In the two years since the first blockchain energy projects started making headlines, the technology has attracted a level of interest perhaps unprecedented with a continuing stream of new entrants.
According to a new review from the European electricity sector association Eurelectric, as of March 2018 there were more than 120 organisations involved in blockchain-based applications in the sector and some 40 publicly announced deployed projects. Over the previous year, in which the increase in interest was most marked, the technology had attracted over €240m investment in venture capital and coin offerings (this latter constituting about 75%).
In that time, early entrants such as New York-based LO3 Energy, Power Ledger in Australia and Electron in the UK have continued to develop and grow their offerings to the point of early commercialisation and for example the Energy Web Foundation is working to develop an open platform for the sector.
However, despite the promise, the review has concluded that blockchain’s future in electricity systems is uncertain, due to limitations, risks, threats and challenges. Further innovation is required before the potential value of blockchain to the sector becomes clear and it is appropriate for large scale deployment in power systems.
Such innovation and experimentation is required essentially across two fronts, according to the review – technology and application.
On the technology side, some of the limitations highlighted have been widely reported and are well known, such as scalability and speed and for example, the high energy costs associated with bitcoin and public proof of work-based blockchains.
Security is another issue, with the review noting that a blockchain’s security remains unproven until it has grown enough to be attractive to cyber attackers.
Another risk concerns the lack of flexibility once blockchains are deployed as significant stakeholder buy-in is required before large upgrades can be made. In addition, there are unresolved user friendliness and user privacy requirements regarding key management and data management.
Potential application limitations pertain to the structure of the electricity industry and scope in network operation, which may challenge the ability of certain blockchain-based applications to grow. For example, peer-to-peer communities are unlikely to function independently from grid operators as long as they are connected to the central grid due to the reconciliation requirements.
The review also notes the presence of alternative technological solutions for many of the potential applications being explored by projects, which blockchain may not necessarily outperform. For example, one alternative is algorithm-based, such as Open Utility’s Piclo power matching platform, while telemetry-based systems are another.
The public perception challenge also is highlighted, with blockchain only recently starting to gain public legitimacy and the risk of disillusionment if implementations fail to deliver.
Developers are aware of the technology challenges and they have adopted alternatives – such as Power Ledger with proof of stake and the Energy Web Foundation with proof of authority – and are working on the other performance issues.
However, the area that is lagging, and will contribute to addressing the limitations, is regulation both on transactive energy in general and blockchain in particular.
In a second report, Eurelectric makes a call for policy and regulatory foresight to enable blockchain to “realise its potential without putting electricity customers at risk”.
The report notes that policymakers and regulators have taken first steps to support the development of blockchain applications in Europe. These include European Commission efforts to standardise and build consensus around blockchain technologies, the provision of funding for blockchain-based pilot projects, and efforts related to the financial technology sector that could improve crowdfunding opportunities.
Further consideration should be given to continued innovation funding, with €83m committed and up to an additional €340m potentially available through 2020, for testing and piloting of blockchain projects to enable the technology to continue to mature.
In addition, the continued and increased use of ‘regulatory sandboxes’ could be considered to enable blockchain projects to expand in controlled environments that replicate features of the electricity system, coordinated with the relevant grid operators.
Standards are another important element both for the interoperability of blockchain-enabled energy devices as well as across industries as the sector becomes intermeshed to others, such as transportation, as the Internet of Things evolves. Blockchain responsibilities, such as who bears legal or technical responsibility in case of a breach, and security issues also need to be addressed.
The report also raises the question of whether a common EU-wide sector blockchain or many interoperable blockchains is the best way forward. Both options offer pros and cons. For example, an EU-wide blockchain could benefit from significant economies of scale but given the level of maturity may be difficult to establish consensus on.