Blockchain, Institutional Evolution, and the Path to Sustainability — Part III
This is the final section of a three part series highlighting how cryptoasset technology can incentivize renewable energy adoption and lead to the development of a decarbonized techno-economic paradigm.
Disruptive Technologies and Opportunities for Implementation
The final part of this research is broken down into four subchapters.
· Through the lens developed in the previous chapters, it will begin by considering the biophysical challenges of the clean energy transition and evaluate proposed visions of a techno-economic paradigm designed around these constraints.
· Next, it will explain why distributed ledger technology is a disruptive innovation and how blockchains are well suited to form the institutional core of this techno-economic paradigm.
· To conclude, this paper will consider two specific cases where blockchain can accelerate the deployment of clean energy technology. First, it will evaluate how Initial Coin Offerings and tokenized securities can unlock the capital needed for sustained investment in cleantech. The second case study will profile blockchain startups currently working to implement the vision of an Energy Internet and a transactive electrical grid.
The Vision for a Renewable Energy Techno-Economic Paradigm: Embracing Antifragility and Structural Change
The physical limitations of renewables and their incompatibility with the current structure of the economy limit the viability of the clean energy transition. As noted by most climate scientists, biofuels, wind, and solar all have relatively low EROEI metrics; although the theoretical potential of renewable energy is high, technical and geographic constraints greatly reduce their ability to power a global industrial economy.[1] Successfully shifting to renewables requires integrated solutions that re-organize economic activity to maximize strengths and minimize weaknesses. Environmental damage extends further than replacing fossil fuel burning plants for electrical generation, as any viable transition must also eliminate the hydrocarbons dedicated to powering vehicles, heating buildings, making chemical fertilizers, and creating plastics. It also must reduce water use in agriculture. In light of the scale of the climate crisis, a true energy transition will require updating almost all systems of economic activity, but this analysis will focus exclusively on maximizing renewable energy use on the electrical grid.
Electricity generation is arguably the best place to start for bringing renewable energy technology to market because historically it has been the economic sector with the highest amount of carbon emissions, although transportation has leapt ahead recently.
Additionally, most proposed solutions to eliminating heating and transportation emissions involve electrifying both sectors, which would increase demand for electricity and introduce another layer of complexity onto an archaic grid struggling to adapt to the 21st century economy. In order to diminish emissions from these primary economic sectors, countries must integrate heating and transportation into a reconfigured, digital, and dynamic grid.
Whether or not one accepts the long-term need for baseload nuclear or natural gas-generated power, a sustainable economy needs cheap inputs of electricity from solar, wind, geothermal, tidal, and hydroelectric power. However, high penetration of wind and solar is severely challenging to achieve because of their value deflating properties; renewable sources have decreasing marginal utility, as one additional solar panel does nothing to help the grid when the sun is not shining. Short duration storage technology will be needed to smooth over the daily variability of these energy sources and will presumably materialize through a combination of batteries and alternative technologies like flywheels and pumped hydro storage. In addition to storage, weathering the short-term variability of renewable sources can include software innovations designed to leverage demand response systems and distributed energy resources. The grid will also need long duration storage to offset seasonal variability, which presents a critical technical challenge most likely to be solved by man-made chemical bonds like hydrogen fuel cells and electrolysis rather than marginal improvements in battery technology.
Maximizing the potential of renewables while operating under given technological constraints requires taking insights from the biophysical and complexity lens developed in the previous chapters. Exposing every node of the digital grid to wholesale market prices will ensure all machines connected to the Energy Internet operate optimally. The poles and wires connecting each aspect of the system must act as a platform capable of dispatching and receiving electricity from each grid asset, rather than simply delivering a product from generation source to customer. It must be ready to use every endpoint as both an asset or liability depending on the weather and time of day. By exposing consumers and prosumers to the risk and reward of a market based on the rhythm of natural systems, technology can sync economic energy consumption with the biophysical world.
