Blockchain as market operator – route to community energy market model?

Quantoz Technology and Energy21 are developing a blockchain based local system operator for community energy markets.

The growth in community energy initiatives demands a new market model if the initiative is to become viable and efficient. And blockchain may just be the answer.

Much of the efforts to develop market models for blockchain, such as LO3 Energy’s Brooklyn microgrid in New York and Power Ledger’s Ecochain in Australia, have focused on peer-to-peer energy trading.

But a new initiative, which is now being pioneered in the Netherlands, is focused on local markets, such as those defined by a postal code area.

Energy market model requirements

The company behind this new concept is Rotterdam-based blockchain startup Quantoz Technology, which was invited by E.ON’s corporate accelerator and incubator programme, :agile accelerator GmbH, to explore a blockchain-based market model focusing on local, residential power markets within the European context.

Also participating is the Dutch business process software provider Energy21, which is supporting Quantoz Technology with energy market expertise.

The basis for a new market model is brought about by the increasing use of renewable energy sources, which requires more demand flexibility in order to balance the energy system, and the growth of prosumers increasingly meeting their energy demands locally.

The current market model, pre-dating the renewables era, does not create the incentives needed to stimulate residential prosumers to share their flexibility.

Indeed, the model shows extreme asymmetry when it comes to the balance between the residential prices that can be received for production and consumption. Thus, prosumers are stimulated to use their flexibility to minimise their dependency on the public grid.

This market design imbalance will likely lead to lower grid operator revenue on the one hand and increasing balancing and re-dispatching costs for the system on the other hand.

As these costs are socialised with all grid users, prosumers will be motivated to reduce grid dependency even further.

This will not only create a reduction in grid use, but more important also will limit the availability of the distributed residential flexibility for the system.

To maintain system balance, all kinds of non-market based measures could be introduced to control production and consumption. This may lead to strict regulation of the retail energy market, decreasing system efficiency and overall increased energy costs.

The blockchain market model

Given the above, a new market model at local level needs to offer incentives for residential prosumers to share flexibility and maintain grid connectivity services.

This will allow the overall energy system to absorb an increasing amount of renewable energy production while operating at the lowest total social costs.

Such a market model would use transaction intensive, near-real-time energy and flexibility auctions – effectively moving away from the traditional local system operator settlement processes and applications.

Quantoz Technology and Energy21’s proposal is that a blockchain solution fulfills this local system operator role and settles the local market transactions.

A distributed permissioned blockchain solution can run at very low operating costs while performing at high availability and security levels.

Other features of this new market model are that grid operators can keep servicing prosumers for affordable fees and that suppliers are able to create new services for the prosumers.

From market model to business cases

This new market model is now being tested in the Netherlands since December 2016, with the aim to further define the local market model and blockchain technology.

The main goals of the project include defining a basic new local power market process model for the Netherlands and the other pilot country Germany; defining the blockchain solution (including best fit core blockchain platform, transaction types, open API functionality, permissions, rules and roles); and exploring the business opportunities (stakeholder analysis, acquisition of proof-of-concept and consultancy projects and roadmap for new business models).

The new local market model is also based on several USEF (Universal Smart Energy Framework) principles, like the three-axis model and the plan-operate-settle cycle.