Application of blockchain technology to energy trading #2
Peer-to-peer energy trading system
Decentralization of utility network (summary of the previous article)
In my previous article, I discussed how physical layer and information layer of utility network might change with increasing penetration of DERs (Distributed Energy Resources). My conclusions were the following:
- 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.
In this article, based on above, I will discuss what requirements of peer-to-peer energy trading system might be and whether blockchain technology meets those requirements.
Functions and requirements of peer-to-peer energy trading system
What would peer-to-peer energy trading system and process look like? This is a thought experiment. I would assume functions and requirements as below.
(1) In order to complete a transaction, supply and demand need to be matched for a specific time. There is no guarantee that surplus electricity of a prosumer always matches with demand of a particular consumer. Therefore, it is more practical to trade electricity in a market than by arranging fixed peer-to-peer transaction. Figure 1 below shows peer-to-peer transaction where prosumer A provides surplus electricity to consumer B and C. Two consumers buy electricity from prosumer A because consumer B just cannot consume surplus electricity from prosumer A at a time. Although not shown in the figure, a retailer also may buy surplus electricity.
(2) The peer-to-peer “market” described above is different from existing wholesale market and is one where only prosumers and consumers participates. For example, market participants consist of prosumers/consumers on a same distribution feeder or prosumers/consumers in a limited area under the same service area of a power grid company.
(3) Trading band (interval) is constant. Figure 1 shows one hour trading band, but it could be 30 minutes, 15 minutes, or other.
(4) In a peer-to-peer market, sell tenders and buy tenders are matched and transacted by intraday system or Itayose system. Example is shown in below Figure 2.
(5) To enhance the accuracy of balancing, multiple trading take place for a certain date and time (e.g. November 3 14:00–14:30). For example, 3-day ahead, day ahead, 8-hour ahead, 4-hour, ahead, 1-hour ahead, spot/real-time etc.
(6) Sell tenders and buy tenders are made automatically by agents of market participants. Such agents are software equipped with algorithms that uses technologies such as solar PV generation forecast and demand forecast. Human intervention is also possible.
(7) Settlement follows electricity transacted and actually delivered. Or, transaction records are made for later settlement. (Transaction means establishment of sell and buy tender matching while settlement means completing transaction by payment.)
(8) Adjustment is made for electricity transacted but not delivered due to, for example, failure of equipment, or decrease in solar PV generation by sudden weather change.
(9) Part of electricity other than procured through peer-to-peer trading is supplied from contracted retailer. Such retailer charge and bill for the portion. (See the previous article for reasons why retailer still sell electricity.)
More details of the system (e.g. trading band, matching system, settlement etc.) need further design and optimization. For discussion purpose, I will assume a generalized system to come up with requirements. More requirements are:
(10) I assume a network that consists of at least thousands market participants for a commercial system. Transaction and settlement (or record making for later settlement) need to be complete within a range of trading band.
(11) Transactions are traceable and verifiable.
(12) Privacy is needed so the contents of transaction is not shown to third parties.
Applicability of blockchain technology
Blockchain technology refers to Distributed Ledger Technology (DLT) that has the following characteristics (source: BBc-1[Beyond Blockchain One] design paper):
Guarantee of Validity (of transactions): The ledger guarantees that a new transaction cannot be mutated, does not contradict with the existing history of transactions, and is committed by a user or users who have right to do so. The ledger also guarantees that nobody can stop a user or users who have right to do so to commit a new valid transaction.
Proof of Existence (of transactions): The ledger provides the proof of existence of a transaction. The ledger does not allow anyone to delete the evidence of a transaction committed in the past, or to fabricate an evidence of a transaction that has never been committed in the past.
Consensus on Uniqueness (of transactions): If two contradicting transactions were to be committed, all users of the ledger (will eventually) see the same one of them in their views of the correct history of transactions.
Descriptions of Rules (that define semantics of transactions): The ledger allows users to define semantics of transactions. (In Bitcoin, all transactions are basically about sending bitcoins.)
Based on peer-to-peer energy trading system assumed in the previous section, I will discuss applicability of blockchain technology to energy trading.