The most effective complex adaptive systems leverage heterogeneous and decentralized entities that work together seamlessly to create emergent behavior greater than the sum of its parts. All biological systems exhibit a clear positive correlation between resilience and diversity. For example, bee colonies with genetic diversity have more stability in the thermal regulation of their hives. Complexity scientist John H. Miller points out that all bees detect temperature changes through chemical signals and respond by working individually to either heat up or cool down the hive to maintain equilibrium; bees that perceive conditions at the exact same level all act immediately and overcompensate in the aggregate, which leads to wild swings in temperature. Bee colonies that interpret signals differently have more diversity in responses and smoother temperature adjustments.[2] Another method complex systems use to increase resiliency and efficiency is decentralized decision making. With any system, there are fundamental limitations to central planning because a centralized point does not scale concurrently with an exponential increase in nodes. The point’s ability to process information and make decisions is eventually overwhelmed by the increasingly complex interactions of each agent. Nassim Nicholas Taleb argues that this difference between centralized, vulnerable complex systems and decentralized, complex adaptive systems is the latter’s quality of antifragility; rather than destabilize in the face of volatility, it capitalizes on disorder.[3] By exposing each individual actor in the electrical system, whether that be a home, business, or solar plant, to the risk of wholesale markets, the frequency of small stressors may increase but drastically reduce the possibility of catastrophic system failure. The system will also learn from volatile episodes and therefore increase resiliency. Seyi Fabode first applied Taleb’s philosophy of antifragility to electricity markets by constructing a vision of a software-infused grid that evolves and adapts over time, keeping tabs of every single node by having a simple credit or debit measure of each entity’s contribution to the system.[4] A grid built on antifragile principles of design minimizes risk of the worst case scenario while maintaining exposure to upside. Just as these natural systems are automatically wired to take advantage of good times and hedge for the bad, smart agents on the grid should be incentivized to take advantage of peak renewable flows and reduce overexposure when the sun is not shining and the wind is not blowing. Decentralized decision-making is also apparent within organisms. Cells respond to signals triggered by hormones, which in turn are set off by external events, and immediately get to work stabilizing the organism’s biophysical system. To maximize the potential of renewables, the electrical grid must incorporate a heterogenous portfolio of grid assets and decentralize decision-making.
When framing civilization as a complex adaptive system, it makes sense to compare this macro-level structure to the advantages and disadvantages of the similar biophysical energy system within organisms. Ectotherms and endotherms, commonly referred to as warm-blooded and cold-blooded animals, respectively, represent the set of trade-offs in energy consumption that can accompany increased or decreased dependency on an external source of energy. Cold-blooded organisms, like reptiles, spend significant amounts of the day basking in the sun to increase to the body temperature ideal for high-level bodily functions. To compensate for a risky reliance on variable sources of energy and a lower metabolic rate, ectotherms are rewarded with a lower food intake requirement than mammals and other endotherms, which must either consume higher amounts or more energy-dense foods. As a result, endotherms approach carrying capacity in given environments more rapidly than ectotherms.
This mental model scales well on a civilizational level. If metabolism within an organism represents economic activity broadly defined, then it makes sense to carry out most activity at peak hours when energy is plentiful. Similar to a very hungry and growing mammal, fossil-fueled civilization has been operating as an endotherm by consuming energy dense resources and surpassing its natural carrying capacity; in order to sustain current high population densities, we must look to the ectotherm lifestyle and carry out most economic activity when renewable sources of energy are available in high quantities, similar to agriculture’s seasonal limitations. Renewable energy resources are variable and dispersed, so economic activity should mirror this constraint by using the market to guide efficient use of energy. But how should entire cities and regions respond when the wind and sun do not shine for weeks, or even months, at a time? It is unreasonable to expect entire economies to completely shut down when the earth is unwilling to provide energy. This is why many scientists advocate the creation of large supergrids capable of transferring electricity from distant points, like sending solar from Morocco to Europe or wind from Wyoming to California. Indeed, Varum Sikaram suggests that a hybrid grid model, incorporating the advantages of both long-distance transmission lines and decentralized smart grids, will best weather the volatility of renewables.[5]
After the proliferation of consumer electronics and software, the technology now exists to mimic many of the communication systems found in nature in order to ensure energy is neither used excessively nor wasted indiscriminately. In other words, it allows “humanity to reintegrate itself into the complex choreography of the biosphere.”[6] If we connect all items that use and produce energy into one network, in an Energy Internet, then the profit motive can direct all actors to operate in the interest of the overall system. As noted above, there are many different types of renewable and zero-carbon technologies, all with their unique advantages and disadvantages, and applying the laws of digital technology and the model of the World Wide Web to renewable energy is apt, as both have near zero marginal costs.[7] The Energy Internet can let the natural order of the market coax out most efficient use of each type of generation, storage, and demand response by tightening feedback loops. In parallel, the emergence of differentiated and cheap sources of energy like wind, solar and storage can create a heterogeneous grid more responsive to the variations of the market.
