Blockchain and its distributed ledger is expected to disrupt many data-based and financially-based processes, as well as several different sectors. With its largely immutable nature, it is capable of creating trust between untrusted partners without the need for intermediate verification.
As such, it is no surprise that, in the energy sector, a key use case of blockchain under development is power trading. However, in a field that has traditionally relied on intermediaries to facilitate the trade, the question arises whether blockchain could eliminate the need for such intermediaries.
Such intermediaries include brokerages, power exchanges or system operators in wholesale markets and retailers or utilities in retail markets.
“Very rarely in the power sector do producers transact directly with end use customers,” Luke points out. He cites the single example as bilateral trades between power plants and large consumers.
Blockchain in energy markets
Considering the question, Luke says that there are no obvious answers.
“The reason is that the institutions that act as intermediaries are often much more than that and provide additional services that blockchain has been unable to provide.”
For example, power exchanges provide full counterparty risk mitigation, which is not covered in a bilateral trade arrangement. Similar retailers provide risk mitigation services to customers, such as flat electricity prices in exchange for a risk premium.
Luke notes that system operators are “perhaps the most immovable” of intermediaries, due to the critical security and reliability services they provide.
“For example, transmission system operators are mandated to balance supply and demand and this requires central coordination of power grid, which by definition distributed ledgers are unable to provide.”
On the other hand, Luke says that where blockchain could be disruptive is in a bilateral trade involving brokerages, which provide reconciliation among other services.
“This process is often cumbersome relying on analogue technologies and there is potential for it to be significantly streamlined with the use of a shared ledger that includes wholesale market traders.”
In addition, he suggests that blockchain could help drive the development of local peer-to-peer markets.
With the more than 150 companies involved in energy sector blockchains, there will be “many interesting applications that will have a positive economic impact on the sector”, he comments.
Utility customer switching
One of these applications, and indeed one of the early use cases to be developed eliminating any intermediary requirements, is supplier switching.
In another presentation at Engerati Meets, Jane Lucy, Founder and CEO of the UK startup Labrador, discussed smart switching.
Labrador has developed a novel plug-in switching device that tracks home energy usage against the market and switches the user either automatically – currently for about three-quarters of users – or with their approval when a better deal is found.
Lucy’s assessment of the UK market is that British households are overpaying on their energy by a collective £5bn per year. About three-quarters of them – more than 23 million households – could benefit from switching, with potential savings on energy bills in excess of £500 per year. However, the number currently switching is less than one in five.
“The biggest barriers to the current process are found to include the effort involved, difficulty in finding information and lack of trust in savings projections,” says Lucy, pointing out the need for a new and simpler approach.
She comments that particular effort has been devoted to ensuring accuracy in Labrador’s projections. “It’s around leveraging smarter data from smart meters and other sources. This means we can take out the guesswork, which is crucial to be able to guarantee savings. As a result, we have found significant differences with the standard price comparison sites.”
For example, more than half of Labrador’s own customers would have been given the wrong tariff recommendation and the majority would have been able to save more. This estimate is based on the average energy usage calculated by Ofgem, which used by energy price comparison sites.
Lucy says that such evidence-based differential around accuracy is likely to become compelling to consumers. “Ultimately it is about using technology to deliver accuracy, transparency and tangible savings in a free and frictionless way.”