(a) Making tenders of sellers and buyers: selling tenders of prosumers are made based on the optimization of supply that takes account of solar PV generation forecast by weather data, associated charge/discharge schedule of energy storage (if applicable), and demand forecast of self consumption portion etc. Buying tenders of consumers uses demand forecast by historical data, weather, and equipment/facility specification data. Software agents of sellers and buyers take care of automatic tenders. I do not think that this process has relation with blockchain technology.
(b) Bidding, matching, and transaction in a market: transaction results in a market need uniqueness and I do not see any advantage doing this process in a distributed system. If this process is done in a distributed system, disadvantages such as increased communication for synchronization and risk of losing uniqueness; so I think that it would be appropriate for this process to be done in a centralized system. The below statement is from JPX Working Paper “Applicability of Distributed Ledger Technology to Financial Market Infrastructure.(in Japanese)” I think that this also applies to energy market.
Majority of functional devices in “transactions” in securities market is how efficiently matching of tenders can be done in the pre-trading process that precedes completion of transactions. Market operators make efforts in ways to concentrating tenders to their market to increase the possibility of matching tenders and completing transactions at the best price by creating competition. Those characteristics above and architecture of DLT, namely processes on a distributed network, has low affinity. When efficient centralized markets are already in place, it would be difficult to improve those. (original in Japanese, my translation)
(c) Settlement: in a cryptocurrency transaction based on blockchain technology, transaction and settlement are carried out at the same time (or with very little temporal gap). If this technology is applied to transactions of securities that usually require a few days for settlement after transaction, time for settlement can be significantly reduced. However, I do not see strong necessity of real-time or near real-time settlement for consumers when consumers pay monthly (Japan) or longer intervals (but sellers would like this). Rather, disadvantages such as extra process and extra fee may appear in real-time settlement. It would be probably more appropriate to store final transaction data for a certain period of time (e.g. day/week/month) and to use them for billing and payment with an appropriate fixed interval.
Nevertheless, there is a claim that blockchain technology is suitable for energy trading for its capability of processing a large amount of transactions in a short time. I think this is to be tested. For example, the founder of Grid+, a US startup company, Alex Miller writes in his blog:
In a future world where there are many localized markets with dynamic pricing based on supply/demand and distribution congestion, centralized administration of settling is neither economically efficient nor technically feasible. The distributed p2p nature of Ethereum provides a complementary settlement layer to the distributed geographically specific p2p energy markets.
Also, there is a below statement in White Paper V3 of Australian company Power Ledger:
A trading platform that requires third-party settlement and reconciliation of
millions of transactions between hundreds of thousands of traders across 5-
minute trading intervals would be almost impossible to support without a
central player taking control of all parties’ data, prescribing fees, requiring trust,
proving accuracy and binding the market up in red tape and bureaucracy. But
the blockchain is an agreement machine that can facilitate the financial
settlement of these transactions, in the same trading intervals in which the
energy is produced and consumed, and it can be achieved at a speed not
possible using current market settlement technologies.
It is possible to complete settlement by transferring tokens or cryptocurrency that correspond to transacted price. If tokens need to be exchanged with fiat currency, then settlement needs external system such as exchange to complete.
If payment currency is a fiat currency, external infrastructure such as banks and credit cards is used for settlement, just as conventional electricity payment is done by fiat currency.
Summary
- Transactions among prosumers and consumers are peer-to-peer. To increase the chance of matching supply and demand, it would not be practical to perform transactions between a pre-arranged pair or among a pre-arranged group of prosumer(s) and consumer(s). Transactions via market is more practical.
- The process of bidding sell tenders by prosumers and buy tenders by consumers, and matching sell tenders and buy tenders would occur on a centralized market outside blockchain (distributed system).
- Settlement should follow matching and transaction of sell tenders and buy tenders. There is a claim that blockchain technology enables settlement efficiently without central control. Necessity and benefit of speed settlement for consumers are not clear at this point though.
I will write about my thoughts about connection with existing infrastructure.
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.