When markets are designed to maximize the physical constraints of solar and wind, they become competitive with fossil fuels. The current flat rate design protects consumers from volatility but does not communicate the value each source of renewables can provide to the grid. Concentrated Solar Power (CSP) plants are currently too expensive, without subsidies, to compete with solar PV, but have the advantage of using molten salt to store energy throughout the night. When markets are designed to reward dispatchability, also known as the ability to produce power on demand, CSP becomes competitive.[8] By changing the dynamics of value, each node will have the incentive to become a grid asset. This profit motive will further develop IoT products and generate a technology cluster of co-innovation as the market incentivizes improvements in the total factor productivity of distributed energy resources and demand response agents. When it is inexpensive and easy to join the network, the cluster will grow exponentially as any disruptive technology would.
In cases where renewables have become cost competitive with incumbents and reached significant levels of grid penetration, there has been both a strong pre-existing case for an energy transition and a cultural inclination towards environmentalism. A given population’s predisposition to considering economic growth and environmental health hand in hand usually manifests in the dominance of one party in state governments. As a result of this political support, governments in California, Hawaii, and the European Union have been willing to undertake the regulatory overhaul and capital investment needed to digitize the grid and incentivize a renewable energy-driven economy. In Hawaii, high electricity prices and a deep reliance on oil imports, combined with the population’s fervent protection of the island’s national beauty, has given the legislature the mandate to force investor owned utilities to implement the technical and regulatory changes required to reach 100% renewable generation by 2045. Some scholars dismiss the role psychological factors play in stimulating support for an energy transition and argue that the only essential component is economic conditions.[9] The biophysical lens, in line with the Marxist materially driven thesis, would agree that the primary impetus behind energy shifts are economic in nature, but does not completely dismiss the role of human behavior in accentuating fundamental trends. Regardless of motive, all progressive states have been innovating in policy design. In Hawaii, the main electric utility, HECO, has been experimenting with dynamic rate design that would smooth the duck curve, counter solar’s value deflation, and make the best use of distributed solar. Even New York Governor Andrew Cuomo recognizes the need for reorganization, as his Reforming the Energy Vision (REV) initiative understands the need for “dynamic prices for electricity services that change based on location, date, and time, so that customers receive finely tuned price signals based on the system costs they incur.”[10] Regardless of the true catalyst for political action, the fact remains that even in Hawaii and other communities seeking deep decarbonization, there are inherent limits to state-driven energy transitions because of institutional scaling issues. The inflexibility of centralized organization and policy efforts still limit the potential of DERs to reach full thermodynamic efficiency.
Even states with tepid renewable energy penetration encounter resistance from utilities, forcing governments to limit the scope of variable pricing, net metering, and demand response programs. Variable pricing, best employed by having one network for trading electricity and managing demand, is the key to syncing economic activity with earth systems, but requires adding more nodes to the Energy Internet and settling transactions almost instantaneously. Under the current paradigm, this solution is not in the shareholder-governed utility’s interest and extremely difficult to implement from the top down. Rather than rely on a utility or independent system operator, in nature, “complex self-organizing systems tend towards decentralization as they grow because the coordination costs eventually overwhelm any centralized node, causing fragility.”[11] These biophysical constraints suggest increased user agency and decentralized institutions will maximize the value of natural energy flows and DERs. The National Renewable Renewable Energy Laboratory supported this logic in a recent study, as it believes there “is a high probability that future energy systems and AEGs will not be centrally planned.”[12]
Renewable adoption faces both institutional and technical challenges. Innovation in both areas is needed, but in order to drive investment in generation and storage technologies, communities must reorganize economic activity according to the rules of antifragility rather than rely on a centrally-planned system. This new energy grid must withstand natural climate-related stressors, incentivize maximum efficiency in production and consumption, and maintain a standard of living politically suitable for the average citizen of a developed country. Adding heating and transportation to the electrical network both increases load requirements and the complexity of the system, as there are more nodes to serve and account for in load-balancing. The key to leveraging this increased complexity to the advantage of the energy system as a whole will framing interactions between each individual node and the autonomous system as a two-way relationship. An electric vehicle, for example, is a negative on the grid when in use but can act as an asset by soaking up excess solar energy and distributing it as needed. Reconfiguring energy storage and consumption to sync with renewable generation as much as possible will offset the value deflation currently plaguing areas with high solar and wind generation. By exposing all points on the grid to wholesale energy markets, the system can form a natural ordered energy market and accelerate investment into its development.
Blockchain as a Disruptive Institutional Innovation
There are two primary avenues as to how blockchain technology can accelerate the renewable energy transition. First, by tokenizing securities and creating a more efficient financial system, distributed ledgers can help bring breakthrough technology to market and fund small-scale projects that suffer from high institutional costs. Second, by decentralizing law and creating a more efficient manner of exchanging value, smart contracts well-suited for shaping incentivizes on the Energy Internet. Before explaining blockchain applications in energy, this research will provide a brief overview using the techno-economic paradigm framework laid out by Carlota Perez.
