Blockchain within the Energy Sector - a Paradigm Shift or Hype?
Illustration 132829124 © Siarhei Yurchanka - Dreamstime
- Sep 20, 2019 1:15 am GMT
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With the current rate of globalization and rapid population growth, it is literally unimaginable to think of the modern world without the availability of energy resources to power the countless processes that run almost nonstop in the 21st-century world. Be it hydro, nuclear or renewable energy sources like solar and wind, the world is in dire need of energy to sustain normal living and industrial processes.
The global energy market is estimated to be worth approximately about $2.5 trillion dollars by 2023 and is largely monopolized by a few big players in the market. These major players control the dynamics of the energy market with an emphasis on higher energy production levels in order to ensure maximum profits. As a result, the contribution of consumers and end-users in this model is restricted to subscription for energy services.
In today’s world where consumer behavior is gravitating towards greater inclusion in the market beyond spending money, the current energy market structure seems to have several apparent shortcomings. The educated electricity consumer today wants to have a greater say in the generation as well as the distribution of electricity. The reason for this can be attributed, in part to the following reasons:
1. People, especially millennials are becoming more environmentally conscious.
2. There is a noticeable decrease in the trust placed in giant energy corporations by many societies around the world.
The digitalization of the energy industry is continuing to gain momentum with the arrival of blockchain technology. The relative level of success enjoyed by a few startups of blockchain-based enterprises in such a short amount of time has created a paradigm shift in the consciousness of modern consumers. It is these changing characteristics of consumer behaviors that are exciting the entire blockchain community. They are the result of an increasingly complex web of transactions, the need to balance geographical mismatches between supply and demand, and significant security and trust concerns given the proliferation of IoT connected devices. By applying blockchain technology to the energy market, the industry can move from its present centralized architecture to a more decentralized peer-to-peer energy trading market – something that is radically transforming the industry’s processes and markets.
Blockchain Technology in a Nutshell
Generally, people conceive blockchain as a new, cutting edge and high-emerging technology. However, Blockchain is just combination of technologies that have existed for a long time: Distributed Ledgers, Cryptography and Peer to Peer (P2P) Networks. It is simply a new and creative way of combining old ideas together to give us an incredible new solutions platform called “Blockchain”. Blockchain technology in its simplest form, is a digital distributed ledger that records transactions and promises to radically speed up transactions and cut costs by facilitating a trusted transfer of value without the involvement of traditional intermediaries. The potential of Blockchain stems from the fact that everyone in every industry can adopt it. It is decentralized, immutable, transparent and utilizes to cryptography to store and secure information - all of which are characteristics the modern consumer looks for in a piece of transactional technology. Thanks to these features, blockchain makes owning money and digital goods easier and safer without needing the intervention or manipulation of any third parties like the government agencies.
How the Core Blockchain Technology is Energy Sector is Evolving
Currently there are approximately 40-50 startups operating worldwide in the energy blockchain space. However, blockchain technology still needs time to mature and as per the Gartner’s latest report on the Hype Cycle for the Blockchain Business 2019, “Blockchain for Utilities” is currently positioned right at the starting phase of “Peak of Inflated Expectations”. This phase estimates that blockchain technology for utilities may be still 2-5 years away from gaining more maturity and right now blockchain technology in energy is too slow to handle real-time market needs. Unlike the financial services industry, the energy industry needs much faster confirmation times to make IoT applications a reality, and again unlike the financial service industry, permissioned based blockchains will emerge due to national, regulatory and privacy concerns. Currently there are many consortia being formed in the industry that are aiming to improve the underlying technology and trial specific use cases, examples of consortia include Enerchain by PONTON.
Blockchain technologies could be also applied to a variety of use cases related to the operations and business processes of energy companies. Below are the potential processes that might be affected by blockchain.
- Sales and Marketing
- Smart Grid Applications and Market
- Grid Management
Blockchain Technology Uses Cases in the Energy Sector:
Blockchain technology presents a massive amount of disruptive potential for the energy industry. Applications are being explored globally and a new ecosystem of energy startups is emerging. While there are many use cases currently being piloted in the energy sector, according to a Navigant Research report and Indigo Group survey, the prominent use cases that are gaining most traction are “Peer-to-Peer (P2P) energy trading” and “Decentralized Generation.” These use cases are mostly hovering around pre-programed “smart contracts” that can trigger transactions automatically. These smart contracts can be set to allow prosumers to feed surplus energy into the grid through a blockchain-enabled meter. The flow of electricity is automatically coded into the blockchain and algorithms match buyers and sellers in real time based on preferences. Smart contracts then execute when electricity is delivered, triggering payment from buyer to seller. Removing financial transactions and the execution of contractual commitments from central control brings a whole new level of decentralization and transparency that the industry has never seen before.
