Application of blockchain technology to energy trading #1
What decentralization of energy network means?
In an attempt to create a new business, I have explored applications of blockchain technology to the energy field since the beginning of this year. It has been half year since I wrote the last article on Blockchain Business Community (in Japanese), and my perspectives have changed; so I decided to write new articles. There are many use cases in the energy sector, but I would like to focus on energy trading among energy consumers in this article series, which seems a major use case of blockchain in the energy sector.
This article is based on one written for iNTERNET Magazine Mook that will be published from Impress R&D on November 16, 2017; but with contents restructured and new contents added.
Hypotheses regarding energy trading that uses blockchain technology
I will organize my original assumptions and hypotheses regarding application of blockchain technology to energy trading.
I am assuming a scenario where further penetration of DERs (Distributed Energy Resources) such as solar PV and energy storage is inevitable and that the flow of energy shifts from one-way (large generation upstream to consumers downstream) to multi-directions with many DERs installed on the network. Peer-to-peer (P2P) energy trading among consumers (prosumers* and consumers to be exact) and sharing energy in communities become meaningful. With this change toward decentralization of energy system, decentralizing energy transaction is more appropriate than conventional centralized transaction.
*A prosumer is a consumer who is also a producer. In this context, prosumer is a consumer who has solar PV and other DERs to generate electricity and send surplus electricity back to grid.
Assuming the above scenario, it was my hypothesis that blockchain technology is more appropriate and suitable technology to realize “distributed” transactions among consumers. The rationale of the hypothesis is that blockchain technology enables P2P transactions without requiring central authority and control.
Nevertheless, it is not that simple. I do not think that suitability of blockchain technology for energy trading has fully been proven, despite a number of pilots happening all over the world. At least I have not come across full, end-to-end, comparison of blockchain-based energy trading system and conventional centralized system. Further, it is not clear whether and how a blockchain-based system is connected, integrated, or replaced with existing IT infrastructure, even if blockchain-based system turns to be more suitable. Energy IT system is already there, and we do not build a system from scratch; discussion is needed where a blockchain-based system lies. To explore those points, I will start from the following discussion points:
(1) Does physical layer of utility network (e.g. generation facility, transformers, and wires) become a “distributed system”?
(2) Does information layer of utility network (i.e. flow of energy consumption data) become a “distributed system”?
(3) Based on (1) (2) above, what are requirements of energy trading system?
(4) Does blockchain technology meet the requirements identified in above (3)?
There are regulatory issues, but I will limit the scope of discussions to technical issues.
Does physical layer of utility network become a “distributed system”?
The first discussion clarifies the meaning of “distributed” and how the architecture of the whole utility system might change with DERs. Conventional utility network is centralized in which electricity generated in large-scale generation plants is delivered to end users at the edge of the network through transmission and distribution (T&D) network. To simplify, physical layers of conventional utility network can be depicted as Figure 1 below.
What would happen to the network when DERs are installed? Let’s assume that part of consumers install DERs, namely solar PV and energy storage (ESS). When DERs are installed at grid edge, the amount of electricity from central generation plant delivered through T&D network decreases, but the conventional utility network is still being used to deliver electricity. The reason is that those DERs meet part of consumer demand but those are not likely to meet all the consumer demand. For example, a residential solar PV can only meet about half of demand even with a residential ESS of a reasonable size. It is most likely that electricity from central generation plants is still used in night and when DERs are out of order. Distributed generation does not replace centralized generation, but it complements centralized one.
It is worth noting that the utility network illustrated in the above Figure 2 is different from “distributed system” (illustrated in Figure 3 below) and “P2P network” which are often discussed in the context of blockchain. Distributed system refers to a system where all nodes are on the equivalent level and service is provided without a central server. The network structure illustrated in above Figure 2 still has centralized generation plant and associated transmission and distribution system. Only part of central function is distributed. I can say that the architecture of the whole system is still based on centralized system with some DERs on the edge of the system.
According to a scenario forecast toward mid-century by a Japanese utility company, roughly half of electricity demand will be met by DERs around 2050. The rest will by met by conventional and centralized energy sources such as nuclear and thermal. It looks reasonable to assume that only part of functions of centralized system are distributed and that centralized system and distributed system co-exist at least in the next 10–20 years.