According to the neo-Schumpeterian lens, techno-economic paradigms and their core cluster of disruptive technologies carry a dominant logic that shapes the nature of corresponding financial instruments, business models, and institutions. Innovations occur in a cyclical patterns that reset about every half-century, albeit with significant overlap.
The foundational innovation of blockchain is digital scarcity; for the first time, assets on the Internet can exist without the need for a centralized and trusted intermediary. Blockchains are the distributed ledger technology underpinning popular cryptoassets, like Bitcoin and Ethereum, and provide an immutable, decentralized public ledger.[13] This new type of asset, called “cryptoassets” because of their reliance on cryptography, naturally divide into several subcategories based on function and network characteristics. These categories include currencies, commodities, and tokens. The most obvious example of a digital currency is the Bitcoin network, a decentralized form of money bootstrapped by a small group of coders then released to the public. Commodities are assets that serve as inputs into finished products, which would include ether, as it is used as computational fuel for applications built on its protocol. Tokens exist on the application layer and can be divided into security tokens and utility tokens. Utility tokens provide access to a network’s service and security tokens function as any traditional security would, just on a blockchain.
Despite not exhibiting a clear increase in total factor productivity, which would describe previous inventions like the steam engine, there several reasons blockchains can be considered as disruptive, if not more, than the first generation of the Internet. Researcher Chris Burniske directly applied the techno-economic paradigm framework to cryptoassets and argues that blockchains are a general purpose technology, poised to eventually affect all consumers and become a platform on which future innovations are built.[14] These assets have inherent advantages in liquidity and trading volume because they exist solely in digital form and can travel as fast as the Internet moves 1s and 0s. However, blockchains are not without technical challenges. Most are not truly decentralized and release tokens through initial coin offerings (ICOs) tied to specific startups or corporations. Even bitcoin, hailed as the most decentralized of all, has chokepoints including centralization of mining power and user-friendly exchanges. As distributed public ledgers, blockchains also struggle to process transactions at the same rate as centralized databases. In order for it to reach its potential as a pervasive and universally applicable technology, blockchain must solve the scaling issue either by making blockchains more efficient, as the Ethereum Foundation is trying to do with its Plasma and Casper initiatives, or creating a new distributed ledger altogether, like the IOTA Foundation has done with a Directed Acyclic Graph (DAG). Regulation is also a threat as governments around the world begin to crack down by investigating ICOs and enforcing securities law.
But there are many talented developers working on these problems and stout optimism that technical challenges can eventually be solved. At the beginning of the Internet, many doubted its true potential and failed to foresee disruption, some mistakenly believing it would have an economic impact no larger than the fax machine. Although this technology is not as obviously powerful and scientifically impressive as the invention of the steam engine, it is revolutionary because the enormous legal complexity of transferring assets, including trusting intermediaries like law firms, banks, and regulators, can be replaced by math and code. Blockchain is disruptive because it “disturbs economic rents that can be controlled and captured by large intermediaries providing centralized trust, whether corporate or government.”[15] Up to this point, economic systems could only respond as quickly as intermediaries could digest information and allocate responses. Commercial activity is limited by the schedule of these institutions — financial trades cannot take place on weekends or after banks close. Decentralizing law is equivalent to decentralizing trust, which reduces soft costs and increases liquidity of economic activity.
Cryptoassets are the next iteration of the Internet and extend the logic of its techno-economic paradigm to all corners of society. In the digital age, data has become an incredibly powerful resource and represents “a cornerstone of modern economic, social, and political management.”[16] Data is now a true asset class and has value, value that has largely been centralized on the application layer of the Internet in big tech corporations like Facebook, Google, and Amazon. This next edition aims to reduce reliance on these large institutions while maintaining the value of data ownership, which is in itself good for the environment. Blockchain can theoretically represent economic growth almost entirely decoupled with the physical world; assets in cyberspace do not physically exist and only require minimal amount of energy when transferring and proving ownership. Rather than own physical items, blockchain makes it efficient to expand the sharing economy. If owners can create smart contracts designed to automatically enforce property rights and settle transactions, it makes leasing more items economically worthwhile. Because digital assets are intangible, they provide an ecological benefit by incentivizing a sharing economy while retaining the legal exclusivity that makes markets efficient.