Within the utilities industry, blockchain is enabling a new way of managing how energy is distributed, accounted for and secured. For example, microgrids could become more resilient with peer-to-peer (P2P) communications. P2P enables intelligent electronic devices to share information directly, without the need for a centralized system. Also, data about the asset activity (and hence the value) can be exchanged instantaneously, 24/7, giving rise to new business models and applications for many distributed energy sources, as well as increasing the security and reliability of the grid itself. With the energy utility industry trending toward a distributed and connected future, blockchain is an alternative for the online portion of the online-to-offline energy sharing platform.
The first most popular use case is enabling a peer to peer energy trading model. The proliferation of Distributed Energy Grids (DERs) or independent renewable energy sources that connect to the grid has helped converts consumers into producers who are able to sell excess power back to the grid.
Decentralized Energy Trading Platforms
With the electricity market decentralized and electrical energy becoming an asset on a blockchain, consumers can begin to trade electricity within a peer-to-peer market. Several applications are being developed such as wholesale energy trading and P2P Platforms between prosumers and consumers. These applications have the potential to introduce a greater economic potential for both energy companies and consumers as far the energy market is concerned. By making electricity a tradable asset on a blockchain, consumers can benefit from the many advantages of blockchain commerce such as low transaction costs and network transparency amongst others.
In wholesale energy trading, blockchains can reduce transaction costs, while providing transparent data for access from several parties including bodies that can certify regulatory compliance. Though this open access of commercially sensitive information could be a potential roadblock, efforts are already underway by many blockchain startups to secure data per regional regulations and grant access only specific views in a public utility blockchain. PONTON which is a consortia of around 40 + energy and utility companies in Europe recently launched “Enerchain 1.0” which is a P2P wholesale decentralized energy trading platform with the objective of smart trading of flexibility, balancing and local energy. Another example would be “Wien Energie”, Austria’s largest utility company which has started to pilot a project on Blockchain for gas trading. The trial results so far have shown significant gains in costs and efficiency by the automation of trade processes such as confirmations, actualizations, invoice generation, settlement, audit, reporting and regulatory compliance.
Several projects on blockchain focus on local marketplaces and P2P trading in community projects or microgrids. These microgrids allow trading in electricity within a specified area. Power Ledger, an Australian startup - is the most mature application in the development of a residential P2P electricity trading marketplace between prosumers and local consumers. Power Ledger is also active in the fields of wholesale electricity trading, electric e-mobility, IoT/ smart devices and automation, grid management and carbon trading. One of the main advantages of microgrids is that it can be used as an emergency backup in situations when there are issues with the main grid. Natural disasters like floods, earthquakes, and hurricanes can cause service disruptions by affecting centralized grid infrastructure. In such an event, microgrids can sustain the community until the main grid is back online.
Blockchain -Key Challenges to be Addressed:
Even though there are many blockchain projects and initiatives currently undertaken by many established energy companies, the long-term value is yet to be proven as most initiatives have trialled the technology in relatively controlled environments and small-scale projects. As a result, a few key challenges need to be addressed before the mainstream adoption of blockchain in the energy industry.
- Blockchain systems have currently high development costs. It may help realize significant cost savings by circumventing intermediaries, however, in some use cases - they might not have the competitive advantage vis-a-vis pre existing solutions in well established markets. For example energy transactions can be recorded in the conventional relational databases such as Oracle that are designed to recognize relations between stored information.
- Blockchain Technologies still need to prove their scalability, speed and security required for the proposed use cases in the energy sector where the transactions volume would be high.
- Though Blockchain Technologies have started to prove their potential in decentralized microgrids, they might face major challenges in balancing, integrating with central controls and in coordinating with the main grid. Existing regulatory and legal frameworks would need to be amended to allow for greater adoption of Distributed Ledger Technology (DLT). For example - in general transmission lines, current regulatory frameworks do not allow consumer-to-consumer electricity trading which has also been seen in many of other P2P Projects. A unified regulatory framework needs to be created which would include new contract types between consumers and prosumers, more flexible electricity tariffs and provisions to allow local or microgrid markets to be integrated into the current regulatory practice.
- Finally, another significant factor that might slow down blockchain adoption is the lack of standardization and flexibility. Standards for the blockchain architectures need to be developed to allow interoperability between technology solutions.
It is proven that blockchain can clearly benefit energy system operations, markets and consumers. Understanding how the next generation distributed ledger technology may evolve, and the business models that might be enabled, are a next step. By virtue of the advantages offered, blockchains could potentially provide solutions across the energy trilemma: they could reduce costs by optimizing energy processes, improve energy security in terms of cybersecurity and finally promote sustainability by facilitating renewable generation and low-carbon solutions. Much like how the telecom revolution and invention of smart phones have reduced the reliance on landlines and phone networks, blockchain technology could revolutionize how the energy and utilities sector operate. It’s now well and truly up to the utility companies to decide what part they want to play in the value chain and its wider adoption in our future society.