Blockchain is a software technology that promises to enable the mass market trading of energy, but how close are we to a financially viable, as well as technically feasible, solution?
Over the past few years, there has been a lot of talk in the energy sector about how blockchain will revolutionise and disrupt the industry status quo.
For some, blockchain, which is based on the principle of a single distributed ledger or database in which all transactions are recorded securely and publicly, is the key to unlocking a more decentralised grid with hundreds of thousands of households generating and selling their own electricity.
But to the doubters, blockchain remains something of an overhyped enigma, with plenty of unanswered questions around whether it can securely deliver at scale and at cost.
Demonstrating blockchain’s power
At present, there are a number of blockchain tests and trials going on in the energy sector. The largest of these is orchestrated by the Energy Web Foundation (EWF), a not-for-profit organisation supported by a large cross-section of European utilities and technology companies, which aims to accelerate the creation of a common platform for running energy industry blockchain applications at scale.
EWF’s test network was launched last year and in October an update was launched to allow it to handle 750 transactions a second.
“In about a year’s time, we intend to release the genesis block of the chain, which will mean it will be a living, thriving system on its own,” says the foundation’s principal and co-founder, Jesse Morris.
But while EWF is working to create a shared industry foundation for blockchain applications, individual companies are not hanging back with pilots to develop their own bespoke blockchain solutions.
Across the UK, utilities are launching blockchain experiments and pilot schemes left, right and centre. A significant proportion of such projects are targeted at enabling peer-to-peer trading, which many believe is the realm in which blockchain can offer the biggest dividends.
Earlier this month, Centrica announced it was joining forces with the US company LO3, which is also behind the Brooklyn Microgrid platform, to look at how blockchain can be used to buy and sell energy in the UK. As part of the trial, a local energy market among 200 businesses and homes will be tested in Cornwall, using LO3’s Exergy platform.
And in April, the tech start-up Verv announced it had completed the first peer-to-peer trade on its test blockchain platform on Hackney’s Bannister housing estate.
Samuel Pachoud, a senior manager at EY, says blockchain’s ability to eliminate the substantial costs involved in trading electricity is what makes it so promising as a peer-to-peer market enabler.
Currently, a high price to play makes it “highly impractical” for homeowners to take control of their own energy trading. But with blockchain, such barriers could be significantly reduced, freeing up the potential for individuals to manage trading and payments for small-scale generators, battery storage systems and electric vehicles, all of which could help to balance supply and demand in real time, as well as empowering so-called prosumers.
“We have a very cumbersome and complex value chain with different players, retailers, settling companies and trading platforms,” Pachoud tells Utility Week. “Blockchain can simplify the relationship between the provider and the user. Everyone will be able to participate in the market and not just be able to buy and sell power with your neighbour, but with anyone in the market.”
PwC’s energy blockchain lead for the UK and partner Steve Batt says the technology also has the potential to speed up and increase the accuracy of energy settlements, because “it offers greater transparency and accuracy of data between counterparties and industry participants”.
“We have a simple test that we use with clients,” says Batt. “We say there are six things to check and you need to have four of them in order for blockchain potentially to be a solution to your problem.
“Blockchain can work for you if there are multiple parties that share data; you need to validate data; there needs to be trust among people; there are intermediaries that add to complexity and taking them out might reduce cost and complexity; there are time-sensitive interactions and people have to interact with each other quite frequently.
“And when I look at those characteristics of where blockchain can help, I see many instances within the energy industry where that is true,” he says.
Paul Massara, who was a former chief executive at Npower and is now chief executive at Electron, which has developed its own flexible trading platform, says blockchain is also a way of speeding up the energy supplier switching process for customers.
“Instead of switching in 23 days and you have issues around data reconciliation, bill numbers and addresses, it can all be encoded in a blockchain, which can allow you to switch in 21 seconds,” Massara tells Utility Week.
“That clearly removes a lot of hassle around switching and opens up new business models. And once you have that chain of information, you can add specific data. It might be that a customer is on the priority services register and therefore you can switch that as well, so it’s a seamless transfer of information, which is all encoded and encrypted.”
Reality check
But there are those who question whether blockchain can deliver on all the hype that surrounds it.
The chief economist at Faraday Grid, Richard Dowling describes it as a “hammer looking for nails to hit”.
“Normally, a problem emerges and someone tries to create a technology to fix it, but at the moment blockchain is a technology looking for a problem,” Dowling comments.
“It’s the Wild West in terms of experimenting about where it can work.”
Dowling says there are three big issues with implementing blockchain in energy systems: cost, scalability, and governance.
In particular, he says, the cost of an energy transaction on most blockchain systems is currently around three to five US dollars and getting that cost down will be a “huge challenge”.
Dowling says: “Blockchain makes a lot of sense if you are dealing with a high value commodity, like money. If I am doing millions of dollars’ worth of transactions, then I am prepared to spend half of one per cent to know the transactions are really secure. But if I am only trading a few electrons, which is a low-value commodity, why would I want to have a huge transactional cost?”
“The original blockchain could only handle three to five transactions per second,” adds Dowling. “Most of the blockchain community have moved to the Ethereum public blockchain, which can handle 16 to 30 transactions a second, but that’s still nowhere near enough.
“In energy systems, you need to handle thousands of transactions a second. The Energy Web Foundation’s best simulation is around 750 transactions. Visa can do 2,000 transactions a second and they do it at almost no cost and that’s the metrics you are competing against.”
Morris agrees that scalability is an issue blockchain developers have to address. “The big question of the past year has been scalability, scalability and scalability,” he admits.