Case Study I: Financing Cleantech
Historically, financial innovation has played a key role in directing and accelerating investment into the core technologies of techno-economic paradigms. New financial instruments are always designed to accommodate the peculiarities of new products and their diffusion.[17] Venture capital evolved specifically to fund the microelectronic and software boom, blossoming as the capital of choice for startups implementing the apps and gadgets of the first digital techno-economic paradigm. However, the VC financing model has, for the most part, failed to effectively commercialize clean energy technology. Despite one 25$ billion wave of investment between 2006–201l, cleantech startups struggle to attract sustained interest from VC firms because of high capital requirements, long development timelines, and an inability to attract corporate acquirers.[18] For the most part, the VC model is best suited for innovations in software and microelectronics because they were designed to serve those industries.
Although venture capital still plays a key role in funding technology, the business model is being disrupted by Initial Coin Offerings (ICOs), the next frontier of financing and an extremely popular application of distributed ledger technology. This new method of raising capital relies on the issuance of digital, cryptographically secured tokens that run on a decentralized public network. These tokens are also unique by combining open source code with scarce digital assets, which provides entrepreneurs with the upside of a venture capital investment but the organizational hierarchy of Wikipedia.[19] Most importantly, it provides a lifeline of capital for firms unable to develop under venture capital’s timeline. This new form of fundraising could be incredibly helpful in directing investment to organizations marketing low-carbon technology, as existing capital markets have been wary of funding renewable energy infrastructure.
With any groundbreaking technology, early markets are highly volatile and consist of both genuine, high-upside investments and deceptive, fraudulent activity. Cryptoassets are no different. The nature of the ICO fundraising process has drawn the interest of regulators, leading to recent SEC subpoenas and investigations focusing on tokens that function as securities. The impetus behind the crackdown is the Securities Act of 1933, which is designed to protect investors from fraudulent or illegal security offerings. In order to determine whether an asset is a security, regulators apply the “Howey” test, a doctrine stating that any security has an investment contract where one party supplies capital in exchange for a share in the profits generated by another party.[20] A legal offering of securities must either publicly file with the SEC or meet several exemption requirements to remain private.The first time the SEC stated that tokens could be regulated as securities was in a response to the Decentralized Autonomous Organization (DAO) token sale investigation.[21] The DAO functioned as an automated venture capital firm and raised money through an ICO, but did not register with the SEC or meet exemption requirements. In response to the SEC statement, the law firm Cooley LLP and startup Protocol Labs formed a partnership to create the Simple Agreement for Future Tokens (SAFT), which was a legal ICO in compliance with the Regulation D exemption of the 1933 Securities Act — the same exemption VC firms use. It only offered tokens to accredited investors and enforced a no-trade clause for a year after issuance.[22] However, by paying a law firm to structure an ICO, part of the advantage gained from tokenizing securities was lost.
There is reason to believe that regulatory uncertainty will soon be minimized and institutional capital will get the green light to enter the cryptoasset space. Following Congressional hearings in the U.S., regulators have begun clarifying how they will address ICO concerns and providing official compliance guidelines. There are also several startups aiming to provide technological mechanisms to reduce legal risk. Harbor seeks to encode regulatory compliance into the distributed network itself, offering a solution that allows firms raising capital to enjoy the liquidity benefits tokenized securities provide, while eliminating the legal risk that comes with distributed ledger technology. It has created an R-Token on the Ethereum network that allows any application to build a compliance protocol; for example, to comply with the Regulation D exception, the network can set trade restrictions for tokens until a year after issuance.[23] This adjustment period fits the techno-economic paradigm model and characterizes the natural life cycle of any disruptive innovation. For several years, Perez’s theory predicts that “the redesign of a whole range of institutions . . . through financial regulation . . . as well as modifications in social behaviors” undergo a period of “restructuring of the context to fit the potential of the revolution.”[24] A golden age will then ensue to set “the conditions for growth and development.”[25] Although the regulatory environment may scare off institutional capital in the short run, it will eventually adjust and lead to a period of sustained growth that will maximize the potential of blockchain technology.