Does information layer of utility network become a “distributed system”?
I concluded that physical layer of an utility system that determines flow of electricity does not become a complete “distributed system,” but what about information layer? Information layer refers to flow of energy consumption information that is used for transaction. Communication infrastructure (e.g. Field Area Network, Wide Area Network) and IT infrastructure (e.g. smart meters, Meter Data Management System, Customer Information System) manage the flow of energy consumption information, but I will simply consider flow of energy consumption information.
In a conventional utility network, electricity consumption of consumers is measured by meters and those consumption data are collected by power grid company through communication network (in the case of smart meters), and the data are sent to retailers that have a contract with consumers for charging and billing. A simplified illustration of information layer of conventional utility network is Figure 4 below.
The architecture of information layer of conventional utility system is centralized in that all the electricity consumption data are collected to power grid companies. Assuming that not many consumers go off-grid, this centralized information network will stay in the near future. Prosumers who have DER also buy electricity from centralized power plants and electricity consumption data collected through a centralized network are used for charging and billing by retailers who have a contract with customers.
When electricity generated by DERs are traded among prosumers and consumers, where does the information layer lie? I am assuming that a new network that connects prosumers and consumers in a peer-to-peer manner is formed. I indicated this in orange dotted line in Figure 5 below. A new network that connects prosumers/consumers is formed while a conventional centralized network stays.
I am assuming that flow of electricity does not necessarily correspond to flow of information. For example, when consumer A buys electricity from prosumer B who has a solar PV, it does not mean that electricity (flow of electrons) from prosumer B actually flows to consumer A through distribution network. Rather, transaction is carried out by logically matching surplus electricity of prosumer B and consumption of consumer A. Transactions among prosumers/consumers on the same distribution feeder may be more desirable and meaningful to make flow of electricity and flow of information close. In Figure 5, I assumed that three networks among prosumers/consumers on the same feeder are formed.
I think that blockchain-based networks that realize transactions among prosumers/consumers will co-exist with existing centralized network, as long as physical layer of an utility network does not become complete “distributed system” (i.e. central power generation and radiant transmission/distribution network from central generation do not disappear). A possibility is that blockchain technology is used for transactions for electricity generated by DERs and that conventional centralized system is used for transactions of electricity generated by centralized power plants. I will discuss hybridized system in a separate article.
It is likely that information layer will not be “distributed system” as described in Figure 3 at least in the next 10–20 years. Figure 6 shows information layer added to Figure 3. In conclusion, both physical layer and information layer will not become complete distributed system like the one shown in Figure 6.
Summary
I discussed how physical layer and information layer of utility system might change in a world where DERs are penetrated. My conclusion, in short, is that conventional centralized networks and new distributed networks (if emerge) will co-exist at least in the next 10–20 years. I can elaborate it in the following points.
- With regard to physical layer of utility network (e.g. generation, T&D network), centralized network where electricity is delivered from large-scale generation plants to end users at grid edge through T&D network will stay.
- With regard to information layer of utility network (mainly consumption data), centralized system where consumption data are measured and collected to power grid company and are sent to retailers that have contract with consumers will stay. If transactions among prosumers/consumers are carried out by distributed network, centralized network described above and distributed network will co-exist, unless those two are integrated.
- The state described in above 1. and 2. is co-existence of conventional centralized networks and new distributed networks. This is different from “distributed network” and “P2P network” used in the blockchain technology.
Some media articles on blockchain indicate a formation P2P network by DERs where utility is eliminated (Figure 7 for example). It is more practical to think that centralized and distributed network co-exist because DERs cannot meet all the demand (and other functional requirements such as ancillary services) and because prosumers who have DER still buys electricity from central generation, which also uses centralized information system for charging and billing.
I will discuss remaining points in the next articles:
(3) Based on (1) (2) above, what are requirements of energy trading system?
(4) Does blockchain technology meet the requirements identified in above (3)?
Thank you for reading and your feedback is welcome. In particular, if I miss anything in this consideration, please let me know at yasuhiko.ogushi@gmail.com or via LinkedIn.
