Sebastien Plessis
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Rewiring energy markets:
an opportunity for blockchain technologies?
The increase in decentralized power production creates new needs for information exchanges in the electricity system
The electricity landscape is changing at a fast pace. At some point, the on-going growth of renewable energy sources is likely to challenge the current organization of the electricity system, where most of the production is injected at the transmission grid level. With an increasing share of production happening closer to the consumer, both physical flows of electricity and exchanges of information required to support these flows are likely to be redesigned: they will also need to occur closer to the consumer and be more decentralized.
In general terms, optimizing a decentralized electricity system will require sharing additional data along the value chain between market players. For example:
This calls for new IT tools leveraging all the flexibilities offered by local power production, potential demand response instruments or power storage.
Defining the “operating system” and associated applications which will materialize the benefits of a decentralized electricity system is a major strategic challenge for all energy market participants (suppliers, grid operators, software vendors, equipment suppliers, etc.). This is evidenced by the intense activity in this area, from traditional energy suppliers and grid operators, but also from specialists in energy management and automation (Schneider Electric, Siemens, GE, etc.), Internet giants, IT specialists or start-ups. For instance, General Electric is experimenting with a decentralized smart grid project in Carros (France), in partnership with Enedis. This project aims to identify key technologies enabling integration of local renewable sources within the grid.
Blockchain could support the increased information exchanges required to manage a decentralized electricity system
From this perspective, blockchain, a technology enabling storage and transmission of data without involving any central institution or market player, is currently a thriving field of research for energy market participants.
Blockchain’s generic features and functionalities
It has two key advantages: security (more and more valued with cybersecurity issues) and the possibility for these contracts to occur from machine-to-machine or system-to-system, without intermediaries or trusted third parties (with associated fees).It was introduced in 2008 as the underlying architecture of Bitcoin, the first decentralized cryptocurrency. Over recent years, many players have considered using the blockchain technology for applications other than currency exchanges, triggering development of new protocols tailored for industrial usages. Consequently, many other blockchain protocols are emerging, including open-source platforms such as Ethereum and Hyperledger that extend the idea of a “transaction” beyond cryptocurrency exchange.
The main innovation brought by blockchain is that data are no longer centralized, but distributed to all participating computers, which store them locally. Blockchain can be related to a distributed ledger which contains the complete history of data transfer among users and is secured through advanced cryptographic techniques.
In various sectors, blockchain is being used to build:
Mapping of blockchain-based projects in the energy sector
In the energy sector, market participants establish proofs-of-concept using blockchain-based technologies. Major energy companies and blockchain start-ups are frequently partnering in these projects. Beyond blockchain start-ups, large companies such as Microsoft and IBM are offering blockchain as a service to other companies.
Most of these projects – and especially the most publicized ones – are centered around “peer-to-peer” energy transactions (i.e. direct exchanges of energy between customers) and cryptocurrency-based electricity offers, but the range of applications also covers the management of charging of electric vehicles (EV), or of renewable energy certificates, while some major energy companies are experimenting with blockchain to optimize their internal and B2B processes.
In most cases, blockchain is competing with other technology solutions. Start-ups active in this field are working on pilot projects to obtain validation by the market, with difficulties for new entrants to generate sufficient revenues.
Exhibit 1: various players in the energy field experiment with blockchain – sample of projects
Alliances are also emerging around the industrial use of blockchain in the energy sector. For example, in March 2017, major energy companies (including Engie, Elia, Shell, and Statoil) partnered with Rocky Mountain Institute and Grid Singularity, a Vienna-based start-up, to support the Energy Web Foundation, a non-profit organization seeking to accelerate the introduction of blockchain-based technologies in energy markets.
In the use cases, blockchain, as a tool, enables more value creation for energy market players than it generates value in itself (IT revenues for blockchain solution providers). Beyond pilots and building new business models, new entrants will need to present the value proposition to their clients (competitiveness vs. other solutions today and tomorrow…), analyze where and how value is created, and decompose possible economic value creation for clients: avoided costs, access to new markets or revenues (modelling business cases and value creation)…
For most use cases in the energy sector, blockchain appears as a questionable technical choice in the short term
Our interviews with senior executives in established energy companies revealed a significant degree of skepticism regarding the specific use of blockchain for these projects. They argue that most of these projects could happen without blockchain and could instead rely on a more traditional central database, with blockchain not yet in the top of the merit order of the possible tools.
The scalability of blockchain solutions is indeed still to be demonstrated as blockchain faces latency issues. Moreover, mature alternative technologies are difficult to beat (e.g. mobile payments for electricity offers in Africa, central databases to manage renewable energy certificates or the charging of electric vehicles), making the economic rationale for using blockchain uncertain. In these contexts, new blockchain solutions don’t solve pain points compared with existing technologies.
