If you have never heard of blockchain then you are not alone. The concept is budding out of the theory stage with entrepreneurs scrambling to implement its power in nearly every industry from banking, voting, insurance and yes … energy. Blockchain is most famously known as the underpinning of the decentralized cryptocurrency known as Bitcoin, but what the heck is it and how can it impact our current energy markets?
At a very high level (which is the only way I could explain it), blockchain is an invisible fabric of data validation that holds the promise of delivering trust and security to online transactions. By its broadest definition it is a foundational technology that operates as an open distributed ledger where records are efficiently verified in a transparent and permanent manner. It is managed by a public peer-to-peer computer network collectively facilitating secure online transactions.
These transactions can be monetary such as a deposit or withdrawal of value or informational such as Mrs. Smith voted for Kermit the Frog for president. The list of records “block” is stitched together and validated one after the other using complex mathematical puzzles. Once a puzzle is solved it chains together with the history of every block that came before it in mass collaboration, the “chain.” The data within the block cannot be altered. The more nodes in the chain the more trusted it becomes.
A major benefit is the decentralization of storing TRUSTED data across the network. Any asset (money, music, votes, health records, fair trade attributes) can be stored, moved, managed and exchanged without the powerful clearinghouses such as banks, title agents, and exchanges. That also means it cuts out all the intermediary fees between the buyer and seller.
The decentralized nature significantly reduces hacking and data manipulation potential inherent in a centralized system. Information is transparent which increases trust in the transaction. The transactions are tracked by a shared transaction ledger with not one organization controlling the data (sorry Google and Facebook).
This type of “power to the people” obviously challenges the big intermediaries of our world such as banks, social media companies and government, but how could it possibly be used in energy?
Prosumers of Energy Transacting Peer-to-Peer
Consumers who have the ability to produce power, called prosumers, could sell their production to their neighbors directly at prices determined by them rather than the local utility or grid operator. These “virtual power plants” can be used to satisfy demand using the most efficient transfer of energy at the distribution level of service. This model fully decentralizes the energy transaction environment to a peer-to-peer system that is frictionless, efficient and trustworthy.
Ownership Documentation of Renewable Energy Credits (RECs)
Authenticity is one of the other promises of blockchain. Verification of a certain attribute, in this case, RECs, will follow the data until its desired buyer. There will be no chance of a single REC being sold multiple times and its source can be clearly tracked and validated.
Demand Response Trading
Similar to prosumers selling to their neighbors, demand response participants can sell their unused power to their neighbors. Instead of cranking up the A/C on a certain day maybe a participant would like to use the value of that additional electricity to feed their family that night. The value can be exchanged immediately so that the benefit for demand reduction can be clearly translated for other goods and services, clearly linking behavior with reward.
Energy Supply Transactions
Imagine a direct link between energy suppliers and consumers through “smart contracts.” Smart contracts add complex logic and rules over a blockchain to serve as a middleman (lawyer, PUCO, broker, court system, etc.) for agreements. Consumers could purchase directly from energy producers under prearranged terms that are embedded in the blockchain data. If a counterparty breaks any term of the agreement the default mechanisms are automatically applied. The concept of smart contracts creates a fast, low cost, efficient safe ecosystem for buyers and seller to transact.
Each one of these energy applications ignore two big challenges of the energy sector: 1) the physical nature of moving energy and 2) the heavy state and federal regulation of our current system. Clearly, system upgrades such as metering, communication and software will need to be implemented before electrons can flow freely peer-to-peer. This will come at a significant cost and take years to implement. The role of regulators must also change to allow smart contracts to guide consumer protections rather than the centralized control of regulation. The status quo will not give up this centralized power easily which will also likely take years of battle with lawmakers.
Even though the current system is steeped with challenges it is not stopping progress. Ten big energy suppliers have come together to align blockchain initiatives by forming the Energy Web Foundation. This global non-profit has been formed with the sole purpose of accelerating blockchain technology across the energy sector. Just last month the foundation released its blockchain network for full access to third parties to develop decentralized apps. There is no doubt that blockchain will – someday – be impacting many areas of our society and energy is no exception.