Once the golden age begins, tokenized securities can play a major role in bringing the renewable energy revolution online. It has been incredibly challenging for cleantech startups to commercialize technology given the 3–5 year timeline of venture capital firms.[26] In addition to the shorter investment horizon, scientific innovation struggles to take place with the VC model because the securities are illiquid and potential buyers, namely utilities and industrial giants, are risk averse.[27] These limitations of venture capital are addressed by tokenizing the security on a blockchain. When released, tokens are immediately liquid and accessible to investors with the patient timeline more suitable for innovation in the hard sciences. Security tokens increase liquidity and reduce soft costs because they are true digital shares that remove intermediaries, allow for fractional ownership, have instantaneous transaction settlement, and reduce exclusivity. ICOs “effectively bypass the time, costs, and intrusions which go with relying upon conventional financial institutions as a source of capital raisings.”[28] The benefits of public securities markets are limited to the largest and most centralized legal entities; the high administration burden of filing with these intermediaries acts as a barrier to entry for smaller, nimbler companies. Harbor recognizes this market opportunity and uses tokenized securities to automate the institutions responsible for enforcing this structure. It aims to combine high liquidity with low administrative burden to remove the illiquidity discount and unlock hidden value.[29] If regulators and innovators like Harbor succeed in standardizing this method of raising capital, cleantech and hard sciences startups could have a viable new avenue to obtain the financing needed for a golden age of sustainable innovation.
Tokens can also play an important role in bringing liquidity and institutional efficiency to renewable energy project finance. Similar to the limitations of small-scale equity financing, project developers have struggled to attract the institutional capital needed to deploy high levels of utility-scale wind and solar. For example, solar power projects have struggled to meet the rigid criteria of institutional investors because they are too expensive to securitize, cannot be traded on public exchanges, and are not worth extensive due diligence and asset management.[30] However, turning the cash flows of these solar projects into tokenized securities holds a lot of promise for reducing institutional costs and creating innovative financing mechanisms. ImpactPPA aims to decentralize the funding of renewable energy projects by using blockchain technology and smart contracts to replace the long, arduous, and costly process currently plaguing power purchase agreements in developing countries. It plans to create value by removing intermediaries, like legacy financial institutions, from the process.[31] By creating a token for funding projects and another allowing communities to vote on which projects to fund, ImpactPPA is building the digital infrastructure to finance microgrids and stand alone systems, providing communities with a cost-effective method of bypassing centralized, fossil fuel based economic development. WePower aims to create an energy financing and trading platform powered by blockchain technology in developed countries. By tokenizing energy, the network ensures liquidity and extends access to capital, which allows energy producers to trade directly with buyers and raise capital by selling energy upfront at below market rates.[32] Ultimately, tokenizing energy on an open decentralized database unlocks value characteristic of security tokens and provides a creative method of raising money for renewable energy projects. It also creates a more fluid institutional environment that blurs legal barriers and fills niches previously inaccessible to liquid markets — developments that encapsulate the logic of the proposed techno-economic paradigm.
Case Study II: Implementing the Energy Internet
Blockchains can also play a role in reducing entropic degradation by becoming the operating system of the Renewable Energy Internet. Maximizing the potential of wind and solar requires using ancillary technology, like batteries for short term energy storage, and digital innovations to turn the grid into a complex adaptive system organized by the logic of a wholesale energy market. Introducing a drastically higher number of nodes onto the grid increases complexity, but by nurturing a decentralized and antifragile system with ubiquitous computing and blockchain technology, the grid can develop an emergent order that incentivizes thermodynamic efficiency in all forms. Indeed, the peer-to-peer properties of blockchain naturally delegate control and create an institutionally more varied and complex economy.[33] By reducing soft costs and increasing the liquidity of economic activity, blockchain technology is well-suited to implement the vision of a techno-economic paradigm shaped to maximize renewable energy.
As more electricity producing and consuming entities come online, it will be increasingly difficult for utilities and independent system operators to make timely and efficient grid-balancing decisions. Rather than trusting these intermediaries to make the right decision, the grid should embrace biomimicry and emulate complex adaptive systems found in nature. Much of the central control will have to be automated and nodes will have to act on their own self-interest based on market signals. However, most current demand response systems and virtual power plants are managed from the top down and have no market compensation structure to incentivize helpful behavior.[34] Implementation of demand response programs, peer to peer trading, and other characteristics of the Energy Internet are currently dependent on utilities and local political climates. Hawaii, California, the EU, and advanced communities all over the world working to accommodate high renewable energy penetration on their grids need the flexibility of these programs but lack the institutional capacity to realize their full potential. To reach thermodynamic efficiency, any fully developed Internet of Things with billions of interacting devices and microtransactions must avoid the prohibitively expensive intermediation of centrally controlled ledgers.[35] To lower the cost of peer to peer trading, demand response, and distributed energy resources for individuals, any dynamic grid approaching the antifragile ideal must decentralize markets to truly reconfigure how individual entities produce, consume, and trade electricity.
