Parte Finale: The Energy Tokens
It’s all about Utility. No digity. No doubt.
Our energy systems are in dire need for a rewiring — business-wise. Over a 100 years of electrification, over a billion people still lack electricity AND we are at the brink of losing the fight against climate change. Wherever I look, I see that people are willing to support and go for the renewable energy future. Now we have technologies that give those people the power to be the change that they want to see in the world. Solar and storage prices are plummeting, whereas that of cryptocurrencies — among which are decentralized smart contract/app platforms — are rising. There is definitely a new “opportunity explosion” in the making.
This is the forth part of a series of posts on the “useful” or minimal token model design for the energy sector. Without the ERC20 Token specification, the plethora of ICOs would not have been possible on the Ethereum network. Since the initial rush, quite a few best practices on token design and ICO structuring emerged as well, which should be adopted and adapted to token sales in the energy domain. In Part 3 best practices was the main focus. This part now sheds some light onto value in energy networks and how tokenization can make this value fungible.
- It’s the network, stupid! “Token utility” is a misconception. Token represents the value of network effects. Hence, it’s about network utility. Sustainability comes through people wanting to participate in the network, not “to have” the coin.
- The innovation lies in programmable incentives via token smart contracts, and a blockchain (not necessarily Turing complete) as their run-time environment.
- In the energy domain, we have physical networks that need capital investment and maintenance — as well as energy application networks, with many different stakeholders and— currently misaligned — incentives. Programming these for meaningful outcomes will resemble eight-dimensional chess. And it will be worth the pain.
- Having an open source, standard, energy token specification will help the ecosystem make quick r/evolutionary improvements, whilst allowing interoperability of the value created within and across different energy tokens and their communities.
“Wow” has been my overused expression of awe in the past two months since Part 3. This time not due to another free fall into one of Blockchain’s deep rabbit holes, but due to bitcoins’ high hill climbing, towing any other cryptocurrency with it — so much so, that many community leaders started warning, begging, threatening for a pause. Wow — world of weird-internet-money. But that’s actually a great teaser to get you into the right mindset, for the energy token model:
Now, what is the “utility” of bitcoin? Wrong question. A definite indicator that the question is wrong is: there is no right answer— although bitcoin has been almost at $20k.
The right question is “What is the utility of Bitcoin”?
I disagree with the notion of the utility of a token (bitcoin) — but urge you to think about the utility of the network, the protocol (Bitcoin). This is an especially important mindset when entering the discourse on energy tokens.
Networks of Value
In energy, we have multiple networks of value:
- The physical energy infrastructure, a network made up of nodes, energy producing, distributing, and consuming/storing nodes. This infrastructure takes care that any electron coming out of a socket has been produced and fed into the grid at that instant. The interconnected electrical grid is the largest machine ever built.
- The energy data layer, which makes everything go round — literally everything in the energy sector revolves around real-time data on energy consumption and supply, since these must be kept in balance at all times. That’s a lie. For now. It will be true, once digitalization has reached a tipping point, or it will be true in some digitalized parts of the grid, like a smart building or district, mircrogrids, etc. Currently, this missing real-time data layer, costs the energy end user hundreds of millions of Euros in energy redispatching — because the grid operates on simulated models (based on little, siloed, data), which increasingly fail with the increasing number of weather dependent, distributed, energy generation resources. This will only worsen with increasing number of new mobile, dynamic energy consumers in the form of electric vehicles and storage. The fact that the machine has been working without this real-time data layer, fills me with awe even more — but still, it will be a better machine when it’s fueled by real-time data. The real-time data will come from sensors of the grid-connected nodes as well as from external sources, such as whether forecasts, mobility patterns etc. I will leave this layer out in the energy token discussion here for brevity reasons and because it will have fundamentally different tokenization and incentive schemes. Although it is exciting, especially with the emergence of blockchain-based platforms like Ocean protocol. Just some words of caution, for expectation management for companies though: having data will cost you even more at first. It’s actually a pure cost factor, unless you can extract real-time prescriptive insights from it to direct or even automate improvements to operations or product. Building up the ability to do so will cost another big chunk of your investment budget , and if you don’t have the right people to do so, you will not recover from those investments. No matter how potentially valuable; Data, like oil, is a raw resource (also equally likely to spill). If you are a big company, you better have a long-term data venture strategy, and don’t treat your data-driven transformation like a project. If you are a startup, be diligent with your partnerships: more than even smart money, you are in need of smart data. Obviously, with so much juice there will be a separate post just on the energy data network and it’s stakeholders. So stay tuned!
- Last, but most interestingly: the energy application layer networks. This is relatively a new notion, and one that does not resonate with energy incumbents much, whose antiquated business model is: sell kWh. However, there already are incredibly good application layer networks: such as token-less Sonnen Community, or even newer undertakings such as token-based PowerLedger.
