Application of blockchain technology to energy trading #9
Will blockchain disrupt energy industry?
“Blockchain is a disruptive technology.” “Blockchain disrupts financial industry.” We hear those phrases a lot, but is this true? In this article, I will discuss if blockchain technology disrupts energy industry.
What is “disruptive”?
To begin with, I would like to confirm the meaning of “disruptive” in the context of innovation. This is classic, but I refer to “Innovator’s dilemma” by Clayton M. Christensen. In this book, innovation is classified into two categories: sustaining innovation that does not have significant impact on market and disruptive innovation which is defined as below:
An innovation that creates a new market by providing a different set of values, which ultimately (and unexpectedly) overtakes an existing market (e.g., the lower-priced, affordable Ford Model T, which displaced horse-drawn carriages)
If blockchain technology disrupts energy industry, the possibility is structural change of energy delivery by peer-to-peer energy trading and other applications. The impact on the market is supposed to be disintermediation of existing players and change in points of value creation in energy delivery. If new value is created as a result and a new market that replaces existing market emerges, then energy industry is considered disrupted.
Will existing players be disintermediated?
This is the discussion point already discussed in my article Part 1. Disintermediation of existing players (i.e. retailers, utilities) means electricity supply is established by peer-to-peer trading between end users who own DERs.
I often see figures like the below. However, I do not believe that this change will occur in the short run (10–20 years). Even if peer-to-peer network is established, it will co-exist with existing energy information network. I already explained reasons in Part 1; but supply of peer-to-peer network is limited and that peer-to-peer network does not have capability of grid management.
It is unlikely that existing players are disintermediated and that existing market is replaced with a new market in the short run.
Will point of value creation of energy delivery change?
This point has also been covered in the democratization discussion in Part 7. Disruption would occur if values of managing and controlling transmission and distribution grid shifts from existing players by peer-to-peer energy trading. My view is summarized as follows; changes in points of value creation is limited.
Unless a private-wire network is built, physical deliver of electricity relies on existing system. Unless supply is secured 24/7, energy information system will be co-existence of two. It is difficult to shift points of value creation completely.
Other new values created
Then will new values that form a new market replacing existing market be created from peer-to-peer energy trading? The following is possibility, if any.
- Guaranteed validity of transactions: one of the characteristics of blockchain technology is guaranteeing validity of transactions and making those verifiable. However, the value may be limited unless information reliability of existing system is significantly low.
- Transactions with attributes: qualitative attributes (e.g. type of generator, location of generator, owner of generation facility) can be recorded and used for transactions. In other words, you can sell electricity with colour. There seems to be an increase demand of electricity with renewable origin among corporations that strive to achieve RE100. This can be a new value.
Summary
To summarize my point, I will test claims of of article by Renewables International. The article claims that blockchain technology will disrupt energy system. Please bear with me as quotation is a bit long. (I could not find the original article, so those are translated from Japanese to English by myself.)
The world of Old Energy that is shaken by energy transformation… WIll blockchain disrupt this next?
(Omitted)
Blockchain enables transaction management and distributed energy supply system in a distributed fashion in the energy industry. This will drastically change the current multi-layer system of “generation-TSO-DSO-retailers-consumers.” Blockchain directly connects (renewable) energy and consumers, and disintermediates utility, broker, market maker, exchange, and banks. Direct and automated interactions via smart contract defines quantities, quality, prices individually and connect small-scale PVs, CHPs, and general consumers. Decrease in transaction cost and efficient process makes promising business models for prosumers.
This is in reality in other industries. Centralized business models such as hotels, rental cars, and taxis are under pressure of companies that provide distributed and peer-to-peer service platforms such as AirBnB and Uber. Services are provided in a distributed manner, but mediation, transaction, and payments are centrally managed by a platform. In short, what if you can supply electricity from your rooftop PV to a toaster of your next door?
Possibility of blockchain technology in the energy industry
Blockchain technology in the energy industry is still at design stage. However, it has potential to disrupt the entire energy system. Electricity, gas, supply of community heat, transaction of renewable energy, electric vehicles, grid management, metering, billing, all or part of traditional energy companies’ business process can be taken care of by blockchain.
