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A blockchain is a way to record and verify transactions without requiring a central entity to maintain or validate the ledger. Its most popular application is in recording peer-to-peer transactions of bitcoin and other so-called cryptocurrencies.

This article was originally published in Smart Energy International 5-2018.  You have access to our digital magazine here.

When users trade bitcoin, a vast, distributed network of computers verifies and records the transaction, which is immutably stored in the bitcoin blockchain and is visible to all users. In theory, blockchain technology could enable swift, frictionless, secure, and transparent currency trading.

Blockchain could also be used to cope with increasingly complex electric power systems.

In 2017, start-up companies raised over $300 million to apply blockchain technology to the energy sector in myriad ways. Some of these start-ups want to enhance existing markets for trading electricity or even to create new ones; for example, by using blockchain to facilitate peer-to-peer transactions that bypass a central utility or retail energy provider. Others hope to use blockchain to track the production of clean energy. Still others have proposed using blockchain to make it easier to pay for charging EVs, raise funds to deploy clean energy, manage customer appliances, and more.

Because the electric power sector is highly regulated, policymakers will play a crucial role in determining how much of blockchain’s potential can be realised. In order to effectively regulate blockchain, policymakers should first invest in understanding it. Next, they should actively support the development of technical standards. And finally, policymakers should make it possible for blockchain ventures to set up small-scale demonstration projects; for example, by creating regulatory sandboxes that loosen electric power sector regulations to permit experimentation.

A major problem is that power utilities are risk-averse entities that are slow to adapt to the changing electric power landscape, in part because they face scrutiny from regulators as well as pressure from shareholders seeking stable returns. Yet only decisive action by utilities can direct the transformation of electric power systems and deliver reliable energy more cheaply, cleanly, and efficiently. Sophisticated prosumers (consumers of electricity who also produce it) could deploy their smart energy equipment to help the grid match demand with volatile renewable energy supply. Rather than straining the grid, EVs – as fleets of mobile batteries – could back up the grid.

And utilities, customers, and third-party firms could collaborate to harness the vast streams of real-time operational data to ensure the smooth functioning of the power system.

In theory, transactions on a decentralised blockchain network could be processed and verified with fewer intermediaries, lower transaction fees, and greater security than those conducted on traditional centralised platforms.

Around the world, electric power systems are heavily regulated, and utilities often have a monopoly over operating the grid and delivering electricity to end users.

Fortunately for blockchain’s prospects, utility-sponsored initiatives comprise the second most numerous category of blockchain ventures. From the Tokyo Electric Power Company (TEPCO) in Japan to E.ON in Germany, established firms in the electric power sector are launching their own initiatives or partnering with startups. Some of these firms own power plants and trade the electricity they produce in wholesale electricity markets; those firms see blockchain as a way to improve the functioning of the markets. Others operate transmission and distribution grids and hope that blockchain can help them do so more efficiently in the face of rising system complexity. By virtue of these firms’ dominant positions in the electric power sector, utility-sponsored blockchain initiatives have a greater chance of achieving commercial traction.

Another category of actors comprises other corporations – both in the broader energy sector and in other industries – as well as nonprofits. For example, major European oil companies such as Shell and Statoil have partnered with the nonprofit Rocky Mountain Institute to support the Energy Web Foundation, which aims to develop a standard blockchain platform upon which energy applications can be built.

Yet another category includes the public sector. A smattering of governments and public sector organisations – including the government of Dubai; US national laboratories; and energy regulators in Singapore, the United Kingdom, and Australia – have signed on to initiatives to develop standards and test blockchain applications such as energy trading.

Involvement of public sector entities such as regulators will be crucial to blockchain’s commercial prospects because the electric power sector is so highly regulated.

Peer-to-peer transactions

The most intuitive – and popular – application of blockchain to the electric power sector is to turn the electricity grid into a peer-to-peer network for customers to trade electricity with one another; for example, by buying and selling excess rooftop solar power. Yet a truly decentralised, peer-to-peer trading network that upends the existing centralised grid is unlikely to materialise in industrialised countries in the next decade, notwithstanding the ambitions of several blockchain start-ups. In fact, many of these ventures rely heavily on today’s grid.

They might market themselves as peer-topeer networks, but rather than enabling neighbours to actually trade power with one another, these ventures continue to use the existing distribution grid and merely conduct virtual transactions that do not change the physical flow of electricity. This may be just as well because the existing grid provides reliability and monetary benefits that are difficult to replicate in a true peertopeer network.

