TGE / ICO Review: Power Ledger and balanced blockchain markets.
I have no financial interest in Power Ledger nor am I personally involved in any of their activities. Additionally, this article is not part of their Power Ledger Bounty Campaign. I simply love DLT and have a background in solar pv. Please do not take this article as any kind of recommendation regarding the Power Ledger TGE/ICO. I renounce any responsibility for your investment decisions. There, now we can talk about the interesting stuff!
The world of imbalanced markets
For a market to work you need to trust it. More specifically, you need to trust the outcome of an interaction with the market. When there are just a few people in a market and you know and trust all of them; you can trust the entire market. As a market grows -and users become anonymous - then you need a trusted party/operator to have a trustworthy market.
When operating a market, rules are needed to define which objectives the market will prioritize because you simply can’t make everyone happy (see the century or so old discussion about the objectives of the money market: should it prioritize the value of financial assets with stable money/deflation or growth with inflation and devaluating financial assets?).
In the 20th century, corporations usually operated the markets (they took over the power to run markets from state governments in the 19th century). My favourite example of this are the financial markets of today, where government endorsed money is controlled by a few commercial banks.
These 20th century “corpo-markets” were created around the idea of limited resources and competition. It’s logical, as the corporations themselves were created around the same ideas. And interestingly, said corporations not only operated the markets, but were the markets participants/users at the same time. So, naturally, the markets were prioritizing objectives that would maximize the benefits of the corporations.
I think the Great Depression made people realize (even if subconsciously) for the first time that this was happening. And people, through their democratically elected government, started regulating the markets and the corporations that regulated those markets (for example the monetary and financial markets, labour market and stock exchange just to name the most obvious).
The New Deal worked pretty well until the late 60s/early 70s, when the democratically elected government decided to end the Bretton Woods system and refocused the markets. Instead of prioritizing manufacturing (trade surplus), employment and wages growth, the new system was optimized to maximize the value of financial assets and the inflow of foreign capital to finance the trade deficit. The markets again were maximizing the benefits of their operators. The discrepancy between the growing real (inflation adjusted) GDP and the falling real minimum wage that started in 1968 illustrates this perfectly.
As you can see, the 20th century markets were just like the corporations that created and operated them: top down, asymmetrical, hierarchical, authoritarian, and built on the idea of scarcity and competition. All things that made them imbalanced. The idea to regulate them was very good and will work great as soon as we are able to regulate the government that regulates the regulator.
Enter the internet
…and nothing changes for the markets. Actually, corporations have it even better. The internet lets them build private corporate markets on steroids (deregulated and monopolized) for advertising (google and facebook), consumer products (amazon), mobility (uber) or accommodation (Airbnb).
The idea of blockchain and distributed ledger changed all that. It is now possible to have a market where there are unknown participants and no regulator yet, you can still trust the outcome of market interactions. The technology itself guarantees it. This is what ‘trustless’ platform means: you can trust the market even if you don’t trust the participants.
This will change markets. From now on, it’s not only possible for people to build markets for themselves, but also much easier to build many competing markets. It’s now actually possible for the participants to co-own and share the market and its benefits. These markets can be democratized, open, and organized around ideas of sharing and cooperation, resulting in them being much more balanced.
And this (finally) leads us to Power Ledger
Power Ledger is an Australian company set to transform the electricity markets. They’ve created a system that allows individual users to trade electricity directly, peer-to-peer on a balanced market, with no third party control or regulation. So why is this a big deal? Because of distributed generation and what it does to 20th century electricity markets and the utilities’ business model.
Traditionally, the market for electricity was organized based on how the physical assets were organized as that was the only technical possibility. So there were consumers: individual people, companies, factories; all connected to the electrical grid. On the other end of the grid - usually quite far away - were big, expensive and complicated power stations that were most often running on fossil fuels or uranium. Customers paid a generator (the owner of the power plants) for electricity consumed which was measured by a consumption meter. They also paid a grid company for transmitting the electricity through the grid, usually based on the consumption of electricity measured by the same meter.
As you might have realized, this system of measuring and billing is not very accurate in this model. Especially when it comes to billing the transmission part; no one truly know how the electricity flows to the specific consumer or the costs associated with it. Initially, there wasn’t any technology to measure it. Later, since the system was working just fine (for the utilities), there was no technological need.
Everything changed when distributed generation (DG) came into the picture. There are different definitions of what DG is, but very generally it’s being able to generate electricity on-site and close to the place of consumption, without needing either part of or the entire grid. Initially, only large consumers were interested in DG, like gas turbines, because of the costs. You need to use a lot of electricity to make a gas turbine cost effective. But recently, more and more people started installing solar photovoltaic (pv) panels.
Initially, PV panels were something tree huggers would install to save the planet. Then, western governments started subsidising pv installation to reduce the carbon footprint. But, the amount of panels installed and pv electricity generated was marginal compared to traditional generation sources. Even as recently as 10 years ago no one was taking solar panels seriously as a viable generation technology or a threat to the traditional electricity market design. All because panels were very expensive. However, because pv panels are essentially semiconductors; they follow the laws of the semiconductor industry. Economies of scale, learning curves and an equivalent of Moore’s law make pv electricity cheaper every year. Depending on the location and grid electricity prices, solar can be a cheaper than the grid. In places like Australia or California, the mass adoption has already started. People are installing panels because it’s the most cost efficient source of electricity for them. (If you want to know the details you can read my other articles on the subject here and here).
