Supply Chain Management

How Can Blockchain Disrupt the Energy Industry?

01 July 2018

The average media consumer is probably aware that America’s energy infrastructure is in rough shape. American energy has never rated higher than a D+ in the Report Card for America’s Infrastructure, the report issued every four years by the American Society of Civil Engineers (ASCE), since its 2001 inclusion. The 2017 Report Card describes a national energy situation involving crumbling grid infrastructure, reliability and security issues, and potential and actual supply problems.

Aging energy infrastructure mired in political bottlenecks and near-monopolized control is ripe for disruptive innovation. Many commentators believe energy’s saving grace may be blockchain technologies like those used in cryptocurrency transactions. But how it might be used is anything but clear at this point.

Blockchain as a Foundational Technology…But When?

The general public probably associates blockchain with cryptocurrencies like bitcoin and Ethereum. But at its core, the technology is simply an open, digital ledger used to record and verify transactions. The entire blockchain is protected by a hash function, which hides most details about the transacting parties but still verifies that the transactions have securely taken place. In its current iteration blockchain forms a verified, relatively secure alternative currency, but in the future it could do much more.

A basic blockchain workflow. Source: B140970324 / CC BY-SA 4.0A basic blockchain workflow. Source: B140970324 / CC BY-SA 4.0

While blockchain is currently almost synonymous with cryptocurrency, any application involving contracts or transactions between two parties could benefit from the technology. Blockchain has numerous benefits, including increased efficiency from eliminating third-party verification, to the potential to decentralize large, cumbersome processes and increased security. As such, it could become a foundational technology: a novel but slow-building innovation that eventually supplants itself in everyday life.

Foundational technologies aren’t sexy and explosive like hot topic du jour disruptive innovation, but they eventually cause an explosion of other life-altering innovations that build on it. For example, TCP/IP began in the early 1970s as a basic means for ARPAnet communication between U.S. Department of Defense researchers in remote locations. It then spread to small localized networks in the 1980s, and exploded in the 1990s, becoming a foundational part of the World Wide Web and digital revolution as a whole. It took decades from its small-scale, single-use introduction, but TCP/IP transformed the way people live and work.

If blockchain is fated to follow the same path, it’s still in its first, single-use phase as a cryptocurrency. A few decades of incubation and blockchain could create entirely new industries and revolutionize existing ones, including energy.

Decentralized Power Generation

The traditional American electric grid was vertically aligned. A handful of investors controlled most generation, and power was supplied to homes and businesses through a standardized grid. From the beginning of electrification to about the 1990s, power generation was a centralized natural monopoly.

Deregulation and an upswing in small-scale renewable generation is changing this, however. The industry is embracing distributed generation, in which small grid-connected distributed energy resources (DER) generate energy locally. DERs are typically renewable sources like solar, wind and geothermal, and can be fed to homes and businesses in a few different ways. They may be connected directly to the traditional grid, or operate on a microgrid.

Many see microgrids as a silver bullet in the fight to revolutionize the U.S.’s crumbling energy infrastructure. These are small, modernized grids that can be connected to the traditional macrogrid, but they can also disconnect and operate autonomously to better provide for local power needs. ASCE’s 2017 Report Card highlights microgrids as a potential solution, saying, “Local solutions, such as distributed generation and resilient microgrids, may offer lower-cost alternatives to major system investments particularly in areas at elevated risk from severe weather or other natural disasters.”

Microgrids can leverage their local flexibility to provide efficient power much more in tune with demand compared to centralized macrogrids. The introduction of blockchain could prove even more disruptive to the distributed generation model, and increase efficiency even more. Because blockchain’s operating principles allow for secure, verified transactions without the need for third-party auditing, small-scale energy producers could use it to buy and sell energy directly to consumers — quickly, efficiently and only when needed.

Conjoule, a German startup, is focused on doing just that. The company is working on transaction architecture for a completely decentralized grid, creating a peer-to-peer energy marketplace. In Conjoule’s blockchain-based model, a resident with a rooftop PV installation could sell excess energy to neighbors using blockchain transactions, without the added time, fees and hassle of going through a centralized corporation or agency.

Conjoule's peer-to-peer energy trading platform. Source: ConjouleConjoule's peer-to-peer energy trading platform. Source: Conjoule

According to a May press release, Conjoule has teamed up with energy provider Innogy to launch a pilot project in Mülheim an der Ruhr in western Germany. “Prosumers” with solar installations will be provided smart meters that measure electricity in real time, and can choose to sell excess energy to community members using blockchain transactions.

Many see peer-to-peer trading as the future of power grids around the world. Decades from now, electric generation may be facilitated through virtual power plants (VPP), cloud-based distribution systems that aggregate resources from multiple microgrids. A successful VPP must be responsive to real-time changes in demand, generation and pricing: blockchain transactions can enable this efficient responsiveness.

Revolutionizing the Supply Chain

At a higher level, blockchain technologies could revolutionize the energy supply chain as well as energy trading as a whole. Energy trading is complicated and volatile: daily prices often fluctuate and are dependent on the season and average usage, and rise and fall based on peak and off-peak hours.

Blockchain could help streamline this market, and several players are already entering this arena. In January, British firm BTL announced the creation of a blockchain-based energy trading platform called Interbit. The platform is now in its second project phase — the first phase demonstrated “back office cost savings via smart contracts that automate trade reconciliation processes,” according to the company. The newest phase, involving four oil and gas supermajors and five energy traders, will attempt to use Interbit to realize cost savings throughout the entire gas trading process.

In the United States, renewable energy certificates (REC) could also benefit from blockchain. RECs essentially provide proof that 1 MWh of renewable electricity was fed into the existing grid. The certificates can be sold, traded or bartered, and the ultimate claimant of the REC can attest to purchasing renewable energy.

The current REC trading system. Source: Cornerstone Capital GroupThe current REC trading system. Source: Cornerstone Capital Group

The images here provide a comparison between the current trading system, in which trust between the buyer and seller is established by a broker and auditor or regulator, and a hypothetical blockchain model that eliminates some inefficiencies. Systems like the one described by the second image could make the trading process smoother and less expensive for all parties.

A potential blockchain-based REC trading system. Source: Cornerstone Capital GroupA potential blockchain-based REC trading system. Source: Cornerstone Capital Group

While blockchain is still a single-use technology, its application to energy trading and generation by startups and early adopters points to a bright future: one with a more efficient grid and a simpler supply chain.

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