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Demystifying the Energy Blockchain Landscape: Technical, Economic and Legislative Aspects

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Blockchain technology is among the most debated and possibly disruptive innovation of digital transformation concepts expected to redesign or evolve economies and societies. Blockchain technology offers a wide spectrum of features included decentralization, security, and effectivity which enables new business models and opportunities in the fields of health, energy, supply chain and government. Decentralization, decarbonization, digitalization and democratization (4D’s of the energy landscape) have been important phases of energy systems and markets transition. Decentralization of energy resources is a trading topic for at least two decades. Cost effectiveness of distributed energy resources (DER) in all power system segments will make future power systems more transactive and push the decentralization levels to increasingly advanced levels. Transactive energy systems and markets require advanced information communication technologies (ICT) such as advanced control and energy forecasting models to maintain requirements of successful modern power system operations. Digitalization and decentralization phases of energy systems evolved parallel to each other. Distributed Ledger Technology (DLT) and decentralization of the power systems are considered to be the disruptive factors that will enable the next paradigm shift in the energy domain.

Figure 1: Decentralization of modern power systems vs. DLT [1]

Digitalization is like a double-edged sword; it increases the capabilities of existing technology, but opens backdoors for hackers or system-generated failures, potentially risking the entire operational domain. Blockchain technology can be considered as sub-class of distributed ledger technology (DLT). Industry and academia prefer to use blockchain and DLT terminology interchangeably. DLT provides great opportunities to partially or fully overcome these kinds of digitalization issues.

Energy Blockchain Use Cases and Segmentation

UNC Charlotte research team performed a comprehensive worldwide market survey and investigated more than 200 energy blockchain companies and their associated common use cases. These energy blockchain use cases can be categorized as follows:

  • Peer-to-Peer (P2P) Energy Transactions/ Trading (33 %)
  • Grid Transactions/ Utility Scale (25 %)
  • Energy Financing / Initial Coin Offering (ICO) (12 %)
  • Labeling / Renewable Energy Attribution and Certification (11 %)
  • Electric Vehicle / e Mobility (10 %)
  • Others (9%)

More than 70 additional energy blockchain use cases have been identified for further future investigations.

The members of IEEE Standards Association P2418.5 (Blockchain in Energy) working group members co-authored an article to discuss the segmentation of various use cases systematically.  Energy, financial and data flow are the main transaction components that are accommodated with the energy blockchain design landscape. The following figure demonstrates the segmentation of the most common and promising energy blockchain use cases on the entire energy value chain and the corresponding type of transactions supported by DLT based energy system infrastructure.  Currently, P2P energy trading and local energy market applications seem to be most attractive energy blockchain use cases which accommodates energy, financial and data recording features of the DLT-based systems. European and Australian Utilities show more progressive behavior in terms of willingness to discover the capabilities of DLT on energy domain than US counter-parts. In general market conditions and regulations seems to be main reason for this gap. The majority of the current use cases are at the grid edge or local market segment rather than regional or national levels. Full or wide spectrum penetration of blockchain technology for wholesale markets and power transmission / distribution system levels will take at least one more decade. Initial showcases and pilot projects operated in the wholesale power market have been initiated by utilities and technology companies. REC trading is one of the most applicable energy blockchain use case due to its maturity.  EV and eMobility use cases are one of the most promising and emerging domains for future applications. Neither example has enough transactions to be commercially viable at this time.

Figure 2: Combined energy blockchain use case segmentation approach (RES: Renewable Energy Sources, ESS: Energy Storage Systems and EV (Electric Vehicle) [2]

The impact of Bitcoin mining is among the hottest debates in terms of being an emerging type of electrical load for the utilities. This discussion is somewhat limited and does not represent the impact or use of blockchain technology as a part of digitalization infrastructure. Bitcoin is just one small part of the entire DLT landscape. In other words, the use of immutable track recording and smart or digital contracting feature of second generation DLT should be the core of the debate instead the crypto currency feature (first generation DLT).  Use of crypto currency is an optional feature for energy blockchain use cases.  Other consensus protocols that support smart contracting feature with low energy / computational power intensive characteristics have the real potential for utility level applications.

