It’s time to take off the rose-tinted blockchain glasses.
The transparency and decentralization that accompanies blockchain helps provide innovation to the energy industry; however, it is by no means a one-size-fits-all solution that will necessarily transform the electricity sector.
Blockchain will face significant hurdles to truly disrupting organized power markets. While there is room for blockchain or a similar technology in the energy market of the future, scaling timelines are dependent on technical and regulatory barriers. Blockchain could have outsized implications for monitoring Renewable Energy Certificate (REC) and natural gas markets, and it seems likely that these use cases will be first to commercialize.
Blockchain energy evangelism
Crypto fervor gripped the nation at the end of 2017, leading to a steep spike of currency prices and massive increases in company valuations. Current blockchain hype within the energy sector reveals similar enthusiasm. Earlier this year, Greentech Media hosted a conference centered around blockchain technologies – an event that would have been unfathomable a few years ago.
Advocates feel blockchain has the potential to “kill the modern utility” and promise it will change everything about the way we buy and sell energy. Between the second quarter of 2017 and the first quarter of 2018, more than $300 million was invested in developing blockchain energy applications.
FIGURE: Funds Raised Q2 2017 – January 2018
Source: GTM Research
There are many barriers facing blockchain’s widespread adoption, including regulatory hurdles, start-up costs, integration issues, and scaling limitations. But the main reason blockchain comes up short is a lack of overarching practical use cases.
Blockchain decision tree
Rather than hunting for problems where blockchain can be used, a bottom-up approach should be taken: where is the energy system struggling, and how could blockchain address the issue?
The flowchart below from UC Berkeley walks through a decision-making process on whether a blockchain is necessary for a project.
Not all blockchain-based companies are created equal. Some make it to the bottom left of the flowchart; these include companies wanting to use blockchain for distribution-level markets, or those with REC applications that cannot be solved by an intermediary. For others, a variety of solutions exist that do not require a blockchain to guarantee success.
Many (not all) peer-to-peer companies can be held up by the question of if a central/third party entity could get the job done instead.
For all potential applications, the value of blockchain is additive, but not revolutionary. Blockchain can empower individual consumers to produce energy and trade directly with other consumers in their network, enabling better access to local energy. But blockchain-based systems do not eradicate the requirement for a market platform.
Blockchain is not a cure-all
As it scales, blockchain cannot escape regulatory and operational standards already in place. Independent System Operators (ISOs) confirm that the electricity system can carry out the flow and trade of electrons, and they effectively match buyers and sellers to meet load and demand. All transactions must be verified with the ISO, which takes the physical constraints of the system into account when settling transactions and dispatching resources in real-time.
Exchange protocols such as 0x allow for trustless, decentralized trading of blockchain assets through relays (for example, relays Paradex and Radar Relay move orders between peers). But the electricity industry is not meant to be free and exposed. If data was openly accessible, market participants could play unfairly by obscuring their costs and operational parameters. ISOs manage and screen information to protect market participants and avoid crises (e.g. Enron).
“Even if all market and operational constraints could be represented in a blockchain platform, ISOs are constantly monitoring the system, rethinking and changing the rules, and occasionally intervening in the market,” says Dr. Eric Hittinger, assistant professor of public policy at the Rochester Institute of Technology. “If the blockchain platform was just a tool used by the ISO to process trades, this wouldn't be a problem. But if the idea is to replace the ISO, I don't think we really want to see the implications of a totally free and transparent market for electricity.”
Some might argue for using permissioned, or closed, blockchains as opposed to public, or open, blockchains. Permissioned blockchains limit who can contribute to the ledger and manage the data. ISOs need to be in charge of the electricity system; therefore, a permissioned blockchain would allow regulators to monitor inputs. In contrast, the trustless nature of a public blockchain is not practical for energy applications.
Transmission constraints are another hurdle, as a distribution system is not designed for two-way flows. Peer-to-peer trading is niche at the moment, but if transactions ramp up, utilities will need to interfere to maintain the system’s status quo.
This issue doesn’t arise when trading Bitcoin or Ethereum, as cryptocurrencies need not rely on transmission lines and physical constraints. Electricity differs from finance in that it is more than a market: it is a system complete with physical infrastructure and the limitations that come with it. Though transactive energy using blockchain is an attractive idea, most companies (including the Energy Web Foundation, a global non-profit focused on accelerating blockchain technology) recognize it is many years away from becoming a reality.
Finally, electrons or carbon dioxide molecules need to be measured for blockchain to be practical in the energy space. Trust must be present in the measurement, and this fact alone goes against the self-governing nature of a blockchain. EWF has included a “regulator node” to allow regulators real-time access to their ledger, but they are by no means comprehensive of all aspiring blockchain initiatives. Third parties known as “oracles” in the blockchain world help address governance, but they are not perfect.
The need to trust feeds and inputs remains a problem that the blockchain community is trying to address. Prediction market platforms such as Augur and Gnosis are trying to resolve the issue without relying on a trusted third-party.
Where blockchain scales first
Despite the obstacles, blockchain’s future remains promising. Many companies are counting on the REC market as the use case to commercialize first.
RECs, tradable energy commodities that serve as proof for one megawatt-hour of electricity generated from a renewable energy resource, are currently intangible to the average person and expensive for energy companies to manage. Monitoring RECs using blockchain has proven alluring for small and large companies alike.
EWF’s first application, “EW Origin,” is able to track renewable energy ownership including location, time, source type, and carbon dioxide emissions. LO3 Energy essentially traded RECs as their first peer-to-peer pilots. Newcomer Volt Markets uses REC issuance as its primary application. And Fortune 500 NRG Energy is exploring a proof-of-concept for blockchain RECs with NASDAQ as a technology partner, aiming to demonstrate how the REC process chain efficiency can be improved and automated through distributed ledger technology. REC marketplace data can be streamlined into one system-of-record to enable the growth of renewable energy demand through corporate sustainability goals.
NRG is also investigating how blockchain can bring traceability to the natural gas market and create incentives for responsibly produced gas. Rather than using certifications, one could use blockchain to purchase natural gas that was tagged with environmental attributes from the time it was produced. Blockchain allows users to trace those attributes along the entire supply chain and target gas supplies that avoid methane leakage, water use, and local community impacts. NRG is not alone: pilots using blockchain are underway across multiple supply chains, including efforts to address food safety concerns and to make the entire cobalt supply chain conflict-free.
Many players want a part in the blockchain energy revolution. But projects cannot be dependent on unrealistic changes in the current system for their business models to be successful.
Technology continues to mature, and there is no denying that blockchain will play an increasingly important role in electricity markets and grid innovation. While widespread adoption of transactive blockchain services might remain years away, use cases for RECs and supply chain are close at hand.
But, for now, don’t expect blockchain to overhaul our existing electricity system overnight.