Blockchain + Energy… why all the fuss?

Image: Joel Filipe @ Unsplash

For those of us watching the energy business closely, it feels like every other day there’s at least one new article touting blockchain as “the next big thing in energy.” Reading some of these articles you could be forgiven for thinking that sprinkling a bit of blockchain dust on a product imbues it with magical powers!

But the blockchain is a bit of an esoteric concept to most of us. So, what is it? At its core, blockchain is a distributed, immutable (read: tamper-proof), and transparent ledger of transactions. In general terms, this means no one person or entity “controls” the blockchain, and that there can be a high degree of trust in the transaction log itself.

The best known application of blockchain is the alternate currency Bitcoin — called a “cryptocurrency” due to the cryptographic underpinnings of the blockchain technology. But there are many variations of blockchain-based technology emerging, including open-source platforms such as Ethereum and Hyperledger that extend the idea of a “transaction” beyond cryptocurrency exchange to incorporate what are known as “smart contracts”. One of the big appeals of blockchain is that these contracts can occur from machine-to-machine or system-to-system, which opens up big possibilities in relation to the Internet of Things, of which we consider digitally-enabled distributed energy resources (DER) to be a part.

In a recent report from Lux Research, which positioned the energy sector as the leader in blockchain development outside of the finance sector, a sector where the promise of blockchain has had the biggest impact to date. Why is blockchain of so much interest for energy? One of the authors of the Lux Research report, Katrina Westerhof, sheds some light:

“Power is a logical use case for a few reasons: units of power and energy are a strong fit for so-called smart contracts based on blockchain, and meters can feed data directly into blockchain logic,” said Westerhof. “Power also relies on cumbersome trading and clearing systems to support complex markets, and blockchain can help create a leaner distributed system that can cut out intermediaries and associated fees”.

While there’s a lot of talk and hype around blockchain — even being covered in the broader business press and numerous TED talks — it is somewhat difficult to determine where the value in leveraging blockchain technology for energy actually resides.

From the conversations we’ve had with blockchain developers and strategists, and our own research, it seems that blockchain is an enabler of value creation, rather than creating the value in and of itself. While it is an elegant way of recording what has happened (tracking and validating value created), it doesn’t inherently provide the mechanisms that drive what should/could happen (driving value creation).

Looking at one of the more commonly explored use cases for blockchain, peer-to-peer energy trading, as an illustrative example. A public or consortium blockchain based solution can provide a secure record of transactions and/or energy flows between peers without a “middle man.” But in order to do this, firstly there needs to be a trusted source of “truth” for the energy flows (currently provided by regulated or revenue-grade meters). Secondly there needs to be a marketplace for connecting buyers and sellers (which is not natively provided by blockchain) — this, in our view, is where the value is created. Thirdly, there needs to be some way to reconcile the market to return the value of the trades back to participants (e.g. as a credit to their bill) — where the value is made tangible. So, in this example, while blockchain streamlines part of the process, there are still many other elements that make up the broader solution.

That said, peer-to-peer trading is just one example of where blockchain can add value in the energy ecosystem. Some of the more intriguing examples we’ve spotted recently include:

With trust in energy companies being so low, part of the appeal of blockchain is its potential to “disrupt” — to displace some of the established models and players within the industry. The flipside to this, of course, is that there are some significant barriers to adoption in its path where existing infrastructure and incumbent players are involved.

So it is perhaps these latter examples—in emerging economies—where blockchain has the strongest value proposition and opportunity to take root. Similar to how cellular networks have enabled emerging economies to “leap-frog” dominant markets in relation to telephony and internet adoption, blockchain could enable similar effects in energy. In such regions where infrastructure and networks are just now being planned and implemented, a truly decentralised model can offer a lot of value, steering clear of some of the challenges and limitations that are becoming apparent in the centralised models prevalent in mature energy markets. This is significant given that 1.2bn people currently live without electricity and many governments in emerging economies are working towards ambitious electrification targets.

These are all exciting use cases. If blockchain is going to be even half as disruptive as some of the claims we’ve seen, we should be going into the process with a strong awareness of where it adds value, rather than just disrupting for its own sake. Especially if we are to understand and address the corresponding impacts on energy equity that may ensue as the “disruption” unfolds.

Unfortunately, however, it seems discussion of the true value that blockchain adds—beyond, perhaps, its PR value ;)—is getting lost amongst the rhetoric and excitement. We look forward to a deepening of the public discourse, beyond just namechecking “blockchain,” and the underlying assumption that this adds value in and of itself, to encourage proponents to better articulate where and how value is actually generated, across the energy ecosystem. Where will the impacts be felt most? Who wins and who loses? How does the value being ascribed to blockchain-based solutions actually come about? How much of this ascribed value is attributable to blockchain specifically, versus the other aspects of the proponents’ business model or solution?

At Nexergy we’ve been interested in blockchain and how it can support our local energy trading platform since day one. For the reasons outlined above, we’re not seeing it as core to our offering yet. We’re focusing on the areas that we think create the most value first—that respond to customer needs and provide validation of the market. But as we scale and our offering matures, we strongly suspect blockchain will become more relevant. We’re excited to see where the talented folks working in the space take things, and we’re looking forward to being part of the ongoing conversation.

Posted by Grant Young, Chief Experience Officer (CXO) of Nexergy.

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