What energy sector problems blockchain can ACTUALLY solve?
The world is lagging in terms of renewable energy adoption. This is not for lack of a desire to live a cleaner life and improve the world for future generations but, rather, due to market conditions that slow the development of renewable energy sources.
Transforming our existing energy market, which has been in development for over 100 years, to one that runs on clean energy is a difficult task, requiring vast amounts of capital. The investment thus far has enabled renewable energy to reach 21.6%. In December 2017, during the One Planet Summit, U.N. Secretary-General Antonio Guterres said: “Finance is the key to successful climate action.”
Since solving capital issue problem will not help to reach 100% renewable energy adoption, we can divide problems into financial and energy infrastructure.
1. Lack of Green Energy Financing
- Capital Availability
Today, capital availability is the most important issue for any renewable energy project.
According to Bloomberg New Energy Finance (BNEF), 2016 level of investment into renewable energy has reached a level of $242 billion US dollars, representing a 23% decrease over 2016 as seen below. Early 2017 trends show that investment in renewable energy has fallen 20.9% in Q1 2017 compared to Q1 2016 from $64.25 billion to $50.84 billion.
The market is dominated by banks, private equity (PE) funds, and hedge funds that are keeping out everyone else from the energy investment market and not serving the needs of renewable energy community with proper access to capital nor the needs of end users of the energy.
- Lack of Proper Energy Financing
A lack of proper energy financing slows project developers by making it more difficult to start new renewable energy projects. Debt providers (banks) are not usually open to projects without a substantial amount of equity capital already raised. The current investment consideration process is lengthy, requiring anywhere from 3 to 6 months to conclude a financing agreement. Another large portion of a developer’s time is spent finding and soliciting the right equity investors for each project.
- Reduced Government Support
Recently, governments have stopped subsidizing renewable energy producers. This led to the increase of percentage required of initial capital for renewable energy development projects. As highlighted in a recent BNEF article, capital availability becomes an even more important issue for renewable energy projects as banks increase the demand on higher initial capital/ debt ratio from 20:80 to close to 50:50 for new renewable energy projects. This makes equity a very expensive source of finance, due to limited availability and increased requirement of such. 77% of the financing in previous years was done through project financing. Changing debt structure will have a significant impact on the available debt capital and thus total investment in the market.
- Limited availability of renewable investment options to general public and Long Capital Lock-Up
Another problem is the participation rate of individuals in renewable energy projects.
High net worth individuals (HNWI) make up the majority of investors in infrastructure projects such as renewable energy production through private equity funds. The general public is faced with these general barriers to enter the green energy market and invest:
- Minimum investment amount, minimums are often as high as $150,000 USD
- Long lock-up periods, which can be 7–10 years for a typical fund
- Lack of knowledge of fund manager reputations and trust in their team
We have to increase capital flow into the green energy sector in order to reach a future with 100% clean, distributed energy.
2. Energy infrastructure inefficiencies
- Limitations of the Current Grid
Even if we could solve the financing problems above, we could not reach 100% renewable energy adoption. Currently, there is no grid flexibility when moving from continuous energy production by power plants to the intermittent energy production of renewables. In order to move from centralized dirty energy to decentralized clean energy, we need to update the grid.
As it currently stands, electricity grids are not optimized to take full advantage of distributed green energy resources with generation profiles varying as the wind blows and the sun shines. Instead, they are engineered for central dirty energy plants with stable generation profiles. To transition to a clean energy future, we we need to account for the peaks and valleys in renewable energy production, and potential grid overloads. For stability, the current grid reinforcements are planned for peak generation and consumption, not for the dynamic green energy future where solar, wind, and hydroelectric energy homes, offices, and (increasingly) electric cars.
Part of the transition to a sustainable, clean energy future requires investments in energy storage, such as batteries, and an understanding of how you can sell excess power back to the grid. Instead of being a one-way street, electricity use will become a two-way street with consumers and businesses being both users and producers of electricity.
Blockchain Will Solve These Problems
Recently, cryptocurrencies like Bitcoin and Ethereum have been making all of the headlines. One of the key reasons they have been well adopted is that they have a global reach and are accessible to regular consumers.
These coins, and others, are powered by the blockchain. The blockchain will reduce the number of middle men, increase access to capital, and provide consumers a new way to invest in clean energy projects around the globe.
Cryptocurrencies and tokens offer an exciting way to increase the amount of capital available for tomorrow’s renewable energy projects.
Through second and third generation of blockchains and the ability not only to transfer the value but do that under a certain set of rules — smart contracts, makes the expansion to energy sector not only possible but practical for transactions in energy to pick up pushing the change of wealth to energy happen for future or on the spot delivery. With the power of choice we can make a world a cleaner and better place.