Ewald Hesse, Chairman of the Board at the Energy Web Foundation (EWF), gave a talk titled “Energy Market Transformation by Web3 Tools” at the Web3 Summit in Berlin on Tuesday, October 23. This presentation was an excellent primer on the state of the energy markets today, as well as the case for transformation and disruption, which EWF is well positioned to drive.
This is the first time we actually talk to blockchain people about energy, and I would like to give you a picture of the energy market, and how to transform this market, or rather how to help this market transform, which it does by itself already. It is actually a no-brainer, because in energy markets, most of the decisions are based on sensor data. The energy market is filled with sensors everywhere. So if you have a virtual machine, then you can connect it to this data, and you can automate everything through smart contracts. The question is why.
The answer to this question is what made us establish the foundation. We created the foundation together with the Rocky Mountain Institute, which has been trying to convince the world for 35 years why running on renewable energy is better than running on fossil fuels. So what we do with the Energy Web Foundation, we are actually building a chain, we are building a product which should constitute the smallest common denominator for the whole energy market around the world. And besides that, which is probably the biggest and most difficult task, we are explaining what kind of new degrees of freedom there are in this technology to our affiliates, 50% of which are large corporations, and 50% startups. Startups get it pretty much, but for large corporations it is very difficult to understand, because there is an abstraction that needs to happen in the business model, and an understanding of the new world, and that is not easy.
So, the energy market is actually very simple. If you look at electricity, there are basically two things you have: on the one side, it is just “produce & sell”, and that is also the key performance indicator for most of the utilities out there, produce cheap and sell high. What is difficult is that you can only produce as much as is consumed at the same time. So if you produce more, the wave in between the frequency gets compressed, and if your frequency diverges outside of the tolerance, then you will have a blackout. For example in Europe, we have a 50Hz frequency. If everyone turns off their washing machines right now, the frequency goes down, the wave is stretched, and if it goes below 48Hz, we have a blackout.
Now, the frequency is of national interest, and that is the reason we have a regulator there. So the regulator is there to put tools into the market to ensure that the frequency is always stable. And this is making the market very complex, because there is usually one entity in each market that is responsible for balancing the market. For example in Germany that is a transmission system operator (TSO), of which there are four nationwide. These are the companies that operate the high voltage lines, those very big ones going overland, and what these parties do, they buy capacity, very fast capacity in an auction, and they basically switch on and off all the time, as they see the frequency going up or down, they just inject and take energy out again. And of course, the more renewables we have in the energy system, the higher the cost for actually doing this. And the interaction in injecting energy, and taking energy out, has actually been growing exponentially in the last 15 years. Now the question is, imagine me being a TSO, and being responsible for adjusting the frequency, who is actually paying for my cost, and it is actually very expensive to balance the grid.
Anyone who wants to trade energy has to register, and they have to send a daily forecast to the transmission system operator, to the balancing authority, as well as any deals they made, here I bought, here I sold, which must balance at the end. And then after two months, they also have to send the actual data from their smart meter points. This is all done on Excel files. In Germany, we have 8,000 of those balancing groups, we have at least 300 traders, they are sending 8,000 Excel files to the transmission system operator. Because the transmission system operator has difficulty managing these 8,000 Excel files per day, and trying to figure out who really deviated from their forecast, there are specific thresholds to participate in this market. There is a minimum product you can trade. The minimum product you can trade in the energy market on a global scale right now is roughly one third of an annual household consumption, so an individual household cannot really participate. It is about 1 MWh or even higher, like 5 MWh. These are very large products, meaning households are not enabled to participate in this market.
Now imagine you were to allow very small devices to participate in this market. Devices as small as even a laptop. Meaning, if a laptop can participate in the energy market, then it would actually change the nature of electrical appliances, because I could see that this laptop could actually do arbitrage, because there is quite a big spread between the lowest and the highest energy price. So the laptop, or an agent on behalf of the laptop, could buy and sell energy. This will alter any type of appliance. A simple example is an electric vehicle. If you buy an electric vehicle, and the market has established tools that also very small products can be traded, then for an electric vehicle in the future, there will a return on investment. A Tesla Model 3, if you put it on the road in Amsterdam, and it is trading energy for six hours every day, at a cost of EUR 35k for this car, the breakeven point would be reached in roughly 3.5 years. As such, in the future you will buy electric vehicles as an investment, they will earn you money after four years. And the same can happen to washing machines, to fridges, etc. So what is happening is — and this has nothing to do with blockchain — that it is becoming more economically efficient to install smaller devices, meaning to produce electricity at the end point, rather than maintaining very large power plants.
When we started our research into the application of blockchain in the energy sector, which was around the time when Ethereum came onto the market 4.5 years ago, the renewable energy injected into the overall energy market was about 20%. We are now at 25%. When looking at the market development, we can forecast that in the next 20–30 years the world will run on 100% renewables. This is great, but it brings another problem: the fewer large generators we have in the network, the less inertia we have, and inertia is stabilizing the frequency. Renewables are very difficult to predict, meaning there will be more and more interactions required to balance the grid. Also, batteries are getting cheaper and cheaper. Compared with 2011, by 2016 the price had nearly halved. My prediction is that in probably 5 to 10 years, manufacturers will use little batteries in their appliances like fridges, washing machines, etc., because, again, you can have a return on investment, as these devices can participate in the energy market.