Pilot projects run by partnerships between blockchain startups, utilities, and progressive governments around the world hold a lot of potential for constructing a new path forward. PowerLedger is an Australian startup building a protocol that allows DER owners to realize the full value of their investment through peer to peer trading. Ultimately, they would like their network to stimulate further investment in distributed renewables and “invoke a transactive economy that moves away from bilateral retail arrangements to multilateral trading ecosystems.”[36] Thus far in its short lifespan, PowerLedger has partnered with progressive utilities and local governments in Australia, Japan, and Thailand implement custom decentralized energy trading applications. Green Power Exchange is another blockchain-enabled decentralized energy trading protocol that seeks to create value by removing legal and institutional barriers. Wind and solar production costs are already lower than retail electricity prices; the retail price paid by consumers is marked up because each intermediary obtains a cut of the value.[37] Their SmartPPA product automatically settles accounts and streamlines the current process of buying power so potential projects have the transparency and certainty of a public ledger with significantly lower institutional costs. The Energy Web Foundation, a nonprofit consortium based in Switzerland, is an open source, scalable blockchain platform working with startups to build the digital infrastructure of the Energy Internet. It facilitates investment and partnerships into the space and has spun out several startups, such as Leap, Omega Grid, and Grid Singularity, with targeted use cases. Overall, there are many organizations around the world working on applying blockchain technology to decentralized energy networks and building the ecosystem of startups, utilities, and developers to prove the model’s long term viability.
Grid+ uses blockchain technology to remove the utility from the transaction process entirely and expose households to wholesale market prices. The team’s ultimate goal is to incentivize the ownership and use of DER infrastructure by leveraging their smart home agent and transactive protocol on the Ethereum network, providing DER owners with the opportunity to profit from their investments; research shows local batteries would be profitable now if retail rates were priced dynamically like wholesale markets. The smart agent, similar to an Internet router, can be thought of as a IoT device that uses complex algorithms and set user preferences to conduct electricity trades on the owner’s behalf. Grid+ believes homeowners do not need the protection of fixed retail rates set by a utility and should have the opportunity to enter the market because the automated energy trader can get homeowners a favorable deal. Additionally, the bank account and private digital key for the agent is entirely controlled by the user, not the corporation. By extending the reach of the market and using technology to settle transactions every 15 minutes, rather than every month, the network incentivizes each homeowner to conduct energy arbitrage and provide ancillary demand response services to the grid. By connecting with Nest and Tesla APIs to integrate the transactive network into all major electricity consuming devices, like heating and transportation, Grid+ has created a dynamic and flexible energy network capable of syncing with renewable generation.
There are many obstacles to implementing these grand visions. Most startups operate assuming utilities will always play a role in energy and offer their products as services rather than attempt to replace the intermediary entirely. Incumbents have tried to capture a slice of the hype surrounding the buzzword “blockchain” by implementing private relational databases offering the speed but not the full value of decentralization provided by tokens and public distributed ledgers. It is unclear whether the full potential of distributed ledger technology can materialize under the current institutional paradigm, as all intermediaries will seek compensation for their services. And they have no reason to change, given utilities still play the essential role of maintaining the physical infrastructure of the grid. The Energy Internet can not be realized without some organization building and financing poles and wires. It is also unclear, however, if blockchain will be capable of disrupting the institutional environment to the extent that it can finance public infrastructure. Additionally, public blockchains pose national security risks and political winds might compel some centralized authority to have oversight over the grid, suggesting the formation of several private peer to peer networks rather than one unified ecosystem. However, Burniske and other analysts believe “history is on the side of public networks.”[38]
Another issue stems from the willingness of customers; will home and business owners be willing to expose themselves to the volatility of the system? The antifragility of the grid depends on this behavioral change, and history shows that it will be possible if the technology is in place to make sure early adopters and eventually mass consumers will have the opportunity to profit. If the products of this techno-economic paradigm, like IoT devices and DERs, are user friendly, then it is likely individuals will be happy to set preferences and let the machines run by smart contracts work the markets on their behalf. When securities law instills legitimacy in blockchain technology and scale through technological improvements, it is likely public networks will overcome incumbents and protocol fragmentation to implement the logic of a renewable energy techno-economic paradigm.
Works Cited
[1] Patrick Moriarty and Damon Honnery, “Can Renewable Energy Power the Future?” Energy Policy 93 (2016): : 3–7, doi:10.1016/j.enpol.2016.02.051.
[2] John H. Miller, A Crude Look at the Whole (New York: Persus Books, 2016), 71–75.
[3] Nassim Nicholas Taleb, Antifragile: Things that Gain from Disorder (New York: Random House, 2016).
[4] Seyi Fabode, The Antifragile Grid (Harper Jacobs, 2017), Kindle Reader.
