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Energy Insight: Blockchain
What is blockchain?
Blockchain is a distributed, shared, digital transaction technology that allows for securely storing data and peer-to-peer transactions. It is a network, where participants can trade directly with each other without involvement of intermediaries, e.g. a bank or energy distributor. Hence, blockchain is considered not only as a technology but also as a new way of doing business, where a group of users collectively co-operate and maintain a transaction database via their computers, instead of any central authority.
Coinciding with the arrivals of such famous peer-to-peer network as AirBnB or Uber, the technology follows an ideology of “dismantling established hierarchies, diverting societal influence from organizations to individuals, using democratic instead of autocratic decision processes, and empowering consumers”.
Blockchain is the underlying operation technology of cryptocurrencies such as Bitcoin. However, it could be also used for nonmonetary transactions, for example in a form of ‘smart contracts’, self-executing contracts that operate on the basis of predefined rules, e.g. quantity, quality or price of traded energy is specified.
How has the technology developed?
- October 2008: Satoshi Nakamoto, an individual with unknown identity published a paper describing a protocol facilitating peer-to-peer transactions via a cryptocurrency called Bitcoin, without going through a trusted intermediary.
- 12 January 2009: The first Bitcoin transaction took place.
- 30 July 2015: Launch of Ethereum, a platform that extends the range of transactions from cryptocurrencies to any other objects that can be represented by Bitcoins, e.g. commodities or derivatives. Such transactions are possible through “smart contracts” applications, that automatically executes predefined processes of transactions.
- April 2016: Decentrally generated energy was for the first time traded directly between neighbours in Brooklyn , NYC, via a blockchain system .
- October 2018: Market capitalisation of blockchain at the end of October was $111.8 billion.
How does it work?
A blockchain database is composed of blocks – a growing list of data records which are timestamped, shared, unalterable and connected to preceding blocks.
The transactions records are verified in short intervals by the network users, the so-called nodes that are incentivised (e.g. financially) to maintain the shared network. The way in which nodes are connected to each other is defined by a peer-to-peer protocol. The safety of transaction data is ensured by cryptography, while a digital ledger updates itself as transactions occur.
Source: Blockchain – an opportunity for energy producers and consumers? https://www.pwc.com/gx/en/industries/assets/pwc-blockchain-opportunity-for-energy-producers-and-consumers.pdf
The design of the technology is claimed to lead to the following benefits:
- transactions transparency as the holdings and transactions of each public address are open to viewing
- transactions settlement moved closer to real time, for example electricity delivered to the networks can be attributed to individual customers in small time units and settled very precisely at variable prices
- reduced transaction costs as intermediaries are not required
- enabling the trading of smaller quantities
- increased operational efficiency
- increased data protection due to decentralised storage of transaction data and its encryption and validation
- strengthened role of individual consumers and small producers
How can the technology be applied in the energy industry?
Blockchain is perceived as a disruptive force in the energy industry. A key application of a blockchain in the energy sector is to develop a decentralised, peer-to-peer energy transaction and supply system via “smart contracts”.
The technology could also be applied in several other energy related areas, namely:
- as a means for paying electricity bills
- to simplify such processes as metering and data transfer, marketing and communication, or grid management
- to control network flows and storage facilities
- to manage balancing activities
- to verify ownership of assets
- to simplify carbon trading
- to facilitate e-mobility transactions
- to facilitate community energy trading
What does the future hold for blockchain?
One of the main arguments in support of a bright blockchain future is the imminent digitalisation of the energy industry. Hence, the future of energy can be shaped by pioneers in digital transformations, such as blockchain developers.
In addition to digitalisation, the blockchain technology and ideology can supports two other pillars of a 4D transition of the energy system, namely decentralisation, i.e. distributed energy and moving away from a central authority and democratisation, where more and more consumers are also becoming producers of their own energy and which empowers small, local energy generators.
As a survey conducted by PwC in August 2018 shows that 15% of 600 surveyed organisations use blockchain in their current business activities, while further 62% have some involvement in the research and development of the technology. Energy and utilities are perceived as leaders in blockchain development, proceeded only by financial services and manufacturing.
However, there are also some doubts about the blockchain future. Some analysts believe that the technology is a result a “Bitcoin bubble”, driven by an excessive optimism about the value of the cryptocurrency, sustained by the belief that this cryptocurrency has intrinsic value and it is the money of the future. Sceptics expect the Bitcoin bubble eventually to burst. Some analysts doubt that customers would substitute their traditional payment method with cryptocurrencies based on blockchain. They believe that it will be difficult to establish blockchain as the dominant transaction technology, especially in existing, developed markets.
Other critics of blockchain point at large electricity consumption by the blockchain operations. According to some estimates, the energy needed to produce Bitcoins for one year is equivalent to the energy consumption of a country like Denmark.
What are the blockchain success cases in the energy sector?
Almost all blockchain applications are still experimental, mainly in the financial and tech sectors.
In the energy sector, some of the successful examples of blockchain energy transactions are:
- the Brooklyn Microgrid – a small network of buildings in the Park Slope neighbourhood, where residents can buy and sell locally produced solar power from each other. The energy transactions between neighbours are facilitated by a blockchain company LO3 Energy.
- Power Ledger – an Australian blockchain platform which allows consumers to buy and sell renewable energy directly between one another in countries around the world.
- Share&Charge (formerly BlockCharge) – a decentralized protocol for Electric Vehicle charging, transactions and data sharing.
Sources and further reading:
Is Blockchain’s Future in Oil and Gas Transformative or Transient? https://energypolicy.columbia.edu/sites/default/files/pictures/gx-blockchain-report-future-in-oil-and-gas.pdf
Blockchain in the energy transition. A survey among decision-makers in the German energy industry https://shop.dena.de/fileadmin/denashop/media/Downloads_Dateien/esd/9165_Blockchain_in_der_Energiewende_englisch.pdf
Blockchain – an opportunity for energy producers and consumers? https://www.pwc.com/gx/en/industries/assets/pwc-blockchain-opportunity-for-energy-producers-and-consumers.pdf
Use cases for blockchain technology in energy and commodity trading https://www.pwc.com/gx/en/industries/assets/blockchain-technology-in-energy.pdf
Digitalisation & Energy, International Energy Agency, 2017 https://www.iea.org/publications/freepublications/publication/DigitalizationandEnergy3.pdf
How blockchain can manage the future electricity grid, https://www.weforum.org/agenda/2018/05/how-blockchain-can-manage-the-electricity-grid/
4 Predictions for Blockchain in Energy in 2018, https://www.greentechmedia.com/articles/read/four-predictions-for-blockchain-in-energy-in-2018#gs.OefVrgo
The Developing Role of Blockchain, https://www.worldenergy.org/wp-content/uploads/2017/11/Blockchain_full-paper_FINAL.pdf
Potential of the Blockchain Technology in Energy Trading, https://ponton.de/downloads/mm/Potential-of-the-Blockchain-Technology-in-Energy-Trading_Merz_2016.en.pdf