“ transactions-per-second is actually the wrong way to think about how blockchain should work in energy, because not every transaction is equal. A blockchain is often talked about as a decentralised ledger, but really it’s a decentralised virtual machine, capable of doing whatever you tell it to do.
“For example, if I sell you a certificate representing the green energy from my house that I did not use, that’s a pretty simple transaction. But on the other hand, if I’m using a blockchain to dispatch a battery and conduct multi-party settlement contingent on prices from a couple of different endpoints, that’s a more complicated transaction. That would require more bandwidth of the decentralised computer.”
Another issue is whether all the players in the energy sector can co-operate and develop a common approach, but Shell’s blockchain lead, Arno Laeven says the “buzz” around blockchain has certainly helped get people round the table.
“Nobody has a final answer yet to what it will look like and therefore everyone understands that we have to work together to find these answers. With the Energy Web Foundation, we are very lucky that two very prominent parties took this to heart – the Rocky Mountain Institute and Grid Singularity – and are working on this,” explains Laeven.
“They have reached a tipping point, whereby you see everyone is going in the direction of the Energy Web Foundation. It does not mean they will be the next institution. The Energy Web Foundation is really only there to build the infrastructure layer. Everything else and all the applications on top of it will be built individually, either by companies or start-ups. This is about laying down the infrastructure layer for blockchain.”
Batt adds that PwC did a joint paper with the World Energy Council on the issue of blockchain and energy, which included a survey on the impact it might have on the industry. “More than 90 per cent said they were confident blockchain would disrupt the industry in some shape or form, and respondents were also confident it would speed up the transformation towards potential future models,” he adds.
“The interesting thing for me is that over 80 per cent of people said they think it will happen in the next five years, some even said within three years. The technology is steadily maturing. We have numerous pilots proving that business scenarios work and this growing belief among people that blockchain will play a key role going forward.”
With several pilot projects running both in the UK and abroad, the next 18 months will be crunch time for many of the projects in development. All eyes will be on whether blockchain applications can deliver on scalability, security and cost. If, as been claimed, blockchain can deliver a more flexible and secure grid, improved data management and new business models then the doubters will be silenced.
Blockchain and the water sector
The vast majority of existing pilot schemes and innovation projects trailing how blockchain can help solve utility industry challenges are taking pace in the energy sector. But as appreciation of the disruptive potential of blockchain grows and the technology matures, the water sector too is getting interested.
In 2017, a Digital Strategy Committee was established by the non-domestic water retail market operator MOSL to ensure the full potential of emerging technologies was being recognised and harnessed by participants.
Blockchain rapidly became a key focal point for the committee, which is chaired by Bristol Water’s Nick Rutherford. At an exclusive industry workshop on 18 June – Understanding Blockchain for UK Utilities – Rutherford will share the committee’s early thoughts on the highest value use cases for blockchain in the competitive water sector and how these will be tested.
This workshop is part of an ongoing schedule of events run by Utility Week and Wipro for the Technology and Innovation Council, a pan-utility community of technology and innovation leaders.
To find out more about the council or enquire about attendance at its events, please contact Elaine Munn: elainemunn@fav-house.com
Expert comment
The significance of blockchain
Wipro’s Ravindra Balija says the technology will be a driver of disruption in the energy industry.
As a technology, blockchain solves the problem of ensuring data integrity in a distributed peer-to-peer system, irrespective of any technical failures or malicious intent in the network.
Another way to think about it is that blockchain or DLT ensures data integrity of a shared data store, where multiple parties have the permission to write to the data store, all of whom cannot be guaranteed to exhibit consistent agreed behaviour.
At a business level, trading parties engage a trusted intermediary who keeps the record of the terms and conditions of the trade as well as arbitrating discrepancies, if any, among the trading parties. Blockchain enables such record keeping while preventing discrepancies.
It also provides capabilities to embark on business process re-engineering across the value chain that spans organisation boundaries/businesses, such that the entire ecosystem can reap the benefits.
The current energy system is dominated by a handful of large participants – generators who sell energy through bilateral and wholesale trades to the retailers, who in turn sell it to the consumers, with energy and financial transactions flowing one way. The grid operators manage the flow of electrons by keeping the system in balance.
Effective functioning of the energy value chain requires accurate and timely information hand-offs among the energy companies to deliver energy to the customers, bill them for their consumption and prevent any blackouts by keeping the system in balance.
With growth in renewables, many solar installations and windfarms are being connected to the grid. Similarly, households and commercial businesses are installing solar PV on rooftops, delivering surplus energy back to the grid, resulting in a variation in energy supplied to the grid owing to the weather conditions.
Charging stations are being commissioned and connected to grid infrastructure to serve the needs to electric vehicle (EV) users. Where, when and how many charging events occur depends upon the movement patterns of EV users, which increases the variation in the energy consumed from the grid.
Variations in supply and demand results in unpredictable load patterns and potentially an increase in the frequency of system imbalances. Increased deployment of renewables and electrification of transport increases the number of market participants, the bi-directional flow of energy and the number of financial transactions. To address this will mean increases in the volume and complexity of the trades, while making settlements complex. This will also increase the volume and frequency of information hand-offs.
Blockchain, along with the Internet of Things, enables the digitalisation of energy, lowers the barriers of entry to more market participants, enables trading among multiple participants, helps govern the marketplace, reduces transaction costs and simplifies the settlement processes.
Information hand-offs are reduced because market participants operate from common and single information source. Owing to its decentralised nature, it enhances the agility of those looking to introduce new products and services as the energy market evolves. This will in turn drive greater adoption of renewable resources, thereby accelerating decarbonisation
Ravindra Balija, general manager of digital architecture and technologies for utilities, Wipro