Full Interview: Blockchain and the Potential for Local P2P Power
An interview with Director of Business Development Scott Kessler of LO3 Energy
This interview is the second in a series of articles on the intersection of blockchain and the *real* sharing economy. By “sharing economy”, I do not mean the Uber/ AirBnb sharing economy which is nothing more than a euphemism for capitalism's newest strategy for generating monopolies and extracting wealth & disempowering those who create real value. The *real* sharing economy is one in which is open, regenerative, equitable, and seeks to empower those left behind by the existing economic paradigm.
This was originally published in a significantly abridged form as a Q&A on Shareable with a creative commons license and is reprinted with permission. Since Shareable readers and Medium readers constitute different audiences, I will be posting the full-length interviews for anyone who wants more information, including the slightly more technical questions I may ask.
In addition to what it is most known for — financial services and cryptocurrencies — different blockchains are already being used to provide a wide range of innovative services around the world. One of these services involves facilitating peer-to-peer (P2P) energy markets. By combining blockchain technology, Internet of Things devices, and automation, the startup LO3 Energy and its partners facilitate highly-efficient energy markets where the price of electricity gets adjusted every second and in turn, automated devices turn on or off depending on how much supply and demand exists at any given time. Aligning production and consumption at such small intervals allows both sides of P2P energy — production and consumption — to become increasingly profitable.
“We can basically expose all these [IoT] devices to a market and allow the market pricing to determine when they are on or off according to your preferences.”
LO3 Energy is currently operating a pilot project called The Brooklyn Microgrid in Brooklyn, New York. LO3 will sell of a significant portion of the Brooklyn Microgrid to residents, allowing the community to have an ownership in its own energy management capacity.
We spoke with Scott Kessler, director of business development at LO3, who explained how blockchains can benefit localities everywhere and drive sustainable power usage practices simply by making energy markets faster, efficient, and precise.
Aaron Fernando, Shareable: Can you tell me a little bit about why you chose to start a microgrid in Brooklyn. Did they come to you; did you come to them?
Scott Kessler, LO3: The first test site was a product of searching for where in the US there was the right regulatory dynamic for this sort of test. We picked New York because of the REV Initiative, which is New York’s way of trying to incentivize utilities to work in new business models.
REV is “Reforming the Energy Vision” and it’s a really big overhaul reforming the energy sector, encompassing sort of everything. One of the big questions within it is “What does the utility of the future look like?” and “What services do they provide?” because there is a acknowledgement that the way utilities make money today (they get a guaranteed profit off of the infrastructure that goes into the ground) only worked as long as we really needed new infrastructure constantly.
But now that we have distributed energy, from solar and wind and now that we have smart devices that could reduce energy use and could respond to price signals, likely the future doesn’t require as much capital expenditure. So there needs to be a new model for the utilities. New York was really ahead of its time in promoting that, in the US, at least — and globally, actually, it was one of the places where regulators said, “we want to start pursuing this.”
So we knew New York and we decided on this neighborhood because we wanted to find a few things. One was a testbed where folks had some environmental consciousness; they were interested in buying clean energy. Where there was a sense of community; where there was a diversity of people and buildings, so that you could work with people of different races and people with different economic backgrounds. And then also, we want to design something that can work in a number of different locations. So we would need to have number of small residential, small business, large commercial and industrial, and large multifamily. And then lastly, it’s really a energy-conscious area, in the sense that they really appreciate the value of electricity. This area was particularly hard-hit by Hurricane Sandy and so they know what it’s like to sort of be out of power. They have a real interest in developing more local resources that might assist resiliency by the time the next hurricane gets here.
I wanted to spend some time talking about the marketplace and the hardware and software that you use. I listened to a podcast with Belinda Kinkead, Director of LO3 Energy, Australia, and she explained how your blockchain is designed to model the physics of an energy grid. Can you explain a little bit about how that works?
The goal is to really have a market that reflects physics. What I mean by that is that when you put electricity onto the grid, up until a certain point, you own the electrical wires. The wires within your home or in your business are usually your own responsibility and then once you get onto the grid, then you start using different pieces of the grid. So you would start using copper wires, and then maybe you need to go through a transformer and maybe you need to go through a substation and then you would get to the end consumer of that energy, and it would go into their building.
What you would need to do is design a market that takes into account “What price are you selling it for?” and “What price is the consumer buying it for?” And then, how do you account for the pieces of the grid that you use? How to we insure that that transformer gets a payment? And that that substation gets a payment?
So what we’re really looking to do is design a marketplace that reflects the physics in the economics. What we have today is a system where we take a guess, really, at “What is the overall cost of the grid?” and then we sort of socialize that cost out among everyone equally and we say that based on how much [energy] you used, here’s your cost for the grid.
But that doesn’t reflect if you were buying energy from your neighbor or whether you were buying energy from a generator a very far distance away. So moving towards pricing that reflects the grid not only includes the fact that the pricing accurately reflects which pieces of the grid that you use, but it accurately reflects when that energy is used as well.
