Application of blockchain technology to energy trading #6

Will blockchain democratize energy system?

My previous article discussed market scale of peer-to-peer energy trading and concluded as follows:

1. Peer-to-peer energy trading needs sellers and buyers. While a buyer could be anyone, a seller has to be one with generator.
2. In the short term (3 years from now) in Japan, the main sellers will be owners of FIT-expired residential solar PVs.
3. The number of such sellers will be 750,000 (1.4% of whole household) in 2020. The amount of electricity used for peer-to-peer energy trading will be 876GWh (0.08% of whole generation), which is tiny fraction of Japan’s whole electricity generation.

In this article, I will discuss the statement “blockchain democratizes energy system” that I find from time to time. Democratization sounds a bit exaggerated. Is this statement valid? If so, what is democratized and why make such a exaggerated statement?

Will blockchain democratize energy system?

I come across a statement that blockchain technology brings democracy to energy, in articles and white papers related to energy trading platform and peer-to-peer energy trading. For example, Power Ledger, an Australian energy blockchain startup, has this word at the very front of their website. (Note: this is a screen capture in June 2018 and design has changed since then.)

Source: https://powerledger.io/

The same key words also appear in a press release of the company (bold letter added by me). Democratization seems to be a real goal of the company.

We’re thrilled to partner with Helpanswers to grow our technology and platform footprint in North America and bring Power Ledger a step closer to our goal of democratizing power,” said Power Ledger Managing Director, David Martin.

Likewise, an article by Restart Energy of Romania is titled:

Restart Energy Democracy: Decentralized Energy Trading Platform with P2P Services Going Global

Another article written by Renewables International has the below expression:

Blockchain technology has power to disrupt energy system and accelerate energy democracy. (my translation)

Finally, though it is a bit different, I also found an article that argues democratization from AWS.

Democratization of energy is rather a fuzzy concept in the above examples, in particular in the first two. I will discuss what it means first.

What is democratization of energy?

According to Oxford Living Dictionary, democratization is:

1 the introduction of a democratic system or democratic principles.

1.1 The action of making something accessible to everyone.

“Democracy” is:

1 A system of government by the whole population or all the eligible members of a state, typically through elected representatives.

1.1 A state governed under a system of democracy.

1.2 Control of an organization or group by the majority of its members.

1.3 The practice or principles of social equality.

This is enough to get an idea. Based on above, I would assume that democratization of energy means the following in a world where peer-to-peer energy trading is possible. Let’s assume that regulatory issues (discussed in my article #4) are resolved and peer-to-peer energy trading is legally allowed.

1. A buyer is given options of who he/she buys electricity from. A seller is also given options of who he/she sells electricity to.

Situation may vary depending on countries and regions, but in general so far a buyer do not have options of who he/she buys electricity from, or has very limited options. In addition, a buyer may have to buy electricity generated by a type of generation that he or she does not support (e.g. thermal, nuclear etc.).

There has been more options since de-regulation of the electricity retail sector. As blockchain-based peer-to-peer energy trading further enables a buyer to buy electricity from prosumers, widening options of who a consumer buys electricity from means democratization, I suppose. In other words, having an option of buying electricity from solar PV owners in your neighbourhood for example is democratization.

Likewise, for owners of solar PVs and other generators, there used to be only one option of selling surplus electricity to a local utility company. Being able to sell surplus to anyone he/she wants to sell means democratization, I suppose.

This is true with pricing options too. Conventionally there was no options for prices for buyers and sellers. Sellers of surplus electricity of solar PV may have to sell surplus electricity at undesired low price to a local utility. If buyers and sellers can determine prices, it means democratization.

