Market view: Move over, Bitcoin

James Basden and Tim Wright look at the part that ‘distributed ledgers’ can play in facilitating the trading of electricity between consumers and utilities.

The pace of growth of distributed energy resources – solar generation, demand-side response, smart meters and storage – is highlighted as a key driver in National Grid’s 2016 edition of Future Energy Scenarios. The company’s “consumer power” profile has 89GW (half of all capacity being connected at the local level by 2040) providing 40 per cent of output. This represents a world where there are tens of millions of devices in the energy system, connected through the Internet of Things (IoT) with “prosumers” actively involved in both producing and consuming energy.

Currently, prosumers need to interact with the market through aggregators or contracts with a licensed energy supplier. To realise the value of distributed generation, these prosumers and other participants in the sharing economy will need direct access to the market. In such a system, prosumers will be able to sell their micro-generation capacity to their neighbours, donate it to a charity or offer it up to the market.

The UK’s complex balancing codes and settlement systems, however, prohibit this level of peer-to-peer trading. Capturing the full potential of distributed generation therefore requires a new approach that creates a distributed system for a distributed world – and incumbent industry players may be best placed to drive this forward.

The answer may be found in the fast-­moving world of distributed ledgers, otherwise known as blockchain – the underlying technology that supports Bitcoin transactions, which is now considered an alternative to centralised ledgers in financial services.

These technologies allow a move from a model of a single trusted third party providing a centralised ledger of all transactions (for instance, Elexon) to one where industry players can maintain their own distributed version of the ledger. Also, each ledger is verified to be identical to the ledgers held by other participants through mutual consensus without the need for a central authority.

Integrity is therefore maintained through the underlying blockchain technology that provides the encryption and algorithms that append transactions to the existing chain of transaction blocks and provide an immutable and permanent record of the transaction.

The potential applications and benefits of this approach in utilities include streamlined industry flows and reduced transaction costs and true peer-to-peer trading, including embedded smart contracts and trusted communications between assets, allowing networks to operate autonomously.

The financial services industry is investing heavily in exploring the potential of blockchain technologies to reduce costs, speed up transactions and reduce fraud. Forty-two major banks, including JP Morgan, UBS and Citi, have joined the R3 CEV consortium to develop use cases and standards for the technology. Other industries such as insurance, healthcare and manufacturing are following in adoption of the technology, with even the UK government’s chief scientist publishing a report earlier this year on how the technology could transform the delivery of public services and boost productivity.

The utilities industry has been slower on the uptake, with start-ups such as Grid Singularity and lo3energy.com developing proof of concepts. Siemens has also targeted investments in blockchain technologies as part of their next47 innovation strategy backed by €1 billion of funding.

As with all new technologies, the hype and excitement often hides the significant barriers that need to be overcome. The technology is still to be proven scalable, robust and efficient and common industry standards will need to be established.

In financial services, Oliver Wyman has identified a transition path where niche applications will become commonplace within the next two years, with widespread adoption by 2030. In utilities, we believe start-ups and industry outsiders, in particular the fintech firms, will be the prime drivers in developing solutions for the sector over the next five years. Their focus will be on applications that operate outside the sphere of regulatory influence such as behind-the-meter solutions and asset-to-asset services.

Traditional utilities should encourage this innovation. Competitive advantage can be achieved if they learn from it and develop new partnerships to understand the potential, risks and challenges of implementing distributed ledgers. Given the regulatory barriers that need to be overcome, established utilities could be best placed to make the bold moves and place the strategic bets in new blockchain-based technologies. If they do this, centralised incumbents may well prove to be the disrupters who facilitate a truly distributed energy system.