So, if you look at IT in the energy market, as I said before, 10 or 12 years ago, the whole energy market had basically its own IT infrastructure. All the information was transmitted through proprietary fiberglass installations, they did not even use the internet for communication. And if we are now looking at the market with more and more renewables entering, then we are looking at a completely different market. So, on the other side, you see this tool of a smart contract, and you think “Hey guys, you have 8,000 Excel spreadsheets, which is nothing else but sending a data point and then confirming it, if you put all this into a smart contract, then you have compliance upfront.” And then there is no reason anymore to have any thresholds for entering the market, because you are not dealing with those Excel files, it is a smart contract. It is working as it is supposed to work. And this is a very simple thing where you can start taking action, but it is not as easy as it sounds, because the energy market is not quite there yet.
From all our research at the EWF, there are now over 250 blockchain startups focused on energy, and many of them are our partners and affiliates. So we developed requirements for what the blockchain needs to have, or what the future energy backbone should be able to do. And if you look at all these requirements, it is clear that Ethereum cannot do it yet, a Proof-of-Authority (PoA) chain is already better, but also cannot do it yet.
So we have had a chain license for the last year, it is a PoA chain, and we funded the development of that already a long time ago, and one of the first test networks was actually on Ethereum. So we are constantly pushing the next development. And Gavin Wood earlier today showed what will essentially be Energy Web 2.0, where every affiliate, every application developer will have her own chain. As the chain runs right now, we have permissioned validators, and these validators are distributed around the globe, some are our early affiliates, like Tepco in Japan, Singapore Power. We built up the foundation very strategically in terms of validators, so that the network is spread around the globe. All the affiliates can actually chose whether they want to become a validator.
It is a public network, and that is a very crucial decision we made, that the network is actually public. We are convinced that otherwise innovation will not happen. So we are eating our own dog food. And if it is a closed network that only permissioned parties can access, then there is no token economics inside, and it will be very difficult to determine what the network is actually worth, or how secure it is. We are convinced that if it is a public network, and everyone can mess around with it, then we can also have an indirect measure of security for this.
The majority of the stack that we have out there is being developed by Parity Technologies, and the EWF funded it. And on the use case side, what we actually do is, we have lots of workshops with our affiliates, we try to come up with the smallest common denominator. So a few of our affiliates are using this, and the affiliates are actually helping us to prioritize our funds into tech development. One of the first was of course light client development. Then WASM, Secret Store — secret smart contracts are not really sufficient for many applications that we have now — , and block explorer.
What is actually very interesting is the dilemma on the light nodes and connecting assets. It is one of the most crucial things. So we have developed a couple of light nodes, and we have also worked closely with a couple of smart meter manufacturers. Christoph Jentzsch from slock.it has developed a very light node, and there were a couple of tests how we can actually put this light node into a smart meter, to avoid the necessity that everyone has to build their own data logger. So if you look at the energy startup scene right now, the first thing that everyone has to do, they have to build a data logger to get access to the data. I want to have access to lots of applications, but I do not want to buy 20 data loggers. So the question is, how to overcome this, there is a bit of a dilemma there. If you talk to startups, if you talk to innovators, and you ask them if they are interested in launching their application also on other data loggers, then of course everyone says yes, but if you ask them at the same time, would you be open to opening your data logger to other applications, then they would reject. So we are helping to overcome this kind of paradox situation by building light nodes and so forth.
Governance is a very, very important topic, because we are in the process of actually decentralizing ourselves, since we do not want to decide on something as crucial as the backbone of the whole energy market as a foundation. Obviously, there are very few people who know everything, there are only a couple of Vitaliks around the globe, and even then you probably do not want them to decide.
Then there are app developers, they already know more, and then there are a lot of token holders, who do not know too much about the technology itself. Also, since many affiliates are large corporations, they were concerned with their financial liability if they vote for an update (or do not). We could not answer this question. It is impossible to put a financial number to this, because you do not know how big the network is going to be, and what kind of applications are going to run there.
So we came to the conclusion, why not let the application developers decide, those who make the network most useful. Therefore there is a Dapp being developed by Christoph Jentzsch which is measuring gas spendings over time, and the more successful the application, the heavier your vote counts in the upgrade decision. Immediately, there are at least ten arguments anyone can come up with how you could game the system. If you have a Crypto Kitties in this scenario, is now Crypto Kitties deciding everything? We are going to figure it out, we are deploying it, and there are a couple of measures we want to install to prevent that behavior. We are going to test it in the next couple of months. And we are going to bring some Ether through the bridge into the game, and we are going to see how they behave if there is real money involved.
