In this article by Thomas Steinberger, Robert Schwarz and Sergiu Maznic of Pöyry Management Consultancy, we examine how the blockchain vision can be translated for the energy sector, and the benefits of near real-time information in an intermediary-free environment.
Blockchain has the potential to change the business world as we know it today. Entire value chains can be shortened by it – including in the energy industry.
In the field of renewables, this shift can lead to new business models, from peer-to-peer trading to flexibility schemes or investment incentives, to name just a few. Although start ups and even classical utilities are increasing their efforts in developing blockchain-based applications and processes,nevertheless the number of scalable case studies is marginal right now and developers have difficulties realising their promising ideas.
So how does the blockchain vision translate into the world of energy, utilities and renewables?
As a digital transaction system that allows for secure data storage and execution of smart contracts in peer to peer networks, blockchain can eliminate the need for intermediaries in transactions. Instead, they are performed peer-to-peer in near real time, as integrity and security are guaranteed by the blockchain.
From an IT perspective, blockchains solve the double spending problem – a phenomenon of the current state of the internet where a copy of each set of data is sent from server to server when information is transferred. For any transaction system this issue needs to be eliminated, which so far has been the job of trusted institutions.
By taking over this task blockchains make any intermediary superfluous and are therefore referred to as the Internet of Value– an evolution of the current Internet of Information. A next step might be the application of blockchains in the energy sector as the Internet of Energy, which leads us to the ever-growing startup scene around the technology.
Blockchain technology gained relevance for the energy sector at the beginning of 2016 with an experiment in an intermediary-free environment.
Brooklyn, New York, when owners of PV systems sold their power in the neighbourhood using the Ethereum blockchain without a utility.
A recent survey indicates that today, around two years after the launch of a major blockchain micro grid research project,there are 122 organisations involved in blockchain technology and 40 deployed projects. Between Q2 2017 and Q1 2018,over $300 million was invested in the blockchain in the energy industry.
While it is still much too soon to speak of a triumph as blockchains must continue to evolve, the technology has the potential to radically change the energy industry. It provides the opportunity for new or more efficient business models and thus the opportunity for entirely new companies entering the market.
The years 2015 and 2016 were starting points for blockchain in the energy sector. Recently we have seen relevant infrastructure layers like the Tobalaba test network of the Energy Web Foundation or IOTA – a blockless distributed ledger, so in the coming years we will see numerous roll outs of new, relevant application layer and business models.
There are at present many new players who are currently developing entirely new areas of value creation, with a variety of startups and established utilities working hard to test blockchain technology. These possible platforms and distributed database systems are striving for acceptance in order to become the leading players in the decentralised world.
Following the example of over 70 banks and financial institutions and their R3 consortium, utilities could also attempt to enable a decentralised power grid and compensate for lost revenues by providing the business platform as a service via such community chains — a kind of consortium. Since the consortium’s participants are known and thus have a particular level of trust among each other, the integrated governance of these kinds of blockchains is much easier than for free accessible public blockchains. This, in turn, also leads to the advantage of a less energy intensive performance.
There are many indications that blockchains will gain a foot hold in the energy sector — an efficient decentralised energy world requires appropriate decentralised technologies. Blockchains could represent and execute various business processes of the energy world and would be an ideal instrument for IoT devices to manage their transactions.
Blockchains are also useful as a trust-building element to provide transaction logs for energy to manage power flows and the accounting of cellular systems, automate proof of origin,enable P2P trading and the administration of asset registers.
Companies and foundations are currently developing the next generation of blockchains for the energy industry, which protect privacy, are fast enough, and have the usual interfaces.
For a wide implementation, developers still struggle to identify the specific business model for the different use cases and simultaneously comply with regulatory requirements. A tremendous regulatory hurdle is the European General Data Protection Regulation and the right to be forgotten. Blockchainis actually not designed for meeting the current state of regulation since one of its major features is immutability. Another hurdle is the handling of personal data. With peer-to-peer deliveries one can draw many conclusions on the personal behaviour. From this aspect a way to aggregate and de-personalise data has to be found. In addition, energy law varies from country to country, which means that the application must be adapted to national law or national law has to assimilate to the principles of blockchain.
Euphoria and reality
In truth, blockchain technology can barely justify the current hype around it. Blockchains are not a panacea but should rather be seen as one of many technologies that could form the basis for next-generation service infrastructure in the energy sector.
Many digital services are already possible today without blockchains. While many ideas are being developed around the technology, a clear direction of where and with what economic benefits blockchain-based applications could be used is still far from apparent. Most of the current applications are attempting to solve fractional parts of the energy market problems, being faraway from the often-named vision of a blockchain of everything.
Meanwhile, research and use would clarify limitations of the technology in the state of the art; for example, limited rate of transactions, long response times between the connected network peers, or the ever-growing volume of data. We are currently experiencing a phase where the blockchain energy pilots from a few years ago are under pressure to deliver concrete results and pathways for commercialisation.
The blockchain euphoria alone is not sufficient to maintain the funding for projects in eternal proof of concept stage. Therefore,the priority at the moment should be to prove the existence of a viable business model by focusing on a real, existing problem that consumers or energy actors are facing.
Disruption vs enabling
Although utilities should actively engage with blockchain technology, there is no reason to be alarmed as the technology is still young for use in the energy sector. Blockchain technologies work wherever transaction costs exceed the transaction value – for energy trading, processes in high temporal resolution (real-time energy economy) become necessary. However, both the related opportunities and risks are already apparent. They should be examined with respect to each company’s own position and strategy in order to derive strategic options. For the majority of companies, the fast-follower strategy is possibly the most appropriate one, but future-proofing the business is even more important.
As with any new technology, the existing market players should invest time and resources to understand the potential and develop use cases. The incumbents can be disrupted if they stop innovating and adapting to new business models. A number of European utilities have understood this and they are actively researching this area.
Another relevant question that remains unanswered is: “Will blockchain enable a renewable future?” Interestingly enough,the majority of the existing projects, especially crowd funding focused startups, are somewhat exaggerating the greenness in their communication.
Despite this, the reduction in market friction by the future blockchain application will have a positive impact on the future of renewables. The current electricity market is still struggling to integrate a high share of intermittent generation and operate the grid in a smarter way. The blockchain applications that we are seeing today could create the basis for a more digitalised and automated market where it will be easier to trade flexibility, cheaper to balance intermittent generation, or perhaps even remove the need for balancing by implementing real-time nodal pricing.
Although the technology is not yet sufficiently scalable and regulatory hurdles have to be overcome, these examples set the vision for a number of passionate players to develop the market of the future.