Because on a hot summer day, when the grid is very close to being overloaded, it is really valuable for you to be able to turn off a device. You know, reduce the amount of demand on the grid. But during the night or during the winter when there is not very much demand, and so that energy has a very different cost. And again we really fail to accurately reflect the time value of energy. What we’re trying to do is create a real tight market that reflects the time value and the locational value of where energy is used and once you get that accurate reflection of the market then all of a sudden all of the IoT smart devices — all of these PV panels and batteries — the return on investment for those gets a lot better. You can much more accurately figure out what devices are going to pay well, and where.
Right now, I can just say that a PV panel has the same value anywhere on the grid but that’s not true at all. You want investors to be looking for the weak spots in the grid that need support and investing money there. And so we need price signals that generate that and so that’s what we mean when we say “developing a market that reflects the physics of the grid.”
How fast does the price information get updated? Is it per hour or in a matter of seconds?
That really is a question of market design, and that’s actually fairly customizable. We have our meters take readings about 60 times a second. They take the readings pretty fast and then, our blockchain — it varies depending on communication and a few other things — but somewhere around 1 second per block. I usually say the max we can do right now is 1 second per block but we actually need to get a little faster than that because some of the things we plan to transact in the future are called ancillary services. Are you familiar with the concept of power quality on the grid?
I’m not. Can you explain that a little?
Different types of electricity on the grid have different sort of, flavors, I’ll call it. And your devices are all expecting one flavor and if what you’re sending them is too out-of-sync with what they’re expecting, they can actually get damaged or even destroyed. So industrial factories with really expensive equipment, hospitals, data centers, factories — they all actually invest a lot of money in devices that can sort of clean up the electricity as it enters the facility and make sure it’s the right flavor.
Right now the way that works for the grid as a whole is that we just have really large — usually it’s a spinning wheel or a spinning turbine of some type that deal with that for us, but there’s the possibility that we can have lots of small batteries dealing with it and lots of different solar panels and lots of different assets that all might get some of that value if they contribute in some small way. We envision a marketplace for that, but in order to transact those ancillary services — that flavor of the energy — you have to operating at sub-second intervals. So we need to get very fast for that.
Can you talk a little bit about the demand response capability — like the ability for the network to turn things off when power is in high demand? Does that include if you have an electric car and you plug it in and use that as storage, does that kind of count?
Yep, it certainly does. Basically the entire idea is that your devices and your building as a whole would know how to answer “What’s the value of you consuming electricity?” At any point in the day that may change by device and the idea would be that they can all participate in the marketplace and really just see, you know, “Is it worth it for me to be using electricity right now?” For a lot of your devices on that hot summer day, they’re going to say “No, not worth it for me.”
Now, maybe your air conditioner stays on because you’re willing to pay that extra amount because it’s hot out. And maybe your refrigerator turns on once every five minutes to make sure everything stays cold, and a few other things you really don’t want to turn off will also stay on. But the idea there is that we can basically expose all these devices to a market and allow the market pricing to determine when they are on or off according to your preferences.
If you were to find out that you’re unhappy that you can’t use something right now and it’s worth it for you to pay it, that’s totally fine. Again, it’s moving toward this world where pricing affects physics. What we want to do is get to a model where you can basically almost get a revenue stream from turning things off because the value of that to the grid is so high that they would actually pay you to do it.
So it seems like this would make electrical production and consumption much more efficient by reducing rates of overproduction, right?
Yeah, basically the idea here is that you’re trying to align production and consumption as much as possible so that if we’re producing way too much energy — let’s say it’s a really sunny day but it’s not that hot and we have a lot of solar production on the grid, and we need something to soak up that energy, well maybe then suddenly energy becomes really cheap and devices that normally wouldn’t be on — they turn on. Or your battery charges at that moment so it’s consuming energy at the cheapest cost possible. Your electric vehicle — that battery’s charging at the lowest cost possible. But on a really hot day, the reverse happens.
The way we design the grid right now is we just simply ask, “What is the absolute most amount of electricity that we will ever consume at one point, for any one moment?” And that is the amount of electrical generation that we build, so there is a lot of generation that, most of the time, is going unused. It’s really expensive because you only use it a few hours a year but you need to build an entire large natural gas plant just to meet those few hours. If we can, instead, pay some people to turn off their devices, the grid as a whole will be cheaper, those people will get paid, and we won’t overload the grid. So it’s all about flexibility of the grid, making the grid a little bit more resilient in the sense that you’re less reliant on any of those one big pieces. You can imagine if we lose one of those big pieces then all of a sudden the price would shift and devices would react accordingly.
Getting into that, in the interview with the LO3 Australia Director, she mentioned something about islanding, does that actually require specialized hardware in certain places — like at the edge of this island — is Brooklyn uniquely situated for that, or can you do that kind of anywhere?
Islanding, you’re correct… the most basic way to think about it is: imagine something like in New York City, it could be a really tall building; in a more suburban section you can imagine a sort of estate development and even though there’s a lot of users sitting within that either large building or development, imagine that it has one point of connection with the larger grid and there is special equipment that allows it to basically disconnect when it needs to and operate in what they call “Island Mode.” So whether it’s a storm outage, whether it’s for price reasons, or whatever the reasons are, that grid can operate like a mini grid — a microgrid. What we are doing here in Brooklyn is we are aiming to install a microgrid but we don’t currently have that capability. Right now, we operate over the public distribution network with the goal of being able to island eventually.
