A new consortium aims to speed up the development of blockchain technology for use in energy applications. Tildy Bayar examines the risks and benefits
In a December 2015 article, David Schatsky and Craig Muraskin of management consultancy Deloitte warned that blockchain technology “is coming to disrupt your industry” – and it seems that, in relation to energy, they may be right. Taking off from the financial sector, where blockchain is already being used for money transfers, digital currency exchanges, cross-border payments, smart contracts and more, the term has become the latest buzzword for energy players seeking to avoid pitfalls and find new revenue streams in a changing business landscape.
Blockchain technology, which underpins the bitcoin virtual currency, is a secure digital mechanism that enables transactions through peer-to-peer networks. Through a distributed database, or ‘ledger’ of ‘blocks’, or timestamped transaction records, a blockchain can operate autonomously and initiate transactions automatically. And, crucially, proponents say its distributed storage feature as well as its security algorithms make it almost unhackable.
For the energy sector, blockchain can allow devices such as electric vehicles, HVAC systems, water heaters, batteries and solar photovoltaic (PV) systems to transact with each other at the distribution edge. It could speed the transition to a low-carbon economy; it could even prove to be the magic bullet that can help integrate ever-growing numbers of decentralized and renewable sources with the grid while keeping costs in check. Among the companies that have noted this potential and are working on energy blockchain pilot projects or preparing to test the technology are heavy hitters like Siemens, Vattenfall, Enel, Fortum, Innogy, TenneT and Austrian utility Wien Energie, as well as a number of startups worldwide.
One pilot project, a collaboration between Siemens and US-based startup LO3 Energy, aims to develop microgrids that allow local energy trading based on blockchain technology. The companies are working on combining Siemens’ microgrid control software with LO3’s peer-to-peer trading platform, which was proven in a 2016 pilot project in Brooklyn, New York. The pilot showed that the platform could enable local trading between producers and consumers of PV power in three Brooklyn neighbourhoods, as well as balance out local production and consumption.
Australian startup Power Ledger, working with blockchain firm Ledger Assets, ran a similar pilot project in 2016 for 10 households in Perth. Residents of the National Lifestyle Villages housing development could trade, sell or give PV power ‘units’ to other participating households during the eight-week trial. A second trial is planned to include about 80 households, some with battery energy storage systems, and Power Ledger said the companies aim to conduct further trials aimed at devising business models for peer-to-peer energy trading.
Meanwhile, Austrian startup Grid Singularity is using blockchain technology to develop a decentralized energy exchange platform that can host applications ranging from validating electricity trades to monitoring grid equipment. The firm says such a platform has the potential to prolong equipment life, improving both large and small power generation system operators’ earnings.
And a crowdfunding platform called The Sun Exchange is using blockchain technology to enable people anywhere in the world to buy in to commercial and industrial solar schemes in Africa, such as a 65 kW solar microgrid in Lesotho, South Africa which will provide power for a mountain community. In this business model, the buyer purchases any number of solar cells and then leases them for use in a project somewhere in the world, with the project only going ahead once all the solar cells are sold.
New business models
Unlike the financial services sector’s embrace of blockchain, with 30 of the world’s largest banks joining a consortium to design and build blockchain solutions, most energy sector players are still wondering how the technology might help them in adapting to the changing energy landscape.
And there is risk involved, as blockchain could potentially disrupt many market segments. UK-based startup Electron is developing a blockchain platform that could allow customers to switch power suppliers within one day, a potential customer service headache for utilities. Although Paul Massara, the former head of RWE npower, recently joined Electron’s board, and the company says it “recognizes the potential for blockchain to transform the shared virtual infrastructure of the energy industry” and “is taking a top-down, collaborative approach to platform development by working with various key stakeholders across the energy industry”, utilities could still be understandably nervous about its impacts.
Compounding this, the blockchain technology itself is not yet mature, with no industry standards yet established and few use cases available to present to governments and regulators. The timescale for scalability is not yet known. And, according to Deloitte, risk-averse industries such as energy could prove cautious about adopting such a fundamental change to the way they do business, even where it is necessary in order to survive and grow.