In the start-up ecosystem, although enthusiasm for blockchain predominates, these difficulties are recognized.
However, two main reasons to favor blockchain over traditional alternatives to manage information are mentioned, which can build momentum for blockchain solutions, possibly also benefiting from improvements in other sectors:
(a) blockchain’s open development platform (complemented by ongoing standardization efforts) facilitates collaborative and innovative projects;
(b) the blockchain protocol, which already exists in many competing implementations, will evolve and overcome its current limitations.
Blockchain is an accessible development platform
Blockchain development tools can be used by any company and therefore provides a cost-effective way to build projects requiring the management of large amounts of data, using a common language to build an interoperable “information infrastructure”. From a start-up point-of-view, it is for example easier to use the Ethereum platform to collaborate with other innovative players rather than investing in a centralized and proprietary solution.
Blockchain could then contribute to lowering already decreasing energy sector entry barriers and therefore allow new players to venture into large energy companies’ playground, with innovative business models and new ways to sell electricity. It is an opportunity for potential new entrants on this market.
Tailoring the blockchain protocol for specific industrial uses may be an answer to blockchain’s current limitations
As an example, Ethereum, a blockchain protocol targeting in particular industrial markets, is contemplating a switch towards a more efficient consensus protocol, the algorithm used to guarantee the security of data stored. This would significantly improve the scalability of Ethereum-based projects, by reducing energy consumption and the time it takes to record new transactions.
Overall, blockchain’s disrupting potential is concentrated where it can enable a more decentralized functioning of markets or information exchanges
Blockchain’s added value lies more in its decentralized nature than in its mere performance as an information management solution, at least in the short term. Therefore, blockchain’s benefits appear stronger in areas where this technology enables novel sets of transactions or facilitates new information flows, that is, where it affects the way markets work.
In the energy sector, as detailed below, this could be the case for:
With less disrupting impact, blockchain provides an additional technological option, competing with mature technologies, to manage the payment of electricity offers, charging of electric vehicles or renewable energy certificates (4.).
Payment system for electricity offers
Cryptocurrency-based electricity offers could be of interest in countries where more traditional payment methods are less effective, in particular in Africa, where engaged amounts for electricity payments are low. For example, South African start-up Bankymoon provides utilities with Bitcoin as a payment method for their clients. The cryptocurrency can be used by clients as a traditional payment method, instead of the local currency. As Bitcoin transaction fees are lower than banking fees, its usage could enable savings on both customer and utility’s side.
Charging of electric vehicles
As regards charging of electric vehicles, Slock.it, a blockchain services start-up, initiated a productive R&D partnership with RWE. One of their collaborations, Share&Charge, enabled testing the usage of smart contracts in the charging process. The prototype consisted in an electrical vehicle charging station and an application. A smart contract, built on the Ethereum platform (one of the most mature blockchain protocols for industrial usage), enables the client to pay directly for the amount of electricity used. After the proof-of-concept phase in 2016, the goal of the two partners is to launch the first charging station in 2017.
Exhibit 2: sample project – the Share & Charge digital wallet for drivers of electric vehicles
Management of certificates, such as renewable energy certificates
Blockchain (or other open ledger) technology could be a natural instrument to manage certificates. It enables trust, high security, speed and lower transaction costs, and possibly simplicity compared to currently complex and expensive outsourced management systems.
It could be used at the national level for carbon credits and renewable certificates.
IBM announced in March 2017 that it had launched the world’s first blockchain-based carbon credit management platform built on top of the Hyperledger Fabric distributed ledger in cooperation with Energy-Blockchain Labs. The new platform will be used by the Chinese carbon asset market.
As another example of management of renewable energy certificates with blockchain, in Rueil-Malmaison (France), the start-up Evolution Energie is experimenting with blockchain to track and certify renewable energy.
It could be an enabler for new incentive certificates where no one wants to manage them, or where no authority at a more local level, such as a city, is considering the launch and management of certificates, or when the complexity of implementing a certificate system is a barrier to the launch of it.
“Peer-to-peer” energy trading based on blockchain is being tested
The most intriguing and debated breakthrough blockchain may cause in the energy sector surrounds the empowerment of the consumer regarding electricity procurement.
Assuming blockchain-based technologies could make numerous, small-sized energy transactions between two parties cost-efficient, consumers could have an increased incentive to act as suppliers of the excess energy e.g. their solar panels produce, and take a more active role in their energy supply sourcing, for example favoring local and/or renewable production sources.
