Since the end of the XIX century, the electricity industry has seen massively expanding, but by and large, all this time if has been operating according to the same principles: non‐renewable sources of energy, large companies monopolising the market, and the opacity of the supply system. A cautious and slow process of modernisation started only in the XXI century with the development of modern technologies, with one of them, called the blockchain technology, able to disrupt and revolutionise the entire industry.
What’s wrong with the electricity industry?
Historically, the electric market has always been ruled by monopolies and oligopolies. In most country, all energy is produced and distributed by one or just a handful of giant corporations, often state‐owned or extremely close to the authorities. This can partially be explained by the ways the energy is usually extracted — according to an analysis conducted by REN21, in 2016 only 10.4% of all energy consumed worldwide came from renewable sources. The absolute leader with 80% — fossil fuel — a valuable and limited recourse that most governments are trying to control in one way or another.
In 1990, the IPCC (Intergovernmental Panel on Climate Change) published its first report on global climate change, naming burning of fossil fuels the main cause of this phenomenon. As a result, solar panels, wind turbines and hydroelectric power stations have sprung up around the world. Still, the main issue with these methods of energy production is the lack of suitable infrastructure and technology for storing excess energy.
A quarter of all the energy coming from Texas is generated by wind farms. When the wind dies down, Texans restore to powering up their gas‐fired power plant to make up the difference. There simply is not enough storage for wind‐generated energy — ideally, this would require powerful batteries, but the production and maintenance fees for those add up to two‐three times the amount required to run a traditional power plant.
In theory, this problem could be solved by increasing the decentralisation of energy production and distribution means, for instance — installing more personal solar panels on private rooftops. Another options is a micro‐grid, which is kind of a mini‐version of a centralised supply system. Micro‐grids are usually interconnected with the main grid, but also include alternative energy sources (solar panels and wind turbines). If necessary, buildings connected to a micro‐grid can function fully independently from the main grid.
Unfortunately, such methods are still highly dependant on the centralised grid, as you can only sell the excess energy you’re producing back into the grid, but not directly to your neighbours. As a result, the end consumers of electricity — us — don’t really have a say when it comes to formation of prices, and more often than not we can’t really choose where the energy we use even comes from, which basically reduces us to mere observers who are forced to pay just to get access to it.
How is blockchain changing it?
Perhaps the two main principles of blockchain technology are decentralisation and security. Initially, it was designed as peer‐to‐peer money transfer platform, which enabled its users to avoid dealing with centralised payment systems and banks. Every single transaction is visible to all users and the entire system is designed in a way that prevents fraud — a fraudulent transaction will be spotted immediately and the attempt will be stopped. Over time, this technology has evolved beyond money transfers and its now capable of facilitating safe, secure and transparent exchange of goods and services, whatever they might be.
It’s important to note that the implementation of blockchain technology doesn’t imply a complete overhaul of the electricity market. In fact, it’s more of an update of the currently existing system, which should eliminate the need to trust the person you’re dealing with, so there’s no need for a third‐party intermediary either. Blockchain is not only a lot more open and transparent than traditional databases, it also makes the process of information exchange significantly safer and cheaper for all parties involved.
According to a report by Colleen Metelitsa of GTM Research, there are now more than 120 blockchain‐startups operating in the electricity market, with the number of demonstration projects around the world exceeding 70. And that’s not all — there are a lot of traditional electricity suppliers which have been operational for decades eyeing up or experimenting with the blockchain technology. For instance, the German utility company Tennet is currently working in coöperation with sonnen and using a blockchain to create an interconnected nationwide network made up of home batteries and electric car charging stations for redistributions of renewable energy throughout Germany.
Metelitsa says that 57% of blockchain‐startups are working on energy resource management solutions. More specifically, many of them are trying to optimise the currently existing networks and micro‐grids, while others are focused on facilitating the trade of renewable energy directly between consumers and prosumers, without any centralised intermediaries involved.
The Lithuanian‐based startup WePower has already launched such platform. It’s built around energy tokenization, meaning that users can basically exchange the platform’s native cryptocurrency tokens for energy. All the deals are facilitated via smart‐contracts — automated applications that exist on the blockchain and contain the commitments of all parties involved in the deal. If one of the parties doesn’t fulfil the terms, all the transactions will be automatically canceled and all the funds will be returned to their rightful owners. The transactions are also recorded on the blockchain, so there is no way to reverse or change them post factum.
Another startup, the Australian‐based Power Ledger, took a similar approach. This spring, it began testing the blockchain technology as a way of distributing excess solar energy between four building of the Chicago University. Subsequently, the system will cover all campuses of the university, as well as its museums and laboratories. This will allow the university to trade its excess energy among all of its building, using only the blockchain and the already existing energy meters.
The blockchain technology also helps the development and promotion of alternative energy. For example, the investment platform MyBit actively contributes to the construction of new solar panels through crowdfunding — the startup distributes the ownership of each system among several owners. The Sun Exchange project does a similar thing, but the panels they crowdfund are being built in developing countries, mostly in Africa. The investor essentially leases the panels they bought ownership in to schools and communities, making a profit while providing people with much‐needed electricity.
The blockchain technology is paramount for both of these projects. First of all, it enables instant money transfers to any place in the world with minimum fees and facilitates effortless trade of solar panel ownership rights. Secondly, the ownership rights, all the receipts, all the information regarding the location of panels and the energy they generate are permanently written down on the blockchain. So, instead of a stack of paper contracts and agreements, we get a record in an online ledger, unchangeable and available to everyone, with automated smart‐contracts being responsible for the fulfilment of terms on both sides.
What are the current pressing issues?
The main issue with the blockchain technology is that it’s just 9 years old. According to Stephen Woodhouse, Chief Digital Officer at Pöyry, blockchain in its current state is still a rather expensive technology. Moreover, the throughput of most currently existing blockchains is way too small to adequately cope with the decentralisation of the electricity grid. Nevertheless, this is going to change very soon, as some of the newer blockchain platform emerging right now are already capable of handling hundreds of thousands of transactions per second.
There is a new blockchain‐startup appearing in the energy sector almost every week. With that in mind, it’s hard to predict exactly how several hundred young companies are planning to compete with giant corporations and divide the market between themselves. Obviously, the market is oversaturated with startups as it is. On the one hand, competition is great for any market, but with so many companies, only a few will survive and the rest will go bankrupt. This, in turn will lead to investors and consumers losing their investments.
There is no question whether the blockchain technology can make a significant contribution to the development of alternative energy — the process has already started, and the technology is transforming the market slowly, but surely. It is worth remembering that this a completely new path, so mistakes will be made. All we can do is wait and observe how the blockchain technology is taking its place in our lives, hopefully making them brighter.
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