Utilities Haven't Been Disrupted by Blockchain — They Are Shaping Its EvolutionPosted for Navigant
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- Sep 24, 2019 3:00 am GMT
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Blockchain first appeared in the energy industry, to great fanfare, in 2016. A blockchain architecture enables devices in a network to exchange information without the need for central intermediaries. This quickly gave rise to a narrative that power utilities were the next intermediaries on the chopping block. But three years in, utilities haven't been disrupted by upstart blockchain vendors—on the contrary, they are helping to shape its evolution in the power sector.
Incumbents Make the Rules, Startups Play the Game
The energy transformation is a process rather than an event. New solutions, no matter how attractive or novel, take time to implement in a system as complex and entrenched as the power industry. Utilities must ensure they can continue to provide safe, reliable power, while acting within a system of regulatory constraints. New tools and technologies must prove themselves to both utilities and regulators before they can be integrated into the system and widely deployed.
This reality has hit energy blockchain vendors hard. Startups developing blockchain-based solutions have found themselves dependent on existing market structures and regulatory frameworks. In the US, for example, vendors that use blockchain to reduce rates and improve choice for electricity customers are necessarily confined to the handful of states with competitive retail markets—typically New York, Texas, and California. While some have claimed meaningful rate reductions for customers, these efficiency gains have not yet come close to sending utilities the way of Blockbuster.
Similarly, models and market structures designed to help integrated distributed energy resources, including demand response programs, flexibility or ancillary services, and virtual power plants, are still in their early stages. This severely limits transactive energy service providers, for whom a key value proposition is the potential to broaden participation and reduce transaction costs within these emerging markets. Utilities remain at the center of transmission and distribution grid operations, and blockchain vendors have to play on their field.
Startups Who Collaborate with Utilities are More Likely to Survive
Since 2016, Navigant Research has maintained a database of energy blockchain vendors and projects (now tracking nearly 250 of each). This database was recently published in the inaugural edition of the Energy Blockchain Vendor and Deployment Tracker. One insight unearthed by this database is the critical role that utilities play in the nascent energy blockchain market: of 36 companies who have failed or exited the energy blockchain market, 34 (96%) did not have an announced utility partner. Of 32 vendors that did publicly collaborate with a utility, 30 (94%) are still active in the market today. Utility partnerships appear to lend vital certainty and stability to a volatile industry with a notoriously high failure rate.
Of course, one explanation for this pattern could be that utilities’ financial resources are simply keeping afloat those energy blockchain vendors which would otherwise have failed. But there are at least two areas in which utilities can fill a major need for startups. The first is a direct connection to the utilities’ customer base, who are ideal customers for many of the services offered by energy blockchain companies. At a time when most vendors face high customer acquisition costs and struggle to scale their solutions beyond the demonstration scale, this channel is invaluable.
The second is that utility partnerships—whether direct or through a consortium—provide the support and guidance that startups need to navigate the physical and regulatory complexities of the energy markets and to build a tool the industry can actually use. Utilities’ institutional knowledge can help vendors focus in on pain points and inefficiencies in the existing system and provide them with a real-world system in which to trial or simulate solutions.
Collaboration can take many forms, from one-off pilots or demonstration projects to participation in research and development consortia like the Energy Blockchain Consortium or the Energy Web Foundation. Blockchain-based solutions such as renewable energy certificates may be less sexy than peer-to-peer power trading or a fully automated grid, but the immediate business case and path forward for such solutions is much clearer. These initial steps can establish a foundation for future experiments that are more innovative and complex.
Utilities Need Startups Too
This is not to say that utilities should not take startups or blockchain technology seriously. Rather, utilities and vendors offering innovative solutions for the energy industry are interdependent. The energy landscape is changing, and as grid systems become more distributed, decentralized, and dynamic, utilities must challenge many of the assumptions that made them successful under the old paradigm. The agile, disruptive Silicon Valley startup mindset can bring a fresh perspective to the utilities industry as it transforms.
Partnerships between vendors and utilities will have a competitive advantage in terms of scalability, commercialization, and overall industry impact. This pattern is already evident in the success and failure of early stage ventures. Startups should focus on first gaining a foothold with pragmatic use cases that can prove the benefits of their technology while still paying the bills. Utilities should keep an open mind and work with the most sophisticated and innovative startups to develop real, useable solutions for the energy industry. Together, they just might be able to transform the industry to the benefit of everyone involved.