Blockchain Energy Trading: What the Future Holds

Stuart Ravens of Navigant Research describes the future of blockchain energy trading in an interview with Kat Friedrich of the Clean Energy Finance Forum and Conservation Finance Network.

blockchain energy tradingIn Australia, Europe, and North America, energy companies are beginning to consider using blockchain technology for distributed-generation payments between small solar installations. A blockchain is a shared digital decentralized ledger that records transactions across a peer-to-peer network. Blockchain technology involves strong encryption.

It may take a couple years for this to grow in popularity, since utilities have been hesitant. If blockchain catches on, it could streamline small cash transfers between solar producers, helping distributed generation grow.

In the interview below, Stuart Ravens, principal research analyst at Navigant Research, described the worldwide outlook for blockchain as a tool for distributed generation financing by utilities. He coauthored a report, “Blockchain Enabled Distributed Energy Trading,” that explores a model for this market.

CEFF: For distributed-energy peer-to-peer power trading, would blockchain be used with an ordinary financial transaction rather than Bitcoin?

Ravens: That’s going to be investigated. In the report, I talk about a theoretical power token. I don’t think it will be Bitcoin. Bitcoin is popular with drug dealers. If your PC gets hacked and hijacked with a distributed denial of service attack, you pay in Bitcoin. It’s a preferred currency of criminals. Utilities, which are frequently government-owned, aren’t going to go with Bitcoin.

The reason I recommended a power token rather than the hard currency is that there are a number of things you can trade peer-to-peer using blockchain. It’s not just you selling me power from your rooftop solar. You could trade negawatts with a neighbor.

You might have subscribed to a critical peak pricing program. You want to keep your air conditioner on? Instead of paying extra for that money, get someone else to participate and reduce their power consumption. The utility gains because they are still able to shift their peak load. You gain because you don’t have to pay the usual rates. Your neighbor will gain because you’re paying them a little bit for compiling their consumption.

There’s potential uses for blockchain – at the moment, it’s really about buying power from small-scale generators. It’s going to be cents or a handful of dollars. Maybe you can sell them for hard currency or exchange them for different benefits.

I think power tokens can add to the service by adding different options instead of just currency.

CEFF: Is blockchain built on a specific software or type of database? If so, what is it?

Ravens: It’s called a distributed ledger. You distribute whatever the block’s recording. For Bitcoin, it’s stored on different users’ servers. There are different chains. One of them would be Ethereum.

I think smart contracts are the way to go for an energy blockchain, whether it’s run on Ethereum or not. There are a few cracks in Ethereum. I haven’t delved into that in too much detail.

With a smart contract, you move away from the requirement for a data miner. Smart contracts self-initiate and self-verify.

If we’ve got solar installed, we don’t want to have to wait for someone to come along to verify a transaction that says you can export power to sell it to someone else.

As a consumer, you want something that recognizes production’s exceeding consumption. “I’m going to be able to deliver X kWh over the next half hour, hour, or two hours; who wants to buy it?”

And then someone else participating in blockchain will have a contract that says, “I’m currently consuming power from the grid; I’ll buy it from you instead.”

Everything will have to be automated. You don’t want to have to do this on your smartphone every half hour when you’re working. Especially if all you’re going to make is a dollar.

Blockchain energy trading in distributed energy

CEFF: Why is blockchain advantageous for distributed-energy peer-to-peer power trading?

Ravens: Because it’s decentralized.

The big thing – you have to make this clear – is that it’s not going to replace absolutely everything. If you can quite comfortably do something with a database now, then you probably don’t need blockchain.

Where blockchain comes in is if you really need to reduce transaction costs or improve speed.

There are a couple benefits of blockchain. That’s why you see it disrupting the financial services industry at the moment.

The big area that I discuss is this peer-to-peer trading. If you try to manage that centrally and a utility says, “We’re going to allow consumers on our network to sell power to each other,” it then has to manage all of the whole infrastructure.

And again, where is the business case for the utility to do that if every single transaction is cents or a handful of dollars? That’s going to be a massive white elephant for them.

If you can distribute it, you’ve got a reliable, transparent trading network where trust is basically embedded. You can have legal oversight of those different contracts and the way they interact.

As soon as you set it up, you can just let it run and it will run itself. Blockchain takes away the requirement for a central market operator.

If you compare it to wholesale power, you have a settlement organization [for wholesale transactions, which is different]. They have to work out who’s dispatched what into the market and who’s bought what. Did those people deliver the power they promised they’d deliver? Did they consume the power they promised they’d deliver? Then the whole thing is settled.

Doing that for a generator with a 4-kW solar-power capacity on their roof, it’s just going to be so complex – and you’re talking about a few cents each time.

Why would you do that centrally? It makes no sense. You can distribute that using the blockchain.

This reduces massively the cost of administering [transactions]. There will be a capital expense for setting the blockchain up. And that’s going to be no mean fee.

But actually, when coming to the day to day running of it, once it’s up and running, it’s a lot cheaper than doing it centrally.

Utilities and blockchain energy trading

CEFF: Are there any issues you think may occur when the peer-to-peer power trading market uses blockchain?

Ravens: Let’s take a step back. There’s an awful lot of hype at the moment about blockchain.

We’ve definitely hit peak blockchain. From the other people I’ve been speaking with about the technology, you know, the buzz and the hype about blockchain at the moment has been about startups going to VCs and angel investors to get seed capital and then using some of that capital to raise awareness about blockchain, about the products they’re developing.

Really what we’re seeing right now is that both VCs and angel investors have more or less had enough of investing in blockchain. You have got to have a really compelling proposition for them. They can’t even seed investment into blockchain.

They’re expecting the whole blockchain industry to go quiet in 2017. We’re really at the start of this. It’s a typical cycle – the classic Gartner hype cycle – we’re going to hit the trough of disillusionment very soon.

And I’m talking about blockchain in general, not just the utilities industry. A number of companies are going to hit the wall where they fail to demonstrate that their products work.

Right at the moment, the individual companies have to demonstrate that they can code properly. And that’s now what we’re waiting for.

One thing that’s really going to have to get resolved is legal enforceability. If I commit to sell you x kWh, someone’s going to have to make sure I deliver that. What are the legal penalties if I don’t?

A big issue is utilities’ conservativism. They failed to jump on the blockchain bandwagon when it left the station. The train was leaving a station and a few utilities jumped on the back of it.

Billions have been spent on blockchain startups but most of it has focused on been in financial services. If the utilities industry had been less conservative and had thought about blockchain a couple years ago, there could have been far more startups now looking at blockchain specifically for the energy industry.

That’s kind of disappointing. It’s not surprising given the utilities industry is so innately conservative. It’s conservative for good reason; I like it when my lights work. I don’t like it when they go out. So it’s good to see the industry is conservative. But it’s disappointing when it comes to a new technology when a lot of the development capital is going into other industries.

CEFF: To what extent would you say blockchain is a rapidly growing area of interest?

Ravens: It’s difficult to say. If we talk about year-on-year growth, we’re talking about thousands of percent. Growth will be rapid because we’re starting from a small number of projects.

Interestingly, I had another briefing with a vendor who’s working in the blockchain space. They said a lot of utilities are looking at this but not making announcements. These utilities are looking at this as a potential differentiator in the future.

Most of the applications of blockchain are around peer-to-peer trading. Utilities want to create products that will support trading of renewable power and export that into other jurisdictions.

I think there will be a lot of appetite for this in the coming years.

Author Kat Friedrich serves as news editor Clean Energy Finance Forum and Conservation Finance Network, which is produced by Yale Center for Business and the Environment. This article on blockchain energy trading was reposted with permission.

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