Small-scale pilot projects emerge to test the feasibility of such blockchain-based systems. One of the most mature and publicized of these projects is run by US start-ups LO3 Energy and Consensus Systems, which are developing a “virtual” microgrid in Brooklyn, allowing participants to trade locally the energy they produce and buy from their neighbors, while still relying on the local distribution infrastructure. The project is enabled by both a blockchain-based trading platform developed by LO3 Energy and a microgrid management solution provided by Siemens.
Exhibit 3: sample project – the Brooklyn Microgrid peer-to-peer retail platform
In Australia, the start-up Power Ledger wants to leverage the large share of homes equipped with solar panels (25% of houses in Western Australia), which produce excess electricity at certain times of day, with no possibility to monetize this energy. The project will enable, through the use of blockchain, connected users to sell this excess electricity to their neighbors, or purchase from them when relevant. After two small-scale trials, Power Ledger will start a new larger pilot project in Auckland this year covering 500 homes, making it the biggest P2P electricity trading project in operation.
Exhibit 4: sample project – the Power Ledger peer-to-peer exchange platform
More and more local power systems are emerging; virtual micro-grid pilots are popping up everywhere. Energy communities are on the rise, mostly in Germany and in the US (where they reach several GW). Many greenfield networks have emerged in Asia to address the need for new power systems for new cities. Blockchain based-technology could be a strong enabler and catalyst for the multiplication of such local systems.
Blockchain facilitates the introduction of new ways for end-customers to purchase their electricity
Again, the necessity of using blockchain to make these projects happen can be questioned. But there, the ability to manage a high number of low value transactions in a decentralized manner – which is blockchain’s core feature – is key, and assuming that scalability issues will be solved, blockchain might be better placed to support P2P electricity trading than traditional ways of managing information.
Blockchain matters in this instance because it can open up new ways for consumers to purchase electricity (e.g. by favoring local, renewable sources, or by actively managing electricity sources) and creating new needs. Even though it is unclear at this stage whether or not blockchain will be the tool of choice to support P2P electricity trading at a large scale, blockchain gives consumers a taste of new possibilities, and might reveal new expectations in the market.
Blockchain could accelerate the redefinition of grid operators and energy suppliers’ role with the increase of renewable production sources
If applied at a large-scale, implementation of “peer-to-peer” energy exchanges would have disruptive effects on retailers and Distribution System Operators’ (DSOs) place in the energy value chain.
Assuming a long-term scenario where end-consumers would manage a large share of their energy needs through their own production and/or the direct purchase of energy from local production sources, the retailer ultimately might become an “insurance provider”, supplying the mere difference between consumption and what is directly sourced by the consumer.
This would also support the emergence of local platforms, connecting prosumers and local production assets within “energy communities”. Producers and consumers would then manage in “short loops” most of the supply of electricity, thereby leading to a decrease in grid usage. New remuneration schemes and incentives could be introduced to accompany (and not slow down) this evolution, as it would be progressively more challenging for grid operators to recoup their costs over such a shrinking usage base.
What will be the exact role of the DSO in this context? In fact, this could create opportunities for DSOs, who are well-placed, close to local production sources, to play a pivotal role in the introduction of blockchain in local energy markets.
In the short term, it mainly raises concerns and concrete issues for TSOs (Transmission System Operators) and DSOs to manage the coexistence of different systems, to deal with local imbalance and ensure that energy is supplied.
Some of these questions are not entirely specific to the potential introduction of blockchain-based technologies in electricity markets, and are linked to the transformation of energy systems towards a more decentralized model. But blockchain could make these issues more pressing by accelerating the underlying drivers.
Although projects in this field are at an early stage in the energy sector, other industries have experimented with blockchain as a tool to trace and share information between several companies along a value chain (e.g. Bureau Veritas with the start-up Stratumn designing a traceability system using a blockchain-based technology for tuna industry, London-based startup Everledger securing the origin of diamonds through a blockchain register…).
Another promising area where blockchain can make a difference with traditional ways of managing information concerns internal and B2B processes.
The true differentiator of blockchain in these instances is not the technology itself as, once again, central databases would be up to the task. But using blockchain brings organizational benefits. Indeed, the practical burden of setting up common IT systems amongst different market players (sometimes competitors) is highly challenging: it means agreeing on technical specifications, responsibilities in implementation and management. In this area, blockchain provides a standardized, common language so that companies can exchange information between themselves in a secure manner, using an infrastructure which is shared by design. What is more, there is no need for one specific market player to take the lead and manage the system.
Blockchain therefore provides a simpler way to run a joint IT infrastructure, that could be instrumental for unbundled and crowded power systems, and lower the IT burden and cost for energy companies. This could help them deal with many B2B processes, internally and in conjunction with clients. It could be worth a closer look for some energy players who have prolonged IT issues, and/or who have huge outsourced IT budgets designated for building tailored and often rapidly outdated solutions.