Distributed transaction and supply system without mediation
Electricity generated in a centralized fashion within a traditional multi-layer energy system is distributed to industrial, commercial, and residential consumers via transmission and distribution grid. Market participants trade at a wholesale market, and all transactions of all stakeholders go though financial service providers (banks etc.). Integration of different applications using blockchain enables transaction and supply system managed in a distributed fashion. Brokers and utilities may have no role.
There is an emphasis of “disintermediation” by blockchain technology. My view regarding this point is as follows:
・Grid owners/operators are the provider of infrastructure for delivery of electricity traded, even if peer-to-peer transactions occur. They are not mediators. Therefore, they are still needed unless energy is traded through a private grid.
・Retailers may be in the position of mediator. However, they are responsible for balancing and billing. As I discussed in Part 7, if we assume that a blockchain-based energy trading system runs in parallel with conventional utility system, which I think is likely, the possibility of retailers being of no use is low.
・The above claim indicates that wholesale market is an unnecessary layer. However, even if direct transactions occur, some market functions are necessary to match generation operators and consumers. This could be a new market that replaces conventional wholesale market, or smaller-scale local market.
・Financial service providers (banks etc.) may become unnecessary if a payment system that has low or no transaction fee using digital currency is established.
Cost reduction, speed, and flexibility
Blockchain that enables transactions without mediation will bring significant cost reduction effect.
Cost reduction or made free of charge by eliminating margins for intermediaries
Cost reduction or made free of charge of operation cost for metering and billing
Made free of transaction fee of banks
Cost reduction of network fee
Cost reduction or made free of charge of renewable energy certificate
Smart contract automates various manual work, which leads to faster process and increased flexibility in all systems
・”Cost reduction or made free of charge by eliminating margins for intermediaries:” it is not clear who intermediaries are and what cost is reduced. My understanding is that blockchain technology alone does not enable this, but it is associated with market design and policy change. As I discussed in Part 4, the current Electricity Business Law in Japan does not allow peer-to-peer energy trading and it needs to be changed. In addition, who takes responsibility of balancing when transacting without retailer needs to be clarified and formalized.
・”Cost reduction or made free of charge of operation cost for metering and billing: ” As I have already discussed, I would assume that blockchain-based peer-to-peer energy trading system would run in parallel with existing energy information system. Current system is not likely to be replaced. Therefore, cost reduction by blockchain technology is unlikely to be realized.
・”Made free of transaction fee of banks:” As aforementioned, if settlement by digital currency that does not incur transaction fee is realized, this will be true.
・”Cost reduction of network fee:” this is not achieved by blockhain, but a matter of policy design. Cost reduction of network fee can be achieved by creating a new network fee category within distribution, or network fee by distance.
・”Cost reduction or made free of charge of renewable energy certificate:” This is possible as blockchain technology can record and transact qualitative attribute.
・”Smart contract automates various manual work, which leads to faster process and increased flexibility in all systems:” I don’t understand necessity of smart contract. I would assume that RPA (Robotic Process Automation) is better suited for automating manual work.
Record all the energy flow and commercial transactions in a distributed manner so those are immutable
Blockchain and distributed transaction record data can save all the energy flow and business activities in a safe and immutable manner. This is the most important benefit of blockchain. Transactions are recorded on computers of all users in a distributed manner. Users “witness” transactions between suppliers and consumers. Therefore (falsified) new data are not consistent with original data that have been recorded in a distributed manner, and falsifying validated transactions is not possible.
・I agree with this point. However, as aforementioned, the value of this would be limited if information reliability of existing system is already high.
Grid management, ancillary service market, and virtual power plant
Grid management becomes easier by smart contract that uses blockchain technology. Smart contract sends signals of which transaction is performed when to system based on stringently defined rules of energy flow and energy storage to balance supply and demand. For example, if there is excess supply, charging excess energy starts automatically by “smart contract.” On the contrary, demand exceeds supply, stored energy is discharged automatically. Therefore, blockchain technology directly affect grid management and energy storage. “Smart contract” can be used in ancillary service market and virtual power plant.
・It may be due to lack of my understanding, but I do not understand the necessity of smart contract. Is this something that regular computer program cannot do?
As mentioned above, I thought about factors that I can think of as possibilities of blockchain disrupting energy industry. So far the degree of disruption seems to be limited. I am interested in further discussion if there are other factors or aspects of disruptions not considered here.
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.
