A revolution in the energy industry is coming. Blockchain is an open and distributed ledger system that can create and update records on an encrypted database that is available to all users on a network. No longer just a dream by producers of renewable wind and solar energy—the big legacy producers of traditional fossil-fuel-based energy are scrambling to be a part of transaction networks driven by Blockchain. How does it work and what will it mean? Here is an example:
You are on a trip. You got an early start and have decided to stop for coffee. You pull off at the next exit and drive up to a charging station. After plugging in your electric car, you head into the café for that coffee. Meanwhile, your car has communicated with the charging station and has told it where you are going. Together, they have decided that you will need a full battery for your journey and the fast charger pumps 10 kilowatt-hours (kWh) of electricity into your car while you are waiting for your mocha latte to cool. The electric charging station automatically debits 10 kWh in tokens from your account.
Those 10 kWh worth of tokens came from the profits generated by your investment in a Spanish solar power facility that just came online last year. The investment in the solar facility came partly from the profit you made from sale of electricity from a giant 100 MWh lithium ion battery back to the grid in Australia last week, and partly from several hundred kilowatt-hours of extra energy sold by the rooftop solar array on the your home three months ago. Some of that extra home energy also went to purchasing future energy from a wind farm that is under construction in Estonia. It’s a facility that would not be possible without the financing provided by the investment in future renewable energy by you and others.
According to enthusiast for the technology (and there are many), all of this will be possible in the near future thanks to Blockchain. If you have heard of Blockchain it is likely because of the cryptocurrency called Bitcoin. The alternative payment system started in 2009 and did away with a central authority that issued currency, transferred asset ownership, and confirmed transactions. Bitcoin used the open and distributed ledger of Blockchain as a way to create and update records. Instead of the transactions recorded by a central bank, Blockchain places records into an encrypted database that is available to all users on a network.
In Blockchain, every transaction is linked to the transaction that came before it (which is where the term “chain” comes from) and records cannot be altered, only added to. Each node in the network stores and forwards ledger information to all of the other nodes, making it nearly impossible to change or corrupt the ledger data.
So, back to our stop at the café. What prevents this seamless transition of renewable energy credits and wealth from happening today is the presence of intermediaries like banks, accountants, lawyers, and a host government regulations regarding energy and commerce. This is the promise of Blockchain—it has the potential to cut through the infrastructure of intermediaries by allowing organizations, machines, and companies to freely interact on the Internet and with the Internet of Things (IoT) through a secure, yet open and distributed, ledger without the layers of regulation and management that add cost and slow the process of making transactions.
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| Regulation of the U.S. energy system varies state by state (Image source: Customer First Renewables) |
Electricity systems are centralized and highly regulated. This is especially evident with renewable energy. Sam Hartnett, an associate at the Rocky Mountain Institute (RMI) explains the problem: “Markets today within the U.S. and elsewhere tend to vary with their structure and their regulatory oversight. They typically are focused on pretty large scale buyers and sellers issuing certificates in blocks of megawatt-hours.
"You have different authorities and intermediaries in that process where you have to have somebody responsible for registering those assets, verifying that they are in fact renewable, measuring their production, creating those certificates. A lot of buyers are not dealing directly with specific generation assets rather they are going through brokers or intermediaries. There are different authorities that are responsible for reporting and verification and preventing things like double-counting and making sure that once you claim a credit that it is retired and no longer available to be traded or sold or claimed against.” This puts the homeowner with a roof-top solar array at a disadvantage when it comes to selling excess solar energy to a distribution grid or in a peer-to-peer transaction with a neighbor, Hartnett told Design News.
The regulatory environment also depends which state you live in. In regulated markets, vertically integrated monopoly energy utilities control all aspects of the market, with oversight from a public regulator. In a deregulated market, power plants, transmission lines, and others sell electricity in a wholesale market and retail energy supplies purchase energy and resell it to consumers. Deregulated markets allow competition from a variety of independent power producers.
Work Under Way
RMI is one of the co-founders of the Energy Web Foundation (EWF), a standalone non-profit incorporated in Switzerland that formally kicked off in early 2017. It was co-founded with a Blockchain company called Grid Singularity.
“We think that Blockchain is a really promising technology to enable a lot of the ideas that RMI has had for a long time about distributed and largely renewable energy systems,” said RMI's Harnett. “In the near term we think there are a lot of really specific applications for the technology that we think have value immediately for existing markets. We have partnered with now over 20 utilities, grid operators, and other energy companies from around the world to explore some of the most promising use cases for Blockchain and then develop applications and commercial projects to leverage the technology to either solve existing challenges in current business models or unlock new opportunities for those energy companies,” he added.
Design News reached out to the IHS Markit office in Paris where studies of Blockchain networks for the energy sector have been underway for more than a year. “We are looking worldwide, but most of the applications are in Europe, in the U.S., and also in Australia,” said IHS Markit Senior Associate Gael Hankus. “All the issues are around harmonizing the regulations between the countries in Europe and the states in the U.S. in order to for Blockchain to really become a game-changer in peer-to-peer exchange of electrons or energy in general,” said Hankus. “Regulation is really something that is slowing down the expansion of Blockchain or the scale up of the technology at a much larger scale,” he added.