Although tokenizing Sonnen Community could be an interesting experiment, it certainly is not a necessity for them to succeed. Similarly, having a token with incentive schemes is not a guarantor of success. The purpose of the standard energy token is not to create a new business model for one such application community — but to align incentives of the bigger ecosystem, in which these startups, incumbents, regulators, and end users interact, and let the value created be fungible.
The purpose of the energy tokens is to make the value created be fungible within and across energy application networks — globally.
Energy tokens represent tokenizable value of these energy application networks. In deriving the description of the energy tokens, we can apply two methods: (1) first principles approach that should yield definitions we all can agree upon (if you don’t, drop me a line or comment so we can improve) and (2) token design thinking to instantiate a tokenized energy application network for a specific purpose (which will require real world deployments and debugging of the programmable incentive schemes, that is why we need regulatory sandboxes).
If you own a solar rooftop, today, you can order an energy monitoring device like Smappee via Amazon, and instantly claim SolarCoins. One SolarCoin represents the value equivalent of 1 MWh of solar power generated. That is the defined protocol of the SolarCoin blockchain. SolarCoin can be interpreted as a reward system for solar energy, like frequent flier miles. Or it can be interpreted as a currency backed by solar energy. People and institutions who want to support solar energy, accept SolarCoins as a means of payment. Vendors of solar equipment, and associated services and products accept SolarCoins as a means of customer engagement. Here is a 5-minute video by Nick Gogerty on how currency is a language for value sharing.
What about all the other potential value, which exists in the depiction above?
Well, there are other coins that represent some of them. EnergiToken for example rewards energy saving behavior. NRGCoin is minted when energy consumption is shifted (both in time and space) to match available renewable energy (or from a different perspective: to incentivize Renewables where needed without over-straining the grid). In Germany you get a “GrünStromJeton” for shifting energy consumption to match availability of local Renewable feed-in. And with ClimateCoin and associated exchanges, you could transform part of your portfolio of energy value into carbon credits.
However, as of the time of this writing, none of these coins are interrelated, exchangeable — although the value that they represent, in principal, is.
In principal, energy tokens can be minted for:
- type of renewable energy conversion and feed-in: solar, heat, wind, hydro
- type of energy usage: store, shift, save, share or gift
- potentially as an attribute: type of grid (not) used (transmission grid, distribution grid, public/private)
Energy tokens represent the absolute value of what they have been minted for. They are fungible, as in: energy not used is as good as energy produced.
All of these tokens, even if fungible, will be valued differently, at different times, and different locations, by different stakeholders. Not solely through exchanging, trading, but also through investing.
Who pays the price?
“Never ever think about something else, when you should be thinking about the power of incentives.” — Charlie Munger
A positive side effect is that an energy system, when tokenized like this, comes with built-in “certificates of origin,” instant settlement, accounting, and billing — not to mention the possibility of reducing costs by enabling more data-driven forecasts and trading strategies by market participants. This potential in cost reduction is too big to be ignored by energy market regulators world wide. Typically, the cost of inefficiencies in energy market processes are passed down to the energy end users. We are in active communication and knowledge dissemination through the energy working group of the German Blockchain Association and collaborate with the global Energy Web Foundation. Please address any inquiries to firstname.lastname@example.org
However, the energy token model is not dependent on regulatory approval. On the contrary, the energy token model can serve as a free market-based incentivization for the energy transition towards a renewable and more efficient energy system. The following is only an exemplary valuation that can happen or be designed:
Energy shift tokens are valued by local grid operator, e.g. small municipality or a private microgrid operator, because they can incentivize the relieving of stressed areas of their grid during different times by buying shift tokens. Shift tokens are also valued by energy retailers, who need a portfolio correction due to prediction errors. Instead of buying additional energy on the spot market when the prices are too high, they can value the energy shifting capacity of their customers to defer the portfolio correction to a time window with better spot market conditions.
Energy save tokens are also valued by the energy retailer when a short term portfolio correction on a spot market through energy shifting potential of their customers would still be more costly then when customers would forgo the amount of consumption that is too short in the energy retailer’s portfolio. One group of stakeholders who value energy save tokens, are the ones who would otherwise pay for wasted energy, e.g. governments having to comply with Paris Agreement; building owners who offer energy-as-a-service; energy efficiency contractors etc. Another group of stakeholders are the equipment vendors who can use energy save tokens as a customer engagement instrument for a more energy efficient equipment line.
Energy store tokens are valued by all renewable energy stakeholders: grid operators, solar equipment vendors, prosumers, building owners etc. Similarly to energy save tokens, energy store tokens can be used as a marketing instrument by energy storage equipment vendors, such as batteries, but also heatpumps, i.e. equipment that can store energy in one form or the other. This might also include the machine itself: the grid always acts as a virtual storage machine, as long as it is able to host the energy feed-in (Beware that regulated grid operators have no direct incentives for business model innovation as opposed to private/micro-grid operators).