Still, even if blockchain does not replace the grid, it could enable more participants to trade electricity. For example, Vattenfall, the largest Nordic utility, is running trials in which it uses a private blockchain network to record electricity transactions in which department stores or even individual homes can sell electricity generated by distributed batteries or solar panels; previously, such transactions would have been prohibitively expensive and time-consuming to process. And in areas of the developing world where electricity grids can be unreliable or nonexistent, opportunities exist for true peertopeer grids to emerge from the power vacuum – the start-up ME SOLshare is connecting homes in Bangladesh so that they can trade excess energy from rooftop solar panels.

Grid transactions

A range of other electricity trading applications that are less radical than a truly decentralised peer-to-peer network are more likely to gain commercial traction – and support from incumbent utilities and regulatory authorities. These “grid transactions” relate to electricity trading in the context of an electric power system in which the power grid remains integral, even if its form and function changes substantially.

Enel is spearheading the Enerchain project to use blockchain to enhance existing wholesale electricity markets. In such markets, owners of large power plants sell bulk quantities of power to utilities and retailers that then sell the power to end users. Currently, these markets require a centralised entity running proprietary software to mediate each electricity transaction, which is both time-consuming and expensive. If these markets listed and cleared transactions on a blockchain network, however, transactions could be validated quickly and cheaply. In addition, the transaction data would be transparent for all market participants to access, enabling more efficient trading. Finally, these wholesale markets could broaden their pool of participants because a blockchain network can cope with a multitude of smaller transactions that would overwhelm a centralised system. As a result, businesses and even households could participate, selling their excess distributed generation into the market and responding to prices that reflect the grid’s needs at each moment.

In addition to enhancing the existing wholesale market, blockchain technology could underpin new markets that marshal distributed energy resources to help balance the grid. Today’s wholesale markets can effectively set prices for bulk quantities of power, based on the customer demand in a particular region and the transmission capacity to transport power from the plants that bid into the market. But on the more local scales served by the distribution grid, no such market exists that takes into account instantaneous differences in customer demand among neighbourhoods or constraints on local distribution capacity.

To date, utilities have invested in costly infrastructure upgrades, such as new electrical substations, when the existing distribution grid cannot meet changing local needs. But as the costs of distributed energy resources – from solar panels to batteries to fuel cells – fall, it would be more sensible to harness such resources, whether situated on a customer’s premises or on the distribution grid managed by a utility. Dispatched effectively, these distributed energy resources can defer the need for expensive infrastructure upgrades to serve communities and can even help keep the overall electricity grid in balance by stabilising important parameters such as the grid’s frequency and voltage.

New so-called distribution markets could make this possible. Various jurisdictions, from South Australia to New York, are experimenting with these markets. In such markets, customers could buy or sell energy at time-varying prices based on their location. In addition, customers could provide services such as voltage support to the grid, also in response to granular price signals. Customers might employ smart software agents to act on their behalf and optimise their energy production and consumption based on market signals. And if they signed up with third-party aggregators, customers could pool their resources – offering to the grid the services of a so-called virtual power plant – that could help the overall system keep supply and demand in balance even with an influx of intermittent renewable energy on the grid.

Blockchain networks could be an important component of enabling such distribution markets. These markets would need to process far more transactions than wholesale markets currently do, and recording those transactions on a blockchain ledger could enable rapid, cheap, transparent, and secure transactions.

Moreover, smart contracts encoded into the blockchain ledger could automatically trigger transactions when certain conditions are met – for example, customers might offer to charge their batteries with excess electricity from the grid when the instantaneous compensation offered for providing charging services exceeds their pre-programmed threshold – facilitating efficient trading.

Still, many other advances will be needed on top of a blockchain infrastructure to realise distribution markets. Setting granular prices in such a market and regularly updating them will require a utility (or some other entity tasked with managing such a market) to install an array of sensors on the distribution grid, deduce the constraints faced at each location in the network, and perform intensive computations to determine real-time prices for the marketplace. Indeed, Australia’s experimental Decentralized Energy Exchange project is focused on solving these pressing technical challenges first. The project’s sponsors remain noncommittal on whether the platform will ultimately record transactions on a blockchain.

Energy financing

The use of blockchain and cryptocurrencies to raise funds for energy projects comprises the second largest category of initiatives to apply blockchain to the electric power sector. This category does not include start-ups that made an ICO to raise funds to then develop, say, a peer-to-peer trading platform. Rather, this category comprises ventures focused primarily on using cryptocurrencies to raise funds for energy projects (which tend, overwhelmingly, to be clean energy projects).

Blockchain networks could make it easier for renewable energy projects to raise funds.