You mentioned a diversity of different users. It was mentioned that one of the things that either is possible or will be possible is crowdfunding some sort of production capacity like a solar panel so that the community itself can own an asset. Can you talk a little bit about how that would work?
Yes, you can imagine that there is a big rooftop here in Brooklyn and it’s really well oriented to get a lot of sunlight but maybe the owner of the building doesn’t want to own a solar panel. So what you can do is you can go out to the community and say “Hey, do you guys want to collectively own this?” Everyone can pay a different amount and you can get a proportional amount of energy that’s put off by the panel, based on how much that you own. It’s really just a way of crowdfunding an asset.
What gets pretty interesting is that if you think about the fact that now, you have money that’s getting invested in the local community that’s being sold to folks in the local community and you have a really nice circular economy effect going on. That money isn’t leaving the community for energy, but rather the economic and the environmental impact of those dollars does stay local. So we think that is a really interesting model and the type of thing that people are really keen to get involved in.
One of the big reasons why people in Brooklyn are interested is because they really do want to get involved with this community aspect of it. They want to get involved in this local economy development. People here participate in things like a food co-op, where everyone works a few hours. It’s very much a neighborhood-oriented area.
Are there any social impact or social effects that you’re noticing around the users that are already using this in Brooklyn?
I would say that they seem like they are definitely more engaged with energy than they’ve ever been before. They’re interested in solar, they’re interested in their impact of their energy use. There’s probably a little bit of self-selecting going on there as well: the folks who are going to participate are going to be the ones who are going to be more aware.
The hope would be that we could use this as a way to drive awareness of environmental issues and local issues. I think we are beginning to develop a community around our group here in Brooklyn, and that’s in addition to the fact that they are already a community in the sense that they live in the same area.
One thing that was a little confusing was that users can select the type of energy that they’re receiving and select local energy over non-local energy. I never really took that much physics, but can you determine with a relatively high level of certainty where electrons are coming and going on that network?
No, it’s very often a point of misunderstanding. What happens there is: the same way we buy and sell energy today, it’s impossible to actually track an electron — the technology just doesn’t exist for it. So the way that you can think of an electric grid is like a bathtub of electrons. You know how much someone is putting in and you know how much someone is taking out but in the middle it’s all one big soup where we don’t know where Electron A came from or Electron B came from, so what you’re really doing is buying the attributes associated with that energy: you’re buying the right to consume the energy off the grid at that time, but we can’t tell you that it definitely came from Household A or Household B. What does end up happening, though, is as something like this grows we can begin to say that within this community, here’s where the energy is coming from. We know where the energy sources are and as you get more and more hopefully local, clean assets, we can be able to say that the amount that’s local and clean is increasing. The pollutants in the local neighborhood would hopefully be decreasing. We can report out on those metrics, but it’s tough to say exactly during this time period, where did this come from, though. That’s the way electric markets work today, regardless of what you’re buying, it’s tough to say where did the electron come from. You’re really just paying someone to put energy on the grid somewhere and you’re taking it off somewhere else but you have no guarantee about where it’s coming from.
It looks like you have other offices in Portland and Australia as well: are there projects of a similar nature there as well?
Yeah, so in addition to Brooklyn, we now have two projects in Germany and one in Australia. We’re looking to develop a number of projects globally. We think that technology can really be deployed anywhere and we think that the general underlying idea of how the grid of the future operates, we think, will be semi-consistent.
Each market is going to have its own differences from a regulatory standpoint. We’re going to have some cultural differences and we’re very much aware of that, so we want to be testing out new business models in each of these markets and not necessarily assuming that the solution that we have here in Brooklyn is the right one for Australia and is the right one for Europe, and so on.
I saw that you were partnered with Siemens. What does that look like — what does that bring to the partnership and what you are able to do?
They are one of our key partners, obviously as a global company have a lot of focus in different markets that allow us to get a bit more exposure than we would otherwise. They are actively developing solutions for utilities across the world, both in the mircrogrid context — where you can imagine their technology pairs very nicely with grid edge technology like ours and allows us to develop this marketplace that does get data on both what’s going on in the home vs the substation and bring that all into one location.
Additionally, they very much are active in distribution management. So when utilities need software to manage their grid, Siemens is one of the companies they go to. Siemens is now able to offer those companies a combined solution where they can say “Yes, we will do all the things you’ve traditionally done and need, but on top of that, have you thought about including a way for your participants to transact with one another; for your customers to participate in a new way?” Going back to the beginning of the conversation, utilities find that really interesting because it is the start of the conversation about what is their business model of the future? How do they make [a renewed] profit, moving forward, if they don’t need to be installing substations and transformers and all the ways they’ve traditionally made profit?
Just to clarify, Brooklyn Migrogrid is a separate organization and it is intended to be significantly owned by the community — we don’t know the exact numbers yet. But right now it is still owned by LO3. We haven’t yet sold pieces of those off, but that is the intention.