To speed things up, a new non-profit organization aims to accelerate commercial deployment of blockchain technology in the energy sector. To date, firms from nine countries have joined the Energy Web Foundation (EWF), a joint initiative of Grid Singularity and US-based sustainability consultancy the Rocky Mountain Institute (RMI). Member companies include Centrica, Elia, Engie, Royal Dutch Shell, Sempra Energy, Tokyo Electric Power Co (Tepco), SP Group, Statoil, Stedin and Technical Works Ludwigshafen (TWL).
EWF says it has identified multiple potential use cases for blockchain technology in the energy sector and, after securing $2.5 million in an initial funding round, the group plans to develop a commercial version of a blockchain software platform within two years.
The 14 use cases the group says it has identified are aimed at “tackling existing pain points” in the energy sector, such as reducing high administration and transaction costs. A simplified process could lead to new large and small market entrants, EWF says, and offers economic potential of at least $1 billion per year.
One example is certificate of origin (CO) tracking. COs are credits or other digital trackers that are attached to units of renewable energy. Blockchain technology can streamline and enhance the transparency of CO issuance, purchasing, trading and retirement, while reducing the transaction costs associated with intermediaries. EWF says this will lead to simplified and enhanced traceability of electricity generation for renewable generators and buyers.
Regarding the risk-averse nature of the energy sector, EWF notes that utility companies “are already getting serious about finding ways to integrate blockchain technology into their operations – as indicated by, for example, the companies who joined EWF as corporate affiliates”.
The group also believes that risk-averse industries should be particularly attracted to blockchain as it offers the ability to enhance both system security and system resilience, especially for utilities. It can support key goals for these firms such as reducing transaction and administration costs, improving efficiency and increasing demand-side flexibility. In the end, EWF says, rather than put utilities out of business, blockchain “can enable new utility business models that promote the deployment of renewables and distributed energy resources across the grid”.
Herve Touati, president of the EWF and a managing director at RMI, says the biggest impact blockchain can have on the energy sector is in the area of decentralized energy. Although what blockchain can do for the distributed sector is “less interesting” than in other areas because it simply “captures existing processes more effectively”, Touati says blockchain could make wholesale energy trading “much easier”.
“One of the difficulties is verification and reconciliation,” he explains. “You and I exchange electricity on the block, we need to verify on both sides, and this takes time – maybe a week/month/year, which costs time and money.
“With blockchain technology and a common ledger, there is no notion of reconciliation because there is only one thing. This will not be revolutionary, it will just be about making the existing system more cost-effective, faster, higher quality and with fewer mistakes.”
But blockchain could also have a more disruptive and potentially transformational impact, he notes. As it is a given that increasing amounts of variable generation will keep coming onto grids, Touati warns that “if we do that without changing what happens behind the meter and remain in a 19th-century electricity system framework, designed 135 years ago, where demand cannot be controlled and we can only adjust supply, of course it will be difficult because with more variable supply we need to add more additional supply that is not used all the time, for use when wind and solar are not generating.
“A more effective way of doing things is to adjust demand. We need a system architecture whereby the demand side can adjust itself dynamically to reflect what the supply can do. It’s not realistic for demand to perfectly match supply, but the more we can do to at least partially match supply, the cheaper the system will be for us.”
And cheapness is, of course, a crucial issue as costs continue to rise – but Touati believes blockchain can reduce the need for new spending on grid infrastructure. “The biggest source of cost by far is CAPEX,” he says. “The more we move into renewable energy, the more this is the case. When there is no fuel cost anymore, 80-90 per cent of the expenditure is CAPEX.
“Especially on the decentralized energy side, what blockchain accomplishes is increased utilization of the existing investment, improving the economics – in the same way that Airbnb increases the utilization of real estate. For the grid, you gain control of distributed energy resources – not individually, but you give them information so they can make the right decision and use the system more efficiently. Instead of a system managed for high peaks, you decrease the peaks.”
