Out of the blockchain hype and the many energy sector projects that are under way and emerging, what of them are grounded in potential?
Two new studies shed some light looking both at general use cases as well as specific projects in the sector. And overall, the sense of the findings is that there is undoubted promise for the role of blockchain but further developments are needed within use cases and projects and particularly on the regulatory front.
Blockchain in energy
Former US Energy Secretary under the Obama administration, Ernest Moniz’s Energy Futures Initiative’s paper is styled as ‘separating the signal from the noise’ to understand the promise of blockchain.
The focus of the study, which estimates investments of $100m-300m in blockchain in the energy sector to date, is on the application of blockchain to key energy use cases. This is investigated through analysis of how the application aligns the core benefits of blockchain to the emerging issues in the sector and whether an ecosystem of business or sector functions can be supported rather than a single use.
On this basis, five use cases are assessed where blockchain is considered to present “significant opportunities for process improvements, added value, enhancing transparency and improving trust between actors in the energy system” – distributed energy resources (DERs) management, electric vehicle (EV) market transactions, energy trading, carbon tracking and registries and energy transactions for emerging markets.
Promising energy use cases
Investigating these in turn, the report suggests that it may be premature to apply blockchain applications to distributed resources. These markets are in their early stage of development and may undergo significant change as they further evolve, but the inherent design of blockchain makes it difficult to retroactively modify the blocks. A blockchain deployed today to support DERs may not be structured to account for the coming changes in those markets.
Electric vehicle charging transacting is seen as a prime use case for blockchain, but challenges remain at consumer, household and local levels, according to the report. Issues are who will see the benefits, barriers to its use and logistical challenges to its deployment. Also, at the local level, blockchain offers a technology solution to improving situational awareness for distribution utilities, but this requires utility buy-in, without which blockchain-based chargers may not be completely valued.
Turning to energy trading the report says that the core benefits of blockchain are extremely well aligned with energy trading applications and the technology has shown promising results in pilot tests for improving process efficiency. Nevertheless, there are challenges to widespread deployment. Blockchain remains to be demonstrated robustly in most energy trading environments. The fully-burdened cost of a blockchain for managing a large-scale trading operation is unknown and it may be may be difficult for trading firms to scale up their blockchain-based operations until other active users across the system do the same.
Similarly, blockchain’s core capabilities directly align with the many challenges around developing, deploying, and managing carbon emissions tracking and trading systems. However, it may be difficult for firms to justify the switch to blockchain as significant investments have been made in current platforms. Another major risk is the uncertainty around the successful adoption of blockchain across the market.
Finally, in the emerging market application, the report says blockchain can be used as a platform for handling energy transactions, billing and settlement, and even to support investor confidence to engage in markets that are historically high risk. Challenges are that in some emerging markets it may be difficult to ensure active consumer participation at high levels, while another issue is that blockchain’s relatively new and untested nature may make its adoption too risky for existing regulatory structures to adapt.
In summary, the report comments that some of the energy applications of blockchain are expected to mature over the next few years, but others are long-term prospects that may be limited by existing policy, regulations, business models and systems engineering. Blockchain applications for energy offer the greatest breakthrough potential where there are rapid changes and emerging issues and there is alignment of energy sector trends with the core capabilities of blockchain.
Another paper from the US Council on Foreign Relations takes a deep dive into three specific applications of blockchain to energy trading, which is the most popular accounting for an estimated 60% of all the initiatives, according to its analysis. These are LO3 Energy’s Brooklyn microgrid in New York, the Grid+ initiative to provide wholesale priced electricity to customers in Texas, and UK startup Electron’s development of a flexibility marketplace.
In addition to highlighting the point that by now should be well understood, that blockchain is an enabling technology, the paper says that these examples reveal two other lessons – and they are ones that other startups should be aware. First, although all of these companies aim ultimately to upend the conventional model of the electric power system, each is taking an incremental path and starting with modest goals. Second, to achieve more than the initial modest goals requires partnerships with incumbent utilities, as indeed the companies are already starting to do, as well as regulatory reforms.
While a growing number of blockchain regulatory initiatives are emerging – the paper lists 16 across the world – three recommendations are offered for policymakers, who are urged to respond to the hype “with prudence and preparation”. These are to invest in understanding the regulatory intersections of blockchain and to set up regulatory sandboxes to enable demonstration projects, as well as to support the development of blockchain standards in the electricity sector. In the case of the latter, these should be open source platforms that pave the way for interoperability.