Applying the Blockchain Model to Energy Distribution
Written By: Elissa Yao
Edited By: Sofia Tryfonopoulou
What ties blockchain to the energy world is more than just the troubling amount of energy some cryptocurrency mining takes. The fundamentals that make Bitcoin so successful can be applied to the energy sector as the push towards renewable energy may fragment regional supply chains. While blockchain itself will not be generating any energy to displace carbon, it still has a place at the table of discussion towards transitioning to clean energy of the future; a future where the energy trade is decentralized and digitized. Blockchain and other distributed ledger technologies changes the way that trust in markets work, negating the need for systems of intermediaries in the past, allowing for a more transparent and direct market.
Blockchain has become synonymous with peer to peer (P2P) trading and decentralized transactions but at the core, blockchain is a data structure, more specifically a database with a continuously expanding log of transactions in chronological order. These transactions are grouped into blocks, hence the name blockchain. Anybody who is a participant in the system can access these logs, lending a form of transparency that is does not exist in many ledgers currently. The currency traded on the blockchain are not a string of data but rather an entry on the blockchain itself. The reason that these ledgers are tamperproof or reliable is that lots of participants are keeping track of the ledger and comparing, based on the incentives provided by the particular system being implemented . Imagine a poker game where there are no chips, where every player keeps their own record of how much each person bets and how much they win and lose each round. After each hand, they compare their records and any dishonesty is caught immediately because their records would not agree with everyone else. This allows for the ledger to be decentralized, or in other terms, not controlled by any individual, government or other body of authority.
The security of blockchain ledgers comes from cryptography, hence the common name “cryptocurrency”. Cryptography is a field concerned with sending and receiving coded messages, often using a key that can decode a coded message. In the blockchain, two keys are used to guarantee the authenticity of each transaction. Every account that can hold cryptocurrency has two keys associated with it: a private key and a public key. The private key is used by the account holder to “sign” each transaction while the public key is used by the ledger holders to verify that the private key of the appropriate account was indeed used to sign that transaction. This ensures the accuracy and reliability of the ledger, negating the need for auditors or external bodies to regulate the transactions and bookkeeping .
Helium, launched in 2019 is one of the most successful examples where blockchain-based systems have been implemented to supply a utility to compete with the traditional suppliers . Helium is a blockchain network that leverages a decentralized global network of internet hotspots. These hotspot devices double as both the network miners and the wire-less access points supplying data connection. Helium has been a huge step forward in implementing an “Internet of things” ideology that may one day be applied to energy distribution much like it is applied to bandwidth by Helium. The company incentivized participation in their system by providing HNT coins, a form of cryptocurrency to participants for two reasons: providing the internet connectivity by transferring data and providing a hotspot coverage or by maintaining the system in a Proof of Coverage algorithm that rewards users for verifying coverage. The implementation of mining here is network based, while most common cryptocurrency is GPU or ASIC based. This allows the mining to be less energy intensive, reducing the carbon footprint that is a common problem for other cryptocurrency systems.
In theory there are many ways that blockchain systems can be integrated into the energy sector. Blockchain can be used to automate billing from both non-centralized power generators and utility companies. A decentralized billing system would open the doors to distributed trading platforms for energy, having the potential to dramatically change the market dynamics. The economics of powering homes, businesses, cars and such can be optimized by blockchain, so consumers pay fair, flexible prices for every kilowatt of electricity used and allows for consumers to have a more active role in the market, trading away energy that they generate or do not use. This trade dynamic could reduce the amount of energy wasted (i.e not used and dumped into the ground) by renewable energy sources, increase the potential value of installations of wind and solar farms. The high transparency that blockchain based ledgers inherently have would also present a huge bonus to governments and organizations who are looking to regulate clean energy . Blockchain also allows for the simplification of the energy network, reducing the number of players to sustain the system since it facilitates direct trading between energy generators and consumers . The middlemen get cut out of the energy market, as autonomous trading agents can look for the lowest prices for the consumer on the market that meet their needs, buy the needed amount, add it to the ledger and then provides the energy directly at the time needed. This transaction data is then available for all parties to verify in their own records, removing the need for network operators, energy retailers, meter operators and banks in the process.
Digitalizing the energy market opens the opportunity to create what is called a “smart space”, where the improvements in automation and big data analysis can indirectly impact the value of energy by enhancing system performances. By creating what is known as an “Internet of Things” (IoT), where much like the world wide web, a network of smart devices in theory can work in sync to best utilize every kilowatt of electricity that flows through the system .
Another specific application for blockchain would be to help reduce the cost and time-delay of the energy imbalance market. In real-time energy supply markets, there are always going to be times where an inflexible arrangement of a predetermined amount of energy delivered from one source to a consumer does not match the demand adequately . Participants in the energy imbalance market have their demand surveyed and power dispatched to meet their energy demands at the lowest cost. This is done to manage grids effectively and increase the efficiency of transmission. Better transmission is an ongoing challenge for places like the US, to get power from where it is generated to the end user is an expensive endeavor. This is often handled regionally, for example Elexon handles the balances for Great Britain. Blockchain, having a completely transparent ledger of transactions makes tracing the exact transactions of which generator and consumer generated an imbalance easy, allowing for low-cost, automated, real-time imbalance billing .
Currently companies like Cryptoblox Technologies Inc. (formerly knