In Part 1 of this series we introduced the concept of a coming revolution in the electricity sector and identified three technologies that will be taking center stage. In this post we take a closer look at the third of these technologies - Blockchain.

Background

In the world of electricity services the two chief operational roles are: -
Product delivery: The act of generating and delivering electrons to consumers
​Commercial settlement: The act of recording production and usage of those electrons and subsequently billing consumers and reimbursing the organisation(s) responsible for the product.

These activities use separate infrastructure and support. In Part 1 we discussed how the means of product delivery is evolving from centralised to distributed and from dumb to intelligent, but how will the means of commercial settlement keep pace?

In the centralised & regulated grid, commercial settlement was not complex because only one organisation was typically responsible for generating and delivering all electricity, so all revenue from metered consumers was collected by that organisation. As the quantity and diversity of entities involved in electricity services markets grows, the complexities around tracking and settling all of the transactions grows exponentially in relation.

Blockchain is a technology that has the potential to enable low-cost & secure transactional tracking & settlement in this complex environment. This article looks at how it could achieve this and which players are at the forefront of development.

A Quick(ish) Blockchain Primer

Simpy put, a blockchain is a decentralised ledger (or database) which enables trustless transactions between participants.

The word 'trustless' needs qualification because it gets used with the expectation of inherent recognition of the groundbreaking nature of its intended meaning. Not to mention that at face value, it sounds flat out undesirable! So let me explain:

The trust in a third party that is normally required before customers will allow it to take care of their private data, money or legal transactions does not come easily.

Can trust in cryptographic algorithms emulate our trust in institutions and each other?

This trust is traditionally established over years or decades through branding, consistent track record, relationship and authority. The resources that organisations put into this can be enormous, but in return it can result in long term business success. Once established, these organisations can become behemoths in their industry, employing thousands of staff and operating and maintaining global IT infrastructure and office space. But in practice these organisations are little more than agents for transactions. Think banks in the finance world, estate agents in property and utilities or retailers in electricity.

On a blockchain, this traditional method for establishment of trust is negated because it is possible for a stronger level of trust to be emulated almost instantaneously. This is done through the ledger of transactions being held by multiple unbiased participants across the internet and its contents agreed through a highly secure consensus process. The validity and security of transactions are ensured through strong cryptography, which are effectively impossible to hack.

This bullet-proof implementation of distributed consensus was the groundbreaking discovery that led to the first widely adopted public blockchain - Bitcoin - a peer-to-peer mechanism for value transfer that eliminated the need for a bank or central payments platform.

Beyond the relatively simple application of peer-to-peer value transfer that Bitcoin represents, smart contracts were developed, which are embedded programs that eventually enable the core blockchain principles to apply to practically any application.

Smart contracts turned blockchains into agreement machines. Ethereum was the first implementation of this type, while platforms like Neo and Waves are building on this underlying premise.

The development of the smart contract potentially allows blockchain to replace the established middle-man and enable direct peer-to-peer relationships at a fraction of the cost. Blockchain also benefits from increased resiliency due to the elimination of single points of failure and at the same time is less susceptible to fraud and corruption.

While blockchain is in its early days of development and is certainly not free of issues, it's fundamental characteristics offer enormous potential and electricity just so happens to be one of the major applications that can benefit.

Applications for Blockchain in Electricity Markets

Building on this understanding of blockchain we can look at three of the immediate applications where the technology is being used to develop enhanced services in the electricity industry. In 2017 energy blockchain startups raised US$324 million and that was just the beginning.

1. Electricity Retailer

In deregulated markets, electricity retailers buy at wholesale prices and then sell directly to consumers. Retailers are therefore responsible for bulk-buying electricity and then for metering and billing the customers they resell it to. So they take care of commercial settlement but are not responsible for product delivery.

In deregulated markets like Singapore and California, residential consumers pay on average around double the wholesale market price for a kWh of electricity. But if they are paying the retailer two times the price that the retailer buys it for, what does that margin cover?

Chart comparing Singapore's wholesale electricity price (USEP) in blue, with the prevailing retail price, in red, over the past 4 years. Sources: Energy Market Authority & Singapore Power Services

Surprisingly, one of the costs of an electricity retailer is credit management. By providing energy on credit and billing consumers in arrears, they must take delinquent customers into account and then add the expected lost revenue (plus a buffer) into the rest of their customers’ bills. This means customers who pay on time are subsidizing delinquent and non-paying customers.

A second big cost that retailers incur is that from marketing. After all, when you are selling a commodity there are only so many ways to differentiate yourself from competitors. Brand becomes a key component in achieving sales volume.

And third up is the cost of administering customers and the cost of the associated billing system assets.

So to summarise, electricity consumers are unwittingly paying for:
a) the bad customers of the retailer,
b) the marketing costs to attract those bad customers and
c) the cost the retailer incurs for them to find out how much you owe them.

This seems like a bit of a bad deal! But how can blockchain transcend these issues?

Blockchain technology promises to be able to replace the role and cost burden of traditional retailers by allowing autonomous interactions between consumers and the wholesale market.

Grid+ in the USA is championing this business model by developing a smart device that sits at the consumer site and transacts secure, real-time payments on the wholesale market through the public Ethereum network. The device leverages artificial intelligence to understand and predict energy usage that, when paired with real-time pricing data, enables smart decisions to be made on how to purchase energy and manage consumption in the most cost-effective way.

Because all electricity purchases are made in advance, there are no credit management costs. And because all transactions are automatically recorded on a secure public blockchain, there is essentially no administrative or IT system overhead required. Grid+ envisage that about 70% of the cost mark-up that traditional retailers add to the price, will be eliminated.

There are challenges though. With 15 minute wholesale market windows, each consumer requires 96 transactions per day. Right now, the capacity limits and transaction costs of the Ethereum network would be prohibitive for a solution like this. Therefore the roll out of this solution will depend heavily on successfully implementing Ethereum scaling solutions based on side chains - which Grid+ are actively involved in developing.

2. Peer-to-Peer Electricity Trading & Micro grids

The logical evolution of the retailer application would be to extend the blockchain solution to enable not just proxy access to the wholesale market but also to allow the peer-to-peer trading of electricity services between all participants in the network, whether they be retailers, prosumers or autonomous distributed energy resources (DERs).

When the data for market pricing and the state of all DERs & loads, is integrated within a single blockchain system, it would allow for the autonomous and intelligent operation of the grid - with the aim to holistically optimise efficiency, price, reliability and asset utilisation. In this way the blockchain would become a transactional tracking & settlement platform for tomorrows electricity grid.

Developing countries are set to benefit significantly from the initial stages of this development journey. In many developing countries - Indonesia and the Philippines being prime examples -there is not one national infrastructure supplying electricity to the entire population, but rather hundreds of disparate 'micro grids' powered by inefficient diesel generators.

A remote micro grid test bed on Singapore's Semakau Island with various DERs including wind, solar, tidal power and energy storage

Because of the inherent complexity of blockchain-enabled transactive grids, it makes sense that the initial roll-ours will be done in smaller scale projects like these micro grids. Another benefit that this approach would bring is that it will enable grid planners in developing countries to entirely skip the step that developed nations took with expansive centralised systems. Instead they could fast forward directly to a distributed grid model.

Companies such as Power Ledger in Australia and LO3 Energy in USA are at the forefront of developing technology initially aimed at implementation of this type of blockchain-enabled micro grids.

3. Crowd-funded Renewable Energy Projects

This is a business model that involves the sale of a renewable energy asset to the public through issuance of tokens on the blockchain. This token model will allocate ownership of the 'Autonomous Asset' and distribute income proportional to the token holdings of each individual, in a similar way that traditional investments in publicly-listed company securities do so through dividends.

Invest in a piece of wind farm or solar power plant using crypto-currency and receive returns in crypto-currency for every kWh generated by your 'fragment' of the 'Autonomous Asset'

Traditionally, investments into large power projects have been restricted to institutions and accredited companies or individuals, so this model can be seen as a significant step forward in the democratisation of grid asset ownership and could significantly bolster the investment in and growth of the renewable energy market moving forward.

WePower - a company that recently completed its initial coin offering (ICO) in Europe, is among the front runners developing this business model.

To Summarise

It is debatable whether blockchain has yet had any meaningful impact on the world beyond the democratisation of capital through the ICO phenomenon. But we have to remember that we are possibly at the same stage of technology development that the internet was in the early 1990s, when many people were also skeptical of the ideas coming from it's early adopters. What is clear is that the potential of blockchain is enormous and in theory, its possible benefits for the electricity sector are multifaceted.

Beyond the three areas discussed in this piece, there are a host of other areas of development ongoing within the blockchain for electricity ecosystem. These include much work around electric vehicle charging infrastructure, decentralised energy exchanges, renewable energy credits (REC) trading and electricity distribution management solutions. The scope is almost limitless, but we are very much at the genesis stage in this exciting space.

Previous Posts in this Series

See Part 1 of this series
See Part 2 of this series
See Part 3 of this series