At the Transmission Systems Operator (TSO) level:

  • Role of energy blockchain empowered more accurate and high-resolution load and generation forecasting and engaging load to reduce reserve requirements where utility benefit is in reducing spinning reserve amounts, imbalance costs and energy market commitment/dispatch risks.
  • The use of energy blockchain in active flexibility and demand-side management use cases to optimize infrastructure operation & upgrades where the utility benefit is in improving investment process and reducing operating risks.
  • Viability and feasibility of energy blockchain based wholesale and interactive regional / local energy markets where more secure, precise and shorter payment settlement processes can be examined.

At the Distribution System Operator (DSO) level:

  • Role of blockchain based local and regional energy market options which also involves P2P energy trading in facilitating and providing demand side flexibility by making use of specific behavior of consumer and prosumers.
  • Role of (resilient) microgrids to exploit the utilities’ and other market players’ benefits and to accomplish more efficient and transactive derivative auxiliary services shall also be investigated.
  • The use of blockchain technology in order to enable next generation charging and charging management infrastructure for EVs and transactive energy storage systems (ESS) as next generation grid balancing and other innovative services in terms of utilities’ and new market players’ benefits shall be explored.

Legislative, Energy Policy and Standardization Framework

Obviously, rules of the game are determined and regulated by the energy policy and legislative authorities. Thus, before starting any energy sector related project, it is essential to investigate the market regulations and energy policy framework. “Push Policy” instruments are successfully implemented to promote the renewable energy resources during last two decade. Without the energy policy makers support, it must have been very challenging to reach today’s decentralization and decarbonization phases with high RES penetration. Similar efforts shall be expected from the energy policy makers to promote the use of DLT in a systematic way.

The European Union (EU) has proceeded to develop various blockchain / DLT related legislative and policy related activities since 2015 by developing some regulations regarding the use of cryptocurrencies and developing DLT related data privacy related framework under the European Data Protection Supervisor (EDPS).[3] In addition, Estonia, Italy[4], Malta, Liechtenstein and United Arab Emirates has some considerable “crypto-political” efforts some of which may evolve to a structured national blockchain strategy document and more. On the other side of the Ocean, federal level DLT related policy activities appears to be on hold. Contrary, in state level are more progressive. Germany was one of the pioneer countries to enable the energy transition (Energiewende) and aims to do the same thing for the digitalization and democratization of the energy sector (and other sectors). Germany has released a Blockchain Strategy Document[5] which aims to promote innovation, attract investments, guaranteeing the stability in especially finance sector, strengthen the sustainability, deepen the digital markets, enabling the international collaboration and connecting the stakeholders in national and international level. German policy makers support various applied research, development and demonstration projects in the field of energy blockchain domain. Within the scope of the 7. Energy Research Program the German government investigated the potential of innovative digitization aspects and consequently decided promotes the start-up companies which are active in the field of energy blockchain. Smart Service Welt I and II technology support program series is designed by the German Federal Ministry for Economic Affairs and Energy to evaluate high potential digitization technologies which can be deployed especially in the field of health and energy. German government initiated and supported a blockchain based energy data recording and control platform for energy assets using smart-meter gateways. The pilot project started in May 2019 which aims to provide publicly accessible user interface for the supported blockchain based energy platform. The strategy document can be considered as preliminary work to identify the fields of detailed future frameworks which might be evolved as “push policy” instruments to systematically support and promote digitalization investments by preparing corresponding legislative documentation and promote high tech companies and technologies with support incentives. Other countries are expected to follow this trend and release their national digitalization documentation soon.

Like other emerging technologies, blockchain needs certain guidelines in technical level similar to the energy policy level.  As IEEE SA IEEE Blockchain in Energy Standards P2418.5 Working Group (WG), we contribute to the standardization development frameworks to provide holistic guidelines to the global community. The WG is in communication with other global and national standardization bodies to enable future coordination in this field. P2418.5 was established under IEEE Standards Association in 2018. The purpose of the WG is to create an open, common, and interoperable reference framework model for Distributed Ledger Technologies/Blockchain applications in the energy sector including power, oil and gas segments.[6] The WG released an energy blockchain specific survey hosted by IEEE. The purpose of survey is to help IEEE 2418.5 WG team to determine the standardization related tasks of the Blockchain technology in energy by understanding the current landscape, current and future application of Blockchain in Energy, and to identify areas of need for standardization. Your inputs are very much welcomed and appreciated.[7] The results of survey will be released with a comprehensive analysis in Q1 2020 and shared with public.