Potential use cases in the energy sector include the optimization of energy trading systems, the management of industrial assets’ maintenance, and new services for energy services companies (ESCOs). As an example, in May 2017, some European utilities (including Engie, RWE, Total, Uniper, Vattenfall) teamed up with Ponton, a German provider of technology supporting energy trading, to test blockchain-based wholesale trading of energy as part of a project named Enerchain.
Major obstacles will have to be overcome before blockchain proofs-of-concept turn into large-scale applications.
On the technical side, the priority issue is to ascertain the scalability of blockchain-based applications. Managing the hardware might also be a challenge as, for example, smart meters would need to embed blockchain capabilities for some applications, raising issues of keeping up with updates and associated costs.
In the shorter term, these current limitations could be remedied more easily in a localized setting, for example to allow P2P energy exchanges at the scale of a city. Instead of a large-scale deployment, blockchain-based solutions could be introduced as a succession of small-scale deployments.
Most current blockchain protocols do not ensure a sufficient degree of sovereignty for policy makers to support their usage at the center of energy systems. Especially, location and concentration of “mining” activities – the compute-intensive tasks required to validate transactions – could be a relevant issue, based on strategic considerations. This may call for specific blockchain protocols designed to remedy these concerns.
Enabling blockchain in electricity markets would require significant adjustments to the regulatory framework, ranging from what is necessary for consumers to sell their own electricity to a complete review of regulated players’ responsibilities. Some countries have already adopted regulatory frameworks facilitating, to some extent, peer-to-peer exchanges of energy (e.g. net metering policies in place in 40 US States, adoption in France in 2016 of a specific regime for auto-consumption…). But the regulatory frameworks are slow-moving: they are far from offering good conditions for a progressive technology ramp-up and for enabling new business models to emerge and start-ups to develop.
As for other innovations in the energy sector, it will take years for blockchain to make inroads on energy markets, and then be rolled-out at some point. It is a great challenge for technology start-ups that have a three-pronged battle for sustainable development: (1) on technology issues to make it viable and work in real-life tests; (2) on competitiveness and ease-of-use compared to other existing solutions – crucial to enabling market adoption and early revenues; and (3) on business models and regulatory issues which should be soon tackled.
At this stage, blockchain is not a ready-to-deploy industrial solution for the energy sector. But it could progressively enable peer-to-peer electricity exchanges and, more generally, accelerate the transition towards a more decentralized electricity system.
The introduction of IT tools such as blockchain could facilitate the development of tailor-made electricity offers. With blockchain, end-users might be able to source a significant share of their electricity supplies themselves, through their own production, through the direct purchase of electricity produced by their neighbors, or coming from other local renewable sources.
This enabler could be at some point a threat for established energy suppliers who could progressively lose the link with their customers, if they fail to adapt to possibly evolving customers’ expectations. It also could be a threat for centralized power networks operators, which retain a large part of the value in the sector.
If large companies are not the only power producers anymore, energy companies and retailers still have the customer base today. They could be disintermediated by other players exploring innovative ways to sell electricity, aggregating energy locally and using new technologies such as blockchain.
More generally, blockchain and similar technologies open the way for specialists in energy management and automation (e.g. Schneider Electric, Siemens, GE, etc.), Internet giants, IT specialists or start-ups to capture a more significant part of the energy or energy as a service profit pool. Indeed, in a decentralized system where most of the production assets run on negligible marginal cost, value is likely to move on to IT systems and services rather than production means.
In a more crowded and competitive arena, with low barriers for new entrants and decreasing margins in the commodity supply, competitive advantages are evolving rapidly in the power sector for the control of the customer and to retain a share of the remaining profit pool which is not given back to customers.
IT is not considered today as a competitive advantage of traditional energy players due to their internal IT challenges and perceived IT user experience for B2C or B2B clients. Adopting blockchain-based technologies early could enable energy players to explore new ways to develop stronger relationships with their customers and adapt to propose new tailored services. Energy players had the luxury of planning their business in the long run and analyzing scenarios. It is less and less easy considering the speed of market changes and the short-term imperatives, but nevertheless crucial to acquire the right new competences to rapidly adapt and keep a competitive advantage in the long run.
Considering the stakes and threats, energy market participants cannot afford to leave the blockchain stone unturned. Even if blockchain is considered as hype and long shot, energy players should take a serious look at blockchain and similar technologies beyond the hype. From a strategic perspective, IT could be a competitive advantage, bringing value to customers and reducing service costs, or conversely it could enable competitors and new players to bypass them.
Blockchain should be on the strategic agenda of energy companies, as part of the more general endeavor to build the future “operating system” making decentralized electricity markets work and keep a key role in them.
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