most likely to bring about real change—but both startups and utilities need to recognize the opportunities for collaboration and take advantage of them.
Blockchain Could Help Align the Incentives of Stakeholders along the Energy Value Chain
Blockchain does not have to pit startups against utilities, or suppliers against consumers and prosumers. In fact, blockchain is one of the only technologies with the potential to support a platform that aligns the incentives of the various stakeholders in the energy system.
Return to TE for a moment. In a blockchain-based system designed to compensate prosumers for the electricity they export, the most sensible device to serve as a node in the network is the smart meter. Prosumers need a meter capable of handling two-way electricity flows to sell electricity into a blockchain-based TE marketplace. But smart meters are not blockchain-specific infrastructure—the meter still needs to be connected to the grid, and that creates new behind-the-meter opportunities for the grid operator.
TE and DR can operate side by side on shared physical and digital infrastructure, creating value for both the customer and the utility. A smart meter connected to a blockchain network could function as a hub for other smart devices behind the home—including thermostats, appliances, lighting, and even EVs. Smart contracts and decentralized applications built on a blockchain platform could allow the utility to fold these devices into a robust DR service.
DR and other flexibility services can be a valuable resource for power providers, in some cases substituting for investments in new generation capacity to meet peak demand. Consumers could opt in to receive some compensation in exchange for, say, allowing utilities to dim their lights by 5 percent during peak periods or pull a few kilowatt-hours from their home battery storage, all automated by smart contracts and supported by the same blockchain-based network that enables TE.
Utilities Do Not Have to Go It Alone
The scenario where grid operators and blockchain-based energy as a service providers work in concert comes with an important caveat: it can only work if all stakeholders involved operate as part of the same network. Common platforms can maximize value for consumers, device manufacturers, developers of TE platforms, and for utilities—but this future can never be realized if end users are required to buy into dozens of different platforms from dozens of different service providers. Imagine if Facebook, Google, Amazon, and Apple all ran their own private internet networks with incompatible protocols.
This is what makes the consortium model for blockchain development so powerful. Consortia bring together a wide range of stakeholders—from electricity suppliers to software companies and industry regulators—to collaborate on developing a platform that takes advantage of synergies and shared objectives. They share risks and costs while pooling talent (and customers). And at the same time, they facilitate dialogue that helps avoid a future race to the bottom where dozens of incompatible technologies work against each other to the detriment of the overall system. Consortia like the Energy Web Foundation, Hyperledger, PONTON, and others are forging ahead and making rapid progress in the blockchain space.
Utilities do not have to suddenly transform into Silicon Valley software companies to avoid a future where they are at loggerheads with their consumers and other stakeholders. But whether blockchain wins the day or not, utilities need to decide if they are going to view the energy transformation as a threat or an opportunity. The choice is still theirs to make—for now.
Lead image credit: CC0 Creative Commons | Pixabay