He offers the example of electric vehicles (EVs) as an area where blockchain can help to avoid large capital expenditures on grid infrastructure.
“Imagine that we bring more and more EVs onto the grid,” he says. “To integrate these EVs we can do it the ‘traditional’ way: you buy a car, and you charge it whenever you want, so people will charge it when they come home from work, around 6 pm. In this case the grid will need to be expanded.
“If instead you put some intelligence on the system, it can, on a daily basis, decide when to charge the car between 6 pm and 6 am, and the grid doesn’t need to be extended in size. So you have not only more decentralized generation and more renewable energy, but also a lower-cost grid.”
But how can this ‘intelligent grid’, incorporating large numbers of new devices, be achieved without opening the sector to growing cybersecurity risks? “We clearly need to adjust for a very large number of devices,” says Touati. “We could do this with a centralized unit, but this is unsafe for cybersecurity.
“In the US northeast last year, a cyberattack on old home devices that all had the same password was used to attack a particular website,” Touati says. “This kind of thing is why we plan to integrate a very strong cybersecurity concept in the architecture of the EWF system. With blockchain, a hacker could still take control of a vast number of devices, but the architecture makes it extraordinarily difficult to do that because every device on the network has a very long randomly generated password.”
This may not sound like much of a defence, but in 2016 US telecoms firm Verizon’s Data Breach Investigations Report showed that 91 per cent of cyberattacks were focused on acquiring users’ passwords, and that 63 per cent of successful attacks resulted from password-cracking. In addition to strong password security, proponents say blockchain records and verifies each transaction, eliminates the risks involved with data management chains, and does away with more easily hackable third-party or centralized controls.
But are we ready for it?
As with other new and potentially disruptive technologies, blockchain will need to be overseen by governments and energy regulators. Are they ready for the challenge?
Touati says energy regulators in Europe, Asia and the US show different levels of readiness. In the US, as regulation is largely up to individual states, “there are a lot of discrepancies across the country,” he explains. “Europe is more homogeneous, in part because it is more centralized in terms of regulation for the energy sector, although of course after Brexit the UK may have different regulations moving forward. We anticipate that, at least in some parts of Europe, we will see early adoption. And of course Asia is another scenario.
“Collectively we should expect that some countries would be early adopters, some will watch carefully and may be fast followers, and some may take a bit more time to join the bandwagon.
“One of our members is Singapore Power.They aim continue to be an innovative player, and as Singapore is a relatively smaller country it may be easier for them. In the US it is very fragmented, with some parts ahead and some parts a little bit behind. Look at the composition of our first 10 affiliates: two companies from Asia, seven from Europe and one from the US.”
From the regulator’s perspective, Touati says, “what’s of paramount importance is the interest of the public at large. Are customers going to benefit? Two overall issues are important in decision-making: first, the integrated safety of the system – a new technology that is not fully tested will raise issues about cybersecurity. And, second, something that is vital for modern economies depending on the country or state: maintaining the economic viability of utilities. Generally speaking, regulation puts this responsibility on the regulator in all countries I know for the distribution grid and the HV grid; the managing entities are regulated monopolies. These need proper finance to be able to operate.
“On the retail and power generation side, it depends whether we are in a competitive market or not. In my view, these would be questions the regulator would ask: with a new technology, what are the benefits, do customers benefit, and is the integrity of the system at risk? And is the economic balance for system operators going to be preserved?”
“Come and join us”
Touati says the EWF aims to build an open-source infrastructure, and “if people are interested in developing applications they should contact us.”
He notes that the companies that have joined EWF to date “are all electricity market participants. Some are vertically integrated utilities, some are traders, some are DSOs – they have different ways of participating. So if someone says ‘I’m a technology provider, how can I join?’, the answer is yes, we are interested in having technology partners. We wanted to start with market participants because we wanted to understand users’ needs before doing anything else, but over time we would like to open it up to other types of organizations.
“It’s such a complicated problem that we don’t believe we’re going to achieve anything alone.”