Design and Architectural Aspects of Proof-of-Concepts

Similar to the energy data analytics frameworks, DLT energy use case and projects shall be developed with strong domain expertise that includes software, power systems, business and legislative knowledge to come up with functional project outcomes. Designing the business logic based on the customer needs is the key part of a successful energy blockchain project. Software development and other technical innovation components shall follow the customer and market needs. Probably most importantly “value proposition” of the proposed use case shall be investigated very precisely. In one of our recent studies, the use and potential of DLT based P2P local energy market platforms and value proposition of the use case estimated for the German market[8]. According to the findings, DLT based P2P market provides 58 Euro cent more daily revenue for prosumer agent with average residential electrical load and a 5-kW installed solar PV capacity (EUR 17.4 per month). If some parts of this revenue is distributed to the other market players such as DLT based local market provider and the associated business partners which designed the platform, in many cases “value proposition” of the DLT based P2P business owner shall execute very precise techno-economic models to estimate the real market value of their products.

Figure 3: Generic architecture of a DLT based energy system

UNC Charlotte research team successfully developed three energy use cases using various DLT protocols and other ICT components with IoT devices and advanced data analytics (artificial intelligence) during the last three years. One of the use cases was developed in collaboration with one of the largest U.S. energy company. Based on gained theoretical and practical experience, system developers and architects have learned that DLT should not be applied to every use case and it does not provide a stand-alone solution for any industrial challenge. It is a very promising digitalization framework, but there are many others that can be deployed as well. Overestimating or overhyping the use of DLT unnecessarily will have a negative impact in the evolution process of the technology. 

Keeping the On-Chain sections of the DLT platforms as light and compact as possible is another critical design parameter. Most of the data intensive operations involving big data and advanced AI can easily be allocated in the Off-chain sections of the architecture. Keeping an eye on the response times of the energy blockchain use cases is another important point when designing PoCs. We have to keep in mind that the performance metrics (latency and throughput) shall be investigated very carefully for especially designing mission and time critical (almost real time operations). Many existing DLT protocols would be able to support time sensitive operations because the validation times of transactions might be higher than the required response times. Full stability analysis is a key component of successful DLT based systems. 

AI Meets DLT

The majority of existing smart contract frameworks are far away from being smart without an AI algorithm behind it. Probably combined use of AI and DLT to execute next generation smart contracts will open new space for the third generation DLT applications. Definitely there are considerable efforts by various research institutions and vendors to apply AI with DLT but most of those efforts can be considered as preliminary attempts until the full integration of AI to the DLT implementations. We contribute similar efforts which brings AI and DLT together in our laboratories. Our research group recently presented a work in this field (Decentralized Energy Forecasting Markets using Distributed Ledger Technology) in the first IEEE International Workshop on Advances in Artificial Intelligence Blockchain in Atlanta.[9] AI based DLT implementations are not limited with the energy forecasting. Many other use cases including smart and connected communities with autark (self-sufficient) and autonomous regional and local microgrids have a potential as future applications. AI can also be used to design semi or fully automatic decision making or support energy systems with next generation smart (intelligent) contracting features I could not stop thinking about the following questions as a researcher who is working on AI and Blockchain technologies to provide some new aspects of next gen energy informatic solutions:

  • “Which party will be responsible for any legal conflict which may cause financial and/or physical damage when the smart contract is executed by an AI based platform?” 
  • “Which court will be responsible to resolve the occurred conflicts originated by AI based DLT contracts, especially if it will be in international domain?” 

There is a similar debate in autonomous vehicles domain as vendors and legal teams calculate risk and blame for future accidents between vehicles not operated by a human.

Conclusion and Outlook

Modern power systems can be considered as multi-disciplinary cyber-physical-social system which requires to involve many aspects such as power systems ICT infrastructure, power markets and energy policy domains. Interoperability, privacy management (General Data Protection Regulation), lack of standardization and energy policy / legislative frameworks, scalability challenges of existing DLT protocols and applied use cases all remain as hot topics. Evolving of the DLT and blockchain technology will continue with more intelligent and easier to inter-operate versions in future. We will be using new and next generation blockchain technologies in the coming decade that have yet to be developed. Next generation shared and circular economy business models based on DLT and other emerging technologies will shape future energy markets as well as other business fields.