They may broaden the pool of potential investors in renewable energy projects by enabling a multitude of smaller investors to supply capital. If a project developer can crowdsource a fraction of a project’s financing by using such a network, that developer might be able to more easily persuade traditional investors to provide the balance of required investment. Still, it is unclear whether such a decentralised network is actually necessary to supply the funds needed for renewable energy generation to grow briskly. The cost of solar and wind projects has fallen steeply, and large institutional investors and major corporations are becoming increasingly comfortable with investing in renewable energy projects.

Blockchain funding ecosystems might enable smaller investors and individuals to invest in projects to which they otherwise would lack access, but the societal benefits of doing so are not obvious.

Sustainability attribution

One of the most immediate applications of blockchain to electric power is its use to record and trade attributes of sustainability.

Examples of such attributes include whether a unit of electricity is renewable and how much emissions resulted from its production.

Currently, systems to track such attributes are centrally managed, complicated, and prone to fraud or errors. Moreover, the compartmentalisation of platforms prevents seamless trading of attributes across regions.

A decentralised blockchain network could enable transparent, accurate, and frictionless tracking and trading of these attributes, which would accelerate clean energy deployment and carbon emissions reduction.

For example, the Energy Web Foundation’s Origin application uses a blockchain to track electricity generation down to the kilowatthour and to record attributes such as the carbon emissions associated with power production. Doing so could enable more accurate calculation of carbon offset credits, which offer a mechanism to trade credits for carbon emissions reduced to balance out emissions created elsewhere, for owners and consumers of low-carbon electricity.

Recognising this potential, several utilities and firms, including Engie, Microsoft, and Singapore Power, are participating in pilot projects that use Origin.

If these projects can be scaled up, then governments might become better equipped to regulate carbon emissions. To date, jurisdictions that have enacted carbon pricing policies have struggled to accurately track and record emissions. In the future, governments might use distributed ledgers to record and trade the carbon emitted from producing, transporting, and using energy.

Various organisations – from IBM to an entity called the Russian Carbon Fund – are developing blockchain networks to record carbon attributes.

Electric vehicles

The line between the electric power and transportation sectors is blurring as a result of the rising popularity of EVs. Such vehicles, however, still face substantial barriers to customer adoption – in particular, a scarcity of public charging infrastructure can dissuade potential buyers. Blockchain networks that enable private owners of charging infrastructure to seamlessly sell charging services to EV owners could improve the appeal and uptake of EVs.

For example, the Californian start-up eMotorWerks and the German utility-backed start-up MotionWerk have partnered on a pilot project in California to create a marketplace for EV charging. The initiative would enable households that own chargers to rent those to EVs, in a fashion similar to how a homeowner might rent a room to a guest via Airbnb. The start-ups reckon that a blockchain network can facilitate a large number of small transactions of fractional units of electricity and do so swiftly, securely, and transparently.

Currently, firms struggle to keep down the costs of building and maintaining charging infrastructure as well as the cost of processing each charging transaction. If a blockchain network can reduce transaction costs by enabling EVs to charge using underutilised chargers already installed in residences or businesses, one of the largest barriers to EV adoption – a lack of available chargers to support travel – could erode. Beyond coming years, blockchain networks could facilitate even more exotic charging transactions. For example, inductive chargers installed below roads could wirelessly charge vehicles stopped at a traffic light, with smart contracts automatically triggering small and swift transactions that are recorded on a blockchain ledger. Finally, smart contracts could also enable EVs to charge up or discharge based on the grid’s needs, enabling the vehicles to act as mobile batteries and to help stabilise the grid while netting their owners income in the process.

Other applications

Most of the initiatives that fall outside the aforementioned categories have aimed to use blockchain to manage a large collection of assets. The Finnish start-up Fortum aims to help electricity customers manage a range of internet-connected appliances. By managing and recording the energy use of appliances, such as heaters, in response to price signals from the grid, it aims to save customers money. (Still, for customers to actually harness their appliances in service of the grid’s needs will require the creation of a distribution market and a system operator that sets granular prices.)

Some utilities are also seeking to use blockchain networks to better manage their assets. For example, the start-up Filament is working with an Australian utility in the Outback to install sensors and record data about the weather and the health of grid infrastructure on a blockchain network, enabling the utility to improve its maintenance efforts. And in the United Kingdom, the electricity regulator Office of Gas and Electricity Markets (Ofgem) is seeking to register customers’ electricity meters as digital entities on a blockchain network. The goal is to enable customers to rapidly switch retail electricity providers – currently the switching process takes up to three weeks – by enabling swift and seamless transactions between customers and the retailers of their choice.