This leaves utilities with the same operations and maintenance costs but with lower revenues as people are consuming their own electricity. By trying to fight it with imposing connection charges or solar pv fees, utilities are only creating a situation where it’s more cost efficient to buy battery storage and go completely off-grid. This would mean even fewer customers, even lower revenue and stranded network assets worth billions for the utilities.
What problem does it solve?
Power Ledger (PL) is a solution that solves exactly this problem: underutilization of assets for both utilities and consumers. Instead of fighting distributed generation, PL offers tools to embrace it and make the transition to the new market reality smooth. In general, these tools allow for accurate, detailed measurements of electricity flow (both ways, in and out) by using smart meters and then securing recordings of those measurements and related transactions in a distributed ledger, where no trusted third party is needed to provide trust.
The thing I like best about this solution: it builds a bridge between the old and the new. Instead of having an energy revolution with winners and losers, we can have an energy transition, or an upgrade if you will, where people cooperate in a new, more effective way. Utilities can let individual customers use their grid and charge precisely for what was used. Prosumers (consumers who also produce electricity) can sell their excess generation in the most efficient way - to their closes neighbours for example -so they don’t have to buy battery storage that is still quite expensive. Both the grid and the generating assets are utilized in a more efficient way. Both consumers/prosumers and the existing utilities have incentives to use the system, so the adoption can be much quicker. The only losers here are the old-school power generators: big nuclear and fossil fuelled power stations that are pushed out of the market by distributed renewable sources. But, as I mentioned before, you simply can’t make everyone happy.
Other, more specific things I like about this venture :
Power Ledger has a fantastic team on board. They managed to pull together high quality, experienced people so as to have all key competences and skills in-house: blockchain, electricity market, understanding utilities, renewables with the emphasis on pv and regulatory issues. They have already proven the concept works with a few trial deployments and have managed to attract high profile partner organization.
TGE / ICO
The Token Generation Event is about selling crypto tokens called POWR. They are needed to access the market and access available services, mainly electricity trading. In essence, this event is about selling the market access at a discount, based on the assumption that the value of the market will grow in the future. Similar to shares in companies, where you participate in the growing value of the company and its profits, POWR tokens let you participate in the growing value of the whole global market that is being created. Power Ledger is a system that works globally, using a single, global POWR token and a public Ethereum blockchain. Any number of local electricity trading markets can be created in different jurisdictions, but they are all part of the same ecosystem.
Power Ledger is using 2 blockchains. One is public, based on Ethereum, and used for interacting with the world. It uses the POWR token that can be traded on third party exchanges. The second one is private, developed in-house (with the intent to switch to Consortium Ethereum in the future), with a high transaction processing rate, and is to be used for trading between electricity market users. The token is called Sparkz and has a fixed value expressed in the local currency (1 Sparkz = 1 Cent).
So, 2 different tokens optimized for 2 different functions. POWRs are designed to store value. They will get more and more expensive over time due to more users willing to join the market and a limited number of POWR tokens. The Power Ledger itself has a number of built-in mechanisms that stimulate demand for POWR and push the price up.
Sparkz are only for electricity trading. They have a fixed value so they are easy to use as a means of payment (no problem with fluctuating conversion rates). There is no third party exchange for them and therefore, no point in using them for anything other than trading. This separation of the 2 functions (storing value and facilitating exchange) is something I‘m a great proponent of , so I’m happy to see a real life implementation of the idea.
Generation asset sharing / crowdfunding
The system allows for sharing ownership of generation assets by multiple parties. Tenants of an apartment building can now co-own a pv system on the roof and share the benefits (revenue or electricity or both) in a seamless, automated way with no third parties involved.
Power Ledger is designed to be used in both regulated and unregulated environments. In a regulated environment (where utilities exist), the system is introduced by the utilities themselves, where they act as an application host. This makes adoption much easier in developed markets where utilities lead the way and give their blessing. An unregulated environment is where there are no utilities, just micro-grids developed spontaneously. In this case the system can be introduce by pro/consumers and they can start trading peer-to-peer without an application host.
Bottom-up market balancing
Power Ledger enables balanced electricity trading by starting on the very bottom with individual consumers and prosumers that are located close together. In cases of insufficient supply or demand, the system tries to balance this trading group with another group in close proximity, then a town with another town, region with regions and so on. It goes a level up only if trade can’t be completed on a local level.
These are highlights of what I’ve learned from the TGE papers available. There are still 2 things I was curious to know, but couldn’t find detailed information about: 1) How the company itself (Power Ledger Pty Ltd) will make money besides selling POWRs; and 2) What will be the direct benefits for the utilities of using the system (just the optimised use of the assets or is there a build in mechanism that charges fees?).
All in all, I like this project very much: the idea, the implementation, the technology used, the way they are moving forward. I wish the Power Ledger team great success and am looking forward to seeing their next steps!
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Thanks for reading,
After the publication I got a message from Dr Jemma Green, Power Ledger Founder and Chair, who replied to my question about the revenue: Power ledger makes money p2p by taking a clip on the ticket for each kWh of electricity sold. For trading within buildings we take a daily fixed charge per connection. For our Asset Germination product we take a %’of notional.
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If you are into crypto and blockchain check out Daniel Jeffries’ DecStack, the Virtual Co-Working Spot for CryptoCurrency and Decentralized App Projects
For very interesting insights on how to evaluate ICOs go here, I highly recommend it.