So, Energy Web 2.0 is something that Gavin presented today. We believe that the PoA chain is kind of an interim play. If you look at Ethereum, it is roughly at 80% of its capacity. So with PoA, we are roughly at 35x in terms of throughput, and in terms of gas cost, once we launch, probably only 1/1000 of the cost on Ethereum. We believe this capacity will suffice for another year, but not more, because we have seen all the applications from our affiliates, and their requirements in transactions per second. The only way forward is the next development step in the blockchain space, where every application will have its own product chain. And it absolutely makes sense, because there are a lot of applications where you want to do a lot of micro transactions, and a DAG chain is actually very useful for that, but then you need a virtual machine, a lot of logic. So I would be happy as an application developer if I could use different technologies and do not have to decide myself for any of the kind of platforms that are treated as a religion of sorts.
Looking at the application side, out of the 250 startups and utilities, large corporations, nearly 60% are going into peer-to-peer trading. However, we are probably two to four years away from peer-to-peer trading at scale, in terms of the scalability of the chain. So if you want to go towards peer-to-peer trading, where really price discovery is done in smart contracts, the requirements are simply too high for current blockchains. Think about decentralized exchanges (DEX), that is something the ecosystem is developing towards, but only for one market. In energy, we are looking at thousands of markets. It is simply impossible currently.
The second majority is actually going into refinancing assets, and this is an area I think is very interesting. Blockchain so far has been useful in raising a lot of money very fast. So why not do that to refinance renewable assets, tokenizing assets, sharing ownership. Especially for developing countries, a very interesting model. But therefore we need regulations to develop on the security side.
What is the most difficult, though, as I said before, is to make people understand what kind of new business models are possible. The above chart is a very famous chart on business model development. And you usually have these three steps. At the beginning, you have a new innovation, then market consolidation happens, and then the next innovation starts to commoditize the previous innovation.
Now, if we see that blockchain is kind of commoditizing networks, then the energy market is actually ahead of the networks. So if you listen to the large corporations, or the vendor side, you always here this sentence “we are building the next Google for the energy market”. The problem is, in the energy market, you are the best trader if you know exactly what is going on right *now*. So if there would be a Google in the energy market, Google would be the best energy trader. And therefore a lot of utilities are very afraid of those parties which have already assets in place and see the data, they are afraid to connect their assets to an analytics company from a large vendor, because there is fear that this vendor in five to ten years could become an energy trader as well.
And then there is the alternative possibility, with blockchain you can build a decentralized operating system, you do not have to give up sovereignty over your data. At the same time, we have to explain that there is also evolution in the blockchain happening. So for me, we are now in the second abstraction. The first use case was very simple, that was a currency. The second is kind of a general tool of this, like Ethereum and so forth. And after that, we see all the specialized chains like Hashgraph, IOTA, EOS, etc. and you basically have to decide for one of the ecosystems. Now, for us, what Polkadot does, and Kosmos, is actually the next abstraction, it is commoditizing the blockchains. We do not have to decide for one of them, because now I can use Substrate and choose the technology I need for my application. We have these two developments, on the one side the old mindset of the energy market, and on the other side the very fast paced development in the blockchain space.
There are a couple of frameworks we have built. One is the certificate of origin, a very simple framework that puts a light node into an asset and just captures one signal, namely how much energy is injected into the grid, and then puts this number into an order book, and then on the other side of the order book, who took this asset and consumed it. This process is done on paper right now, around the globe, and the smallest product that is being traded right now is 1 MWh. Putting this onto a smart contract, the product can become as small as you want. And it is bringing massive liquidity into this market, and we have just signed a very large deal with one of the large companies in this space, with the idea to establish the registration and trading backend on Energy Web for this entity. So the majority of the applications are either going into creating liquidity in smaller products or making use of assets more efficiently.
The foundation was created by the Rocky Mountain Institute and Grid Singularity, and the partners we are working with are Parity Technologies and slock.it. We have the goal to decentralize ourselves, and we have the goal to be as transparent as possible, and therefore there is a Foundation Council which is concerned with the mission of the foundation, and then there is the executive team for the delivery.
For the affiliates, there are very different motivations why they joined the foundation. The majority of large corporations joined to learn, to understand how this might disrupt their business, and what are the new possibilities, what are the new degrees of freedom. Startups typically join for a completely different reason. Startups join because of the license. VCs join because of the token. There is a lot of interaction between those different parties within the foundation. So the reason parties are joining us, and that is how we structured the foundation, joining us and signing a memorandum of understanding (MoU) entitles the affiliate to four things:
- EWF support with education, frameworks, etc.
- EWF gives away tokens against paymetn; so, affiliation is actually the token sale.
- EWF grants a special license; if you start embedding light nodes and data loggers, the GPL3 prevents that you create proprietary software on the light node. So you need something like LGPL. This license if being granted by becoming an affiliate.
- Parties are also entitled to run an authority.
This is the license. If you want to get rid of the copyleft and the GPL3 on the Partiy client, this is one of the ways, you become an affiliate. It comes with the condition that the application is running on Energy Web.
Please see also the following Web3 Summit reports: