Blockchain: Testing the Waters
No one, except maybe a few tech visionaries, expected the Internet to become such a critical part of our lives. Today, technologists are constantly on the lookout for other game-changers like the Internet. Blockchain may be one of those things — and it could have far-reaching implications for the electricity sector.
Blockchain is a distributed public network that was originally designed as a distributed ledger to support the crypto-currency Bitcoin. [Note: For a fuller discussion, listen to GTM’s The Interchange Podcast – A Guide to Blockchain and Energy.]
What blockchain has going for itself is the security, traceability and process efficiency. Due to the decentralized networks, Blockchain does not have a central point of failure and is better able to withstand malicious attacks. Traceability is inherent in the Blockchain architecture. In financial settings, blockchain reduces the time and cost to complete transactions, either internally, between business units, or externally between businesses and/or customers by eliminating the need for a middle man. For those reasons alone, it makes sense for electricity providers to explore how it could apply to their industry.
Most of the development of blockchain to date has been in the financial services market. Only about three percent of blockchain developers are focusing on electricity. Still, forward-looking utilities and energy traders are already looking at proof-of-concepts and pilots for blockchain.
The Energy Web Foundation (EWF) leads one noteworthy initiative, with members including Centrica, Sempra, ENGIE, Statoil, TEPCO, Shell, SP Group, TWL, Stedin and Elia, brought together by the Rocky Mountain Institute (RMI). Through Energy Web, members are working to conceive of a shared open-source infrastructure, where developers can layer on applications relevant to the industry.
But while interest and activity is increasing, there’s no consensus on how soon blockchain will penetrate the electricity industry, according to a panel of industry experts who spoke at the GTM’s 2017 Grid Edge World Forum session, Blockchain in the Electricity System, a New Paradigm for Digital Transactions .
Hervé Touati, managing director at RMI, estimated it would take just four years to see widespread deployment of blockchain. According to David Groarke, managing director of Indigo Advisory Group, early adoption is likely in the five-year range, with wide-scale deployment in the 20-year range, due to the number of stakeholders involved, the evolution of the technology required, the regulatory landscape and the overall level of engagement required from customers. The third panelist, Lee Krevat, director of new ventures at Sempra Renewables, said he could see a single use blockchain supporting energy transactions between facilities within a microgrid on an island, or in a new community, in five years.
“Where blockchain has opportunity is where there is no existing solution,” said Groarke. Take EV charging and EV roaming work.” Of course, consumers can use their credit cards at charging stations. It gets more complicated when utilities seek to manage the “duck curve” and incentivize rates for charging at different times of the day or when vehicle-to-grid becomes a reality. “Blockchain can capture the signature for EV and owner,” says Touati. “The EV becomes a profit center where the car is connected to the grid and the utility can exchange information to charge or discharge the car.”
Panel moderator Scott Clavenna, CEO of Greentech Media, pointed out that Blockchain’s features of security, transparency, open ledger and contracts fit well with the decentralization of the electricity system to allow peer-to-peer sharing of distributed energy resources (DERs) and the development of centralized distribution system operators (DSOs). Blockchain could be one of the ideal platforms for transactive energy, he said.
There is the proverbial chicken and egg, though. Do business models, new markets and blockchain applications relevant to the industry develop at the same time? Or does one develop first?
It appears there are some markets where the prospects for blockchain could be more immediate. For example, markets in Mexico, Peru and Chile have not invested extensively in legacy energy trading systems or well-established energy markets, making it easier to jump straight to blockchain. The technology is noted for its process efficiency, which can virtually eliminate the time it takes to do reconciliation and settlement by keeping a single logical transaction record, so regulators are bound to like it.
The hype cycle is fading. Developers are in the problem-solving mode, honestly addressing technical challenges and industry applicability. There is more work to be done on transaction time, processing power and energy consumption. The original Blockchain architecture depended on a sophisticated mathematical algorithm requiring significant computing power to verify the validity of the transaction. At the same time, developers are creating additional functionality (see Indigo’s representation below).
Then there is the question of transparency. Price transparency is important to the operation of multi-participant exchanges. At the same time, electricity providers need to guarantee security. With encryption, it is an open question as to how to grant permission for accessing information like market clearing prices or volumes, though developers such as Grid Singularity are working on permissions-based blockchain.
There has been a lot of talk about Ethereum in the last few years. Ethereum is a second generation Blockchain which goes beyond facilitating peer-to-peer currency exchange to facilitate application development. Ethereum supports smart contracts – computer protocols intended to facilitate, verify, or enforce the negotiation or performance of a contract.
Clavenna challenged the panelists with a question from the audience, “Do you have to be high on ether to see a place for utilities in Ethereum?” Ethereum with its contract features has appeal, but it is expensive. EWF is working with developers on a redesign without the cost of Ethereum. Groarke notes that outside of energy, most applications will be on private chains.
Financial transactions are one application. Beyond that, Touati posits that blockchain has the potential to track electricity flows. Touati gave the example of Greenpeace being able to track the lifecycle of a renewable energy credit, or REC, by reading and validating the production meter to verify the credit’s retirement. Or imagine a small internet-connected device that can inject a message into the blockchain that demand response or energy storage is available for dispatch from a facility on a constrained part of the grid. In that scenario, there’s no meter required.
Further afield are control and dispatch functions like smart device interactions based on Artificial Intelligence. This is where the security of the private blockchain has appeal but current ability to scale is an issue. There are a slew of existing and new technologies already competing for that space.
Utilities have a lot on their plates these days, but exploring blockchain in conjunction with other new initiatives is worth it, according to the Grid Edge panelists. If utilities ignore this opportunity, it could mean missing out on a lot of value in enabling a better infrastructure system.
Consortiums like EWF make getting into blockchain easier. For energy trading, it makes sense to work in a consortium where there are already defined regulatory structures, like in regional grid operator territory for PJM or CAISO. Another alternative is to work directly with developers of blockchain, renewable energy and batteries. For example, Dutch-German transmission operator TenneT is working with renewable energy project developer Vandebron, the Sonnen Group and IBM on two utility-scale pilots – one for vehicle-to-grid and the other for wind-plus-storage grid integration. For more examples, Indigo has set up a resource center that tracks pilot projects worldwide.
Exploration begins with evaluating potential use cases and running a proof-of-concept (POC) test with existing data sets. The POC allows a company to play with technology in a “sandbox” using real data, without interfering with applications run in a production environment. The hardest piece may be assembling the data. For example, to test a blockchain for how it handles EV charging transactions, a utility would need to assemble a sampling of data from its existing customers about charging behavior. This may be difficult unless charging is separately metered in the home or the utility owns the charging network. POC to test efficiency of energy trading and settlement using blockchain would be easier as data could be extracted from the energy trading and risk management system and injected into a blockchain. The proof-of-concept can be completed in a few months. Pilots are more complicated, but are useful to test new applications and business models. A pilot is especially useful where device to collect data to be injected into the blockchain need to be installed.
Conducting tests, whether POCs or pilots, allows utilities to evaluate whether blockchain has potential for their business. Blockchain is a long-term play, but utilities are used to projecting decades ahead as they plan for capacity. If utilities participate, rather than sitting on the sidelines, they will get an opportunity to shape its development to better serve their needs.