2. Elimination of intermediaries such as utility and exchange (as indicated in the article by Renewables Internationals above)

Even if peer-to-peer energy trading is legalized, I think that the above statement is only partially valid. The reasons are below:

a. As of today, it is impossible for a peer-to-peer energy trading participant to rely on blockchain-based energy trading system 24/7 as I explained in my article #1. Blockchain-based energy trading would happen in parallel with conventional system as supply is very limited.

b. Even with the point a. above, blockchain-based energy trading still depends on existing distribution network (except special cases such as private line network and microgrid). Therefore, network fee has to be paid to grid operator. Grid operator may not be considered intermediary, but it can be said to be in the position of intermediary.

c. As I wrote in my article #3, coordination between blockchain-based energy trading system and existing utility system would be needed for charging and billing. This coordination is not exactly intermediacy, but it it hard to say that blockchain-based energy trading system is intermediary-free and independent.

d. Balancing supply and demand is still needed with peer-to-peer trading. Blockchain-based peer-to-peer energy trading system may be able to balance for the amount traded via the system. However, given that participants of peer-to-peer trading are also customers of existing retailer, coordination is likely to be required between blockchain-based energy trading system and existing utility system.

e. Peer-to-peer energy platform provider can be in the position of intermediary.

3. Democratization from AWS

The article that states democratization from AWS is as follows:

Amazon Web Services dominates the world. It is called “the world of AWS”. Central servers have all the authorities and process all transactions. This is centralized system.

On the other hand, the reason why blockchain technology gets attention is that each computer processes data autonomously and completes transactions and procedures.

(omitted)

It is new in that transactions can be completed autonomously by smart phones without central server having information of all transactions and processing those.

It is still possible, I think, that blockchain nodes are located in AWS, depending on architecture design. I actually saw such proposal from an IT vendor. There are options that do not use AWS, but options that use AWS still exist. It sounds a bit exaggerated to call it democratization.

I was not able to find information quoted in the article above that “miyabi” by bitFlyer and application of Sekisui can be run only by smart phones. I think that the information is incorrect.

Is democratization really important?

I am aware of people who care about provenance of electricity. However, my view is that energy democratization described in 1.,2., and 3. above is not likely to be a big issue for majority of people in today’s developed countries.

Important factors of electricity supply include supply stability, reliability, quality, right to receive supply, and adequate price. As electricity infrastructure business tends to be natural monopoly, the business is regulated in many countries and adequate prices are maintained. In Japan where unbundling of generation and transmission/distribution is taking place by 2020, transmission and distribution will remain a regulated sector. Authority oversees the business so network fee is not increased unreasonably. (This is a side topic, but a Canadian utility company I used work for disclosed annual salary of employees on their website under transparency and accountability.)

If democratization is important in electricity, it would be in the situation where electricity price rises unreasonably and/or citizens lose right to receive electricity supply involuntarily.

Water supply, the same infrastructure business, once experienced unreasonable price hike associated with privatization. In 1999, a local water company in Cochabamba, Bolivia, became under control of a giant multinational. Water bill hiked to $20 in a town where minimum monthly wage is less than $100. This is equivalent to $400 monthly water bill in a developed country. The impact was significant.

Citizens rallied to seek abandoning contract with the multinational, demolishing privatization of water, and citizens’ participation in policy making. Bolivian government moved on military repression and caused death. After fierce fight, the multinational finally left the country, but sued Bolivian government for $25 million of lost profit, which is allowed under WTO rules.

(Source: Shiva, Vandana, Water Wars: Privatization, Pollution, and Profit)

I digressed a bit, but if energy system is hijacked like the above example, democratization would become really important and of primary concern. Otherwise, democratization may not be a prime issue for many consumers.

I am not saying that peer-to-peer energy trading does not have value, but democratization alone may not invoke strong demand for peer-to-peer trading.

Summary

I see statements of democratization of energy mainly made by businesses that promote peer-to-peer trading. I would assume that democratization in the context of peer-to-peer trading means the following. I will also add my thoughts as well.

1. Democratization means being able to have options of who you buy electricity from, what origin of electricity (e.g. solar, wind, or thermal), and at what price. For owners of generators, who you sell surplus electricity to. → I agree that peer-to-peer energy trading increases options.
2. Democratization means trading of electricity without intermediaries.→Peer-to-peer trading does not mean complete independence from existing utility system. Peer-to-peer trading still relies on existing utility system for delivery of electricity, charging and billing, balancing, and other functions. Plus, one cannot rely on peer-to-peer 24/7.

As long as stable supply, reliability, quality, the right to receive supply, and adequate price are maintained, democratization of energy is unlikely to be a primary concern for many consumers. This is not the case if hijacking like Cochabamba story above occurs though.

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.