Don’t panic about Blockchain

Blockchain technology could fundamentally change the energy industry. Robert Schwarz asks how utilities are responding to the phenomenon and how they should prepare for the change.

Blockchain is a distributed, digital transaction technology to securely store data and execute smart contracts in peer-to-peer networks. The story of blockchain technology has the potential to become an Oscar-winning screenplay. What should interest those in the energy industry is the disruptive potential of blockchains.

Blockchain best refers to so-called distributed ledgers, which store peer-to-peer financial and business transactions immutably in a distributed network. More critically, they legitimise and execute them in real time. The ledger is one of the components of each block, which when combined forms a chain. Blockchains have disruptive potential because, among other things, they ultimately make any intermediaries (banks, financial institutions, utilities, exchanges, distributors, publishers and record companies, among others) superfluous.

If your own identity and that of other entities (people, objects) cannot be called into question and interaction with each other can only take place in a pre-regulated framework, this creates a “chain” of security and trust.

Blockchain technology became relevant for the energy sector at the beginning of 2016 with an experiment in Brooklyn, New York – Brooklyn Microgrid. Owners of PV systems sold their power in the neighbourhood without a utility, using the Ethereum blockchain. Barely six months later, Siemens announced its collaboration with the local start-up responsible for the project, Lo3 Energy, to research blockchain microgrids.

While it is still much too soon to speak of a triumph, the technology has the potential to radically change the energy industry. It provides the opportunity for new or more efficient business models, but also means entirely new companies may enter the market.
Although utilities such as Innogy, Fortum and Vattenfall are working hard to test blockchain technology, conversing with programmers and start-ups reveals vague statements rather than concrete information about the prospects of sustainable blockchain-based business models and their impact on utilities.

Energy suppliers could, for example, evolve towards becoming application or system providers, enabling a decentralised power grid and compensating for lost revenues in the energy business with licensing and usage fees.

Conversely, and following the example of more than 70 banks and financial institutions, utilities could attempt to own the technology and stay in the race through community chains — a kind of consortium.

Although utilities should actively engage with blockchain technology, there is no reason to be alarmed. The technology is still very young for use in the energy sector. Blockchain technologies work wherever transaction costs exceed the transaction value.

However, both the related opportunities and risks are already apparent. They should be examined with respect to each company’s position and strategy to derive strategic options. For most companies, the fast-follower strategy is possibly the most appropriate, but future-proofing the business is even more important.

In truth, blockchain technology barely justifies the current hype. Blockchains are not a panacea, but should rather be seen by utilities as one of many technologies that could form the basis of next-generation service infrastructure. Many digital services are already possible today without blockchains.

Research and use would clarify the limitations of the technology. For example, limited rate of transactions, long response times between connected network peers, or the ever-growing volume of data. Currently, a complete copy of the Bitcoin blockchain weighs in at some 100GB. A look ahead promises a fully automated future. With decentralised, autonomous organisations and artificial intelligence, any transaction between machines can be performed, including the roles of asset management and property.

The structural requirements of the regulated energy market are also barriers to blockchain-based business models, meaning the technology’s value proposition cannot be fully developed today. Nevertheless, topics such as digitisation and robotics are already on the agenda in the EU. Legal experts expect the first decisions this year. There is a recommendation by the European Parliament to the European Commission about new civil law rules for robots. Also, the role of the prosumer could be strengthened  to change the nature of the industry’s value chains.

There is no doubt that blockchain technology has the potential to completely alter the energy landscape, not least because of its ability to cut out the middleman. However, there is no need for utilities to panic just yet. Where the technology might go is still far from apparent and, more importantly, there is plenty of scope for utilities, in a similar way to financial institutions, to commandeer the technology. Suffering? Fighting for survival? No, simply necessary developments.