[5] Sivaram, Taming the Sun, 200.
[6] Jeremy Rifkin, The Zero Marginal Cost Society (New York: Palgrave Macmillan, 2014).
[7] The Beam, “Blockchain: The Internet of Assets Reminds us to Look Back at Past Industrial Revolutions,” Medium, April 05, 2018, https://medium.com/thebeammagazine/blockchain-the-internet-of-assets-reminds-us-to-look-back-at-industrial-revolutions-8f7f85d17c93.
[8] Sivaram, Taming the Sun, 185.
[9] Vogler, Climate Change in World Politics, 82.
[10] Sivaram, Taming the Sun 210–211.
[11] Sinclair Davidson, Primavera de Filippi, and Jason Potts, “Blockchains and the Economic Institutions of Capitalism,” Journal of Institutional Economics, 2018, 11, doi:10.1017/s1744137417000200.
[12] Benjamin D. Kroposki, “Basic Research Needs for Autonomous Energy Grids,” 2017, 8, doi:10.2172/1412807.
[13] Darcy Allen, Chris Berg, and Mikayla Novak, “Blockchain: An Entangled Political Economy Approach,” SSRN, April 9, 2018, 2.
[14] Chris Burniske and Jack Tatar, Cryptoassets (New York: McGraw-Hill Education, 2018), 27.
[15] Davidson, de Filippi, and Potts, “Blockchains and the Economic Institutions of Capitalism,” 3.
[16] Allen, “Blockchain: An Entangled Political Economy Approach,” 6.
[17] Perez, Technological Revolutions and Financial Capital, 34.
[18] Benjamin Gaddy, Varun Sivaram, and Francis O’Sullivan, “Venture Capital and Cleantech,” MIT Energy Initiative, July 2016.
[19] “Olaf Carlson-Wee: Polychain Capital and the Rise of Protocol Tokens,” Interview, Epicenter Podcast, 2017.
[20] Andrew Rollins, “Thoughts on the SEC’s Initial Coin Offering Bulletin and Investigative Report,” Medium, August 08, 2017, https://medium.com/@andrew311/thoughts-on-the-secs-initial-coin-offering-bulletin-and-investigative-report-3e3197d08878.
[21] “SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, were Securities,” SEC Emblem, July 25, 2017, https://www.sec.gov/news/press-release/2017-131.
[22] Juan Batiz-Benet, Marco Santori, and Jesse Clayburgh, “The SAFT Project,” The SAFT Project, October 2, 2017, https://saftproject.com/.
[23] Remeika, Bob, Arisa Amano, and David Sacks, The Regulated Token (R-Token) Standard, Harbor.com, 2018, https://harbor.com/rtokenwhitepaper.pdf.
[24] Perez, Technological Revolutions and Financial Capital, 24.
[25] Ibid. 52.
[26] Sivaram, Taming the Sun, 39.
[27] Gaddy, Sivaram, and O’Sullivan, “Venture Capital and Cleantech.”
[28] Allen, “Blockchain: An Entangled Political Economy Approach,” 21.
[29] Remeika, Amano, and Sacks, The Regulated Token (R-Token) Standard.
[30] Sivaram, Taming the Sun, 67.
[31] Dan Bates, ImpactPPA, ImpactPPA.com, April 2018.
[32] WePower Team, WePower: Green Energy Network, Https://drive.google.com/file/d/ 0B_OW_EddXO5RWWFVQjJGZXpQT3c/view. WePower.network, March 7, 2018.
[33] Allen, “Blockchain: An Entangled Political Economy Approach,” 13.
[34] Enbala. DERMS: Next Generation Grid Management. Enbala. Hubspot.net. March 29, 2018. https://cdn2.hubspot.net/hubfs/1537427/Chapter2Final.pdf?submissionGuid=dc8d8992-719e-4e48-ba61-54c41070208a.
[35] Casey, Michael J. “In Blockchain We Trust.” MIT Technology Review. April 09, 2018. Accessed May 01, 2018. https://www.technologyreview.com/s/610781/in-blockchain-we-trust/
[36] PowerLedger Team, Power Ledger White Paper, Powerledger.io, 2018, https://powerledger.io/ media/Power-Ledger-Whitepaper-v8.pdf.
[37] GPX Team, Whitepaper: Blockchain Based P2P Energy Trading Platform, Gpx.energy, 2018, https://drive.google.com/file/d/1Qvn7e9Q_NhURYM2-wkru6zP10P6L-w3x/view.
[38] Burniske, Cryptoassets, 18.