Energy share tokens are valued by communities. It’s main incentive mechanism is community building. Since the physical conditions of electricity networks are such that in an interconnected grid (such as in Europe or North America) we effectively share the fed-in electricity, we can conceptualize settlement communities based on e.g. brands or locations. For example, an end user who wants to support local renewable energy resource owners, e.g. from the neighborhood, would value the energy share tokens of neighboring solar rooftop owners. Energy share tokens, have a fantastic side effect: They are an incentive to invest in energy infrastructure. WPR in essence is such a token (although the token sale distribution and the trading platform create some skewed/relative derivations of value).
“Valuing” an energy token here means that stakeholder is willing to pay money for it, because they have an immediate use for it, or because they can further sell it.
The energy domain needs a continuous token model: tokens are minted and given to stakeholders with the physical capacity to contribute a particular service to the network. For example, energy store token is automatically minted and given to stakeholders with energy storage capability according to their potential and actual used storage capacities.
These tokens can then be bought for direct consumption, or for derivative business. As mentioned, the latter use case or rather side effect, is quite intriguing. Imagine, for example:
(a) you are an owner of a building, who is willing to install solar rooftop, however, you are lacking capital. By activating energy share tokens, you can raise the funds. Energy share tokens would be signed by potential future consumers or retailers or investors with a certain pricing. Ownership of these energy share tokens would entitle to nearby consumption or selling to nearby consumers.
(b) you are an electrical equipment vendor, your customers have the potential to receive minted energy store tokens (for batteries, heatpumps), or energy save tokens (for a A++ energy efficient washing machine, dryer, etc.), in accepting these tokens as part of the payment you are essentially offering discounts or enabling cross-selling.
These examples, are rudimentary, but hint to where business and financing model innovation will occur in the emerging technological revolution of the energy sector (I highly recommend Carlota Perez, “her research explores the relationship between technology and economic development, between finance and technological diffusion and between technical and institutional change.”)
Sky is the limit when it comes to business model innovation based on standardized energy tokens — because the customer-facing stakeholders above are freed from developing and maintaining entire IoT platforms each, only to be able to take advantage of energy tokenization. With standardized energy tokens any inverter, energy monitoring device, or a microcontroller in a smart appliance can implement the required logic for energy tokens to be minted and exchanged. Derivate marketplaces such as energy exchange markets and carbon credit markets would only need to integrate one API (or rather: ABI)— that of standard energy tokens — and offer the value exchange of energy for any community globally.
Don’t worry you can still ICO.
As a company or foundation having or planning to have an energy token sale, your first reaction might be: “Hey, the token is our USP, why should we standardize?” I hope this is not your USP, as the standard energy token implementations will only reside in a repository somewhere. Your network, community, ability to build meaningful real-life business relationships, create the customer-facing application(s), and the stamina of your people, including your early adopters, to pull it off from zero to one — that is your USP. The angle you take to the market: your understanding of your customer — that is your USP.
Your understanding on how to create a thriving network of stakeholders who value your vision, your instantiation of the standard energy token, — that is worth to be part of. You should definitely issue a token for your participatory network. The standard energy token, will only enable energy monitoring/control device makers to support many such communities like yours. The old saying is “competition is good for business” — the new saying has been “ open source and co-opetition is the new normal.” However, in our line of business — the rewiring of the energy business based on smart contracts, it’s not normal — it is a necessity.
Let’s apply token design thinking
If the above derivations of the energy tokens was sufficient, then token design thinking is the necessary condition for the energy application community/network you are building, or thinking about participating. In Part 3, I described why the below 3 steps were necessary. Let’s see how they can be used to instantiate standard energy tokens with a specific purpose/utility, which is inferred from the network utility:
- What is the purpose of the network?
2. Who are the stakeholders and their incentive profiles?
3. How should we distribute the token?
Instead of running though a hypothetical token generating network/event — I’d like to work this along a real TGE — so stay tuned for an “Encore” to this series (cliff hanger ;)
In the meantime please do share your comments and concerns whether this token model can cut it in the energy sector!
Maybe one spoiler from the Encore: If your energy token is based on a network of already paid-for solar and storage, and participants are contributing their “overcapacities” you are pretty much off the “hook.” You can consider your services like an enabler and your token smart contracts will only face as much regulatory hiccups as Uber or Airbnb did, if at all (depending on liberalization of energy markets). If your network enables the installation of new solar and storage, then you have to be as diligent as you would without the token wrt. profits, revenue shares, income and capital taxes, like a cooperative. Of course, there’s still the energy share token and its “side effect” as mentioned above, which lands us right back in the “gray zone.”
However, I’m being optimistic that with so much effort on the side of the governments placed to make the people and institutions participate in climate action — how could they possibly say no, to a perfect tool for it?! I’m convinced more then ever that regulatory sandboxing will be the best move forward! It’s time for serious play.