Proving Validity?
Blockchains hold significant promise for the energy sector. “The value is being able to set up a fully decentralized, cryptographically-secure, computing environment to run applications and manage data, and enable all types of parties who don’t know or trust each other to access that data. You have the inherent resilience built into the network where there is no single point of failure, no single attack vector,” said RMI’s Hartnett.
Validating transactions that take place on Blockchain depends upon what type of network has been set up. Public Blockchains allow anyone with a computer (“a miner”) to validate a transaction. However, the computer that validates the transaction has to solve a series of complex mathematical problems, which can take vast amounts of computing power and consume huge amounts of electrical energy. Additional time and electrical energy is also required for other computers to check the solution before the transaction can be validated, which leads to problems of scalability. This type of validation is called “Proof of Work” and is used by cryptocurrencies such as Bitcoin. The extraordinary energy consumption required to “mine” for Bitcoins by solving complex mathematical algorithms and use of Bitcoin for illegal purposes has demonstrated some of the issues associated with public Blockchain networks.
Private Blockchain networks can also be set up, with the participants, or nodes, all known and established and capable of validating transactions. This requires much less computing power and energy consumption and is the right solution for a limited number of participants who are all known to one another. The validation on a private network is typically through “Proof of Authority” as the private member nodes are expected to keep the Blockchain secure.
A Permission Blockchain often does its validation by Proof of Authority, with a select number of authorizers who can validate transactions. The authorizers can be chosen by “Proof of Stake” where token can be purchased which indicate an investment in the Blockchain. Energy networks tend to be Permission Blockchains because of their secure nature and low energy requirements for validation. The Energy Web Foundation (EWF) is a Permission Blockchain that uses Proof of Authority—only some nodes have the ability to authenticate the transaction. You can be a EWF-user and still participate in energy transactions while other authorized nodes will do the validation for a small transaction fee.
Energy Enabler
The renewable energy sector stands to benefit the most from the use of Blockchain networks. “Today, for now, Blockchain is the most suitable technology to enable this increase in participation of end users or consumers in the supply of distributed generation,” explained El Mehdi Basslim, an associate in the IHS Markit Paris office. “The reason Blockchain can enable this is the lowering of transaction price. Since the Blockchain doesn’t require the intervention of third party to handle the financial settlement between the purchase elements, the transaction costs are low enough to enable the trading of small amounts of energy between the participants,” Basslim told Design News.
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| The Hornsdale Power Reserve in Australia uses a huge lithium ion battery for grid resilience and is the sort of facility that would be part of a Blockchain energy network (Image source: Tesla) |
“Blockchain is an enabler and it can facilitate the integration of distributed generation on the grid. Blockchain is not an end onto itself. It clearly needs to rely on either legislation changes or technology development such as IoT, or machine learning, or digitalization of the energy sector, in order to really change the way we produce, transport, and consume energy,” added IHS Markit’s Hankus.
There are a large number of ways in which Blockchain networks can be used to enhance the energy grid. “We started with a pretty long list of over 200 applications and through some of our engagements with our affiliates we narrowed that list down to four application domains for our initial focus,” said Harnett from RMI. “Those are Certificates of Origin, or renewable energy credits as they are more commonly called in the U.S., utility billing, and transactive energy, by which we mean distributed devices within a grid or network engaging in two-way communication making operational decisions based on value. We are also looking at electric vehicle charging and vehicle-to-grid as an area of focus.”
With RMI, EWF is building an open-source application that they are calling “Origin.” It is specifically going to be used for certificate issuing, trading, tracking on the chain. “We think it’s one of the first killer-apps for Blockchain, where you have a lot of different parties involved, needing access to a common set of facts, there is a lot of back-office functions and administrative burdens associated with the issuing, trading tracking and that adds a lot to the transaction costs. There is kind of a lower boundary, both as a buyer and a seller, as to what makes sense to participate in this market. So what we see is renewable procurement is really dominated by large companies today,” said Hartnett.
Peer-to-peer transactions, selling your excess solar energy electricity to your neighbor through your smart meter for example, is also a favored application for a Blockchain network that is expected to grow dramatically.
“Blockchain leverages all the technologies that we have today. Starting from the Internet of Things to machine learning, because it provides the ledger that can be easily connected to smart meters and everything can be stored on the same Blockchain and different players can have access to this data and also the flow of energy between the different participants,” said Basslim in Paris.
How soon will Blockchain have an effect on energy systems? Hartnett from RMI wants to go after low-hanging fruit: “You could envision in a year or two, all wholesale trades could take place on a Blockchain network.” After that, renewable energy certificates and other peer-to-peer energy transactions on a large scale should be possible. “Where we are with Blockchain is like looking at a cellphone in 1995 and thinking you know what cell phones are,” explains Hartnett. “This whole technology has really come into the consciousness or everyday people within the last year. This is only the beginning,” he said.
Senior Editor Kevin Clemens has been writing about energy, automotive, and transportation topics for more than 30 years. He has set several world land speed records on electric motorcycles that he built in his workshop.
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