Finally, some initiatives have sought to apply blockchain technology to enhance the cybersecurity of electric power systems. For example, a joint initiative of Siemens and US government entities including the Departments of Energy and Defense is conducting a pilot demonstration of using the cryptographic algorithms that underpin blockchain to secure critical power sector infrastructure and prevent unauthorised breaches.

Invest in understanding blockchain and its regulatory intersections

Blockchain is a foreign concept for most policymakers in the electricity sector, who often lack the right resources to understand what blockchain is, how a particular application might advance public policy objectives, and how blockchain networks should be regulated.

A global push to enact data privacy regulations makes it particularly urgent that policymakers understand the intersection of blockchain and privacy. The European Union’s General Data Privacy Regulation, which came into force in May 2018, requires in some cases that personal data be anonymised or erased, for example, to comply with an individual’s right to be forgotten. But whether blockchain records can be truly anonymised remains unclear; at best, an individual’s data might exist on a blockchain under a pseudonym. Moreover, because distributed ledger technology is by design immutable, data stored on it is difficult to erase.

Sound policy will enable the electric power sector to harness the potential of blockchain while safeguarding data privacy.

Policymakers should convene representatives from academia and industry to explain to them the basics of blockchain and its potential applications. Electricity regulators in the United Kingdom have proactively organised such gatherings, and policymakers in attendance have written up their insights in an accessible format to share with colleagues. Regulators in the United States would benefit from similar convening.

Recognising this, the state of Illinois has established a Legislative Blockchain and Distributed Ledger Task Force.

Support the development of blockchain standards in the electricity sector

At present, the growing multitude of initiatives with their own proprietary platforms could impede prospects for blockchain to achieve scale. Yet the promise of blockchain is to enable efficient transactions among a vast array of network participants. A set of standards ensuring that different blockchain platforms are interoperable could speed the commercialisation of blockchain technology.

One of the first such efforts from the US government, an interagency report published by the National Institute of Standards and Technology (NIST), provides an audit of blockchain applications but commits only two paragraphs to their possible use in the electricity sector. NIST, which has a history of pioneering work in cryptographic standards dating back to the 1970s, should go further.

A useful first step could be convening stakeholders working on various application types to identify where common standards – such as for blockchain and protocol types – might be feasible, constructive, or impractical.

Moreover, national laboratories such as the National Renewable Energy Laboratory should continue to assist industry consortia, such as the Energy Web Foundation, to develop private standards. These standards might address common protocols that ensure interoperability of private blockchains or might alternatively seek to create a template for certain smart contract types. Such efforts can help the United States, where the electricity landscape is fragmented, to keep pace with blockchain hubs in Europe, where fewer utilities and regulators have made early adoption of blockchain easier.

In supporting the development of standards, policymakers should not show arbitrary preference to one firm’s technical standards over another’s. Rather, policymakers should support the development of open-source platforms that foster competition among multiple firms but ultimately pave the way for interoperability.

Set up regulatory sandboxes to enable demonstration projects

Other countries are experimenting with blockchain projects in the electric power sector often by relaxing electricity regulations at a small scale to foster innovation. This approach is sometimes called creating a regulatory sandbox, in which new ventures can test their ideas without affecting the bulk of the electricity system. Within a restricted geographic area, a sandbox might offer ventures relief from regulatory reporting requirements or legally ensure that a pilot project can operate, thereby making it possible for a start-up to raise private funding.

National electricity regulators in Singapore and the United Kingdom have both pursued this approach and attracted prominent blockchain start-ups to pilot their ideas in their jurisdictions.

Some US states are following suit; more should do so. For example, the New York State government has encouraged firms to pursue small-scale demonstration projects applying a range of technologies – not limited to blockchain – under less restrictive regulations.

Such high-profile demonstration projects could provide an example to be scaled up at a later date. Equally important, this approach limits any failures of an experiment to one area.

Insofar as blockchain can facilitate the more efficient operation of the electric power system – reducing costs, improving reliability and resilience, and limiting emissions – it deserves to be tested. SEI

About the authors

• David Livingston is the deputy director for climate and advanced energy at the Atlantic Council’s Global Energy Center.

• Varun Sivaram is the Philip D. Reed fellow for science and technology at the Council on Foreign Relations.

• Madison Freeman is a research associate for energy and U.S. foreign policy at the Council on Foreign Relations.

• Maximilian Fiege is a cybersecurity consultant with Deloitte and Touche LLP.