[1] Umit Cali and Claudio Lima, Book Chapter: Energy Informatics Using the Distributed Ledger Technology and Advanced Data Analytics, Book: Cases on Green Energy and Sustainable Development, IGI Global, 2019, USA

[2] U. Cali, C. Lima, X. Li and Y. Ogushi, "DLT / Blockchain in Transactive Energy Use Cases Segmentation and Standardization Framework," 2019 IEEE PES Transactive Energy Systems Conference (TESC), Minneapolis, MN, USA, 2019, pp. 1-5.
URL: http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=8843372&isnumber=8843368

[3] https://www.pwc.com/m1/en/publications/documents/establishing-blockchain...

[4] https://news.bitcoin.com/italian-government-dlt-policy/

[5] https://www.bmwi.de/Redaktion/DE/Publikationen/Digitale-Welt/blockchain-...

[6] https://standards.ieee.org/project/2418_5.html

[7]https://www.surveymonkey.com/r/Preview/?sm=l25kNvWduKf1M0yHy6zX1mIQp7rsckEUYCfQDi9Q5E4bGJTuG7xiV9FZZMzGp_2BJH&state=invite_modal

[8] U. Cali and O. Çakir, "Energy Policy Instruments for Distributed Ledger Technology Empowered Peer-to-Peer Local Energy Markets," in IEEE Access, vol. 7, pp. 82888-82900, 2019. https://ieeexplore.ieee.org/document/8740846

[9] https://ai4blockchain.github.io/

Umit Cali's picture

Thank Umit for the Post!

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Discussions

Matt Chester's picture
Matt Chester on Sep 25, 2019 10:08 pm GMT

What a thorough and well researched piece, Umit. Thanks for sharing it. 

UNC Charlotte research team performed a comprehensive worldwide market survey and investigated more than 200 energy blockchain companies and their associated common use cases. These energy blockchain use cases can be categorized as follows:

Peer-to-Peer (P2P) Energy Transactions/ Trading (33 %)

Grid Transactions/ Utility Scale (25 %)

Energy Financing / Initial Coin Offering (ICO) (12 %)

Labeling / Renewable Energy Attribution and Certification (11 %)

Electric Vehicle / e Mobility (10 %)

Others (9%)

This survey caught my eye. I'm curious-- how do you expect that the coming years will alter this breakdown, if at all? Are some of these applications more difficult and will thus get a greater percentage as the kinks are worked out, so to speak? 

Umit Cali's picture
Umit Cali on Sep 26, 2019 4:31 am GMT

Matt,

Thanks for reviewing the article and sharing your opinion about it.

Well, that was a good question and the answer is not that easy. I will try to express what I expect. I think P2P trading use cases are overrepresented. I have very strong doubts if the current and near future local market brings sufficient value proposition for all the players who are active in this domain.

In general there are various factors which may impact the distribution (percentages) of the use cases such as legislative framework. This is a binding one for everyone who are active in any business segment (Energy policy layer) . Second issue is willingness to discover new technologies and business models.  (Business layer). Next one is the maturity level of existing DLT protocols. There are several unsolved (or partially solved) challenges including interoperability and scalability. Technical challenges are easier to resolve in comparison to other factors which are mentioned. I believe, it is just the beginning.  Most likely, we will not be using the existing DLT frameworks after a decade. There will be more functional and easier to use versions. If there will be more progressive efforts in energy legislative domain the other impacts will follow.

I expect that  the fusion of DLT in parallel to other digitalization drivers towards the transmission and distribution grid and whole sale market side will be really a hot topic in next years. This is an extremely challenging topic. The trade volume is very high and some of the existing technology (centralized databases and other ICT) may provide similar solutions (with lower efficiency).

My favorite use cases are which are related to eMobility. This is an amazing field which will yield new types sharing and / or circular economy models which are not there yet.

Final remark: Most of the early stage P2P energy trading companies will disappear due to lack of suffient value propositon and lack of multidiciplinary expertise (in power systems, ICT and energy economics/ policy frameworks) Percentages will definitely change. We will see how.

Umit

Matt Chester's picture
Matt Chester on Sep 26, 2019 2:43 pm GMT

Appreciate your response, Umit. Great insights! Hope you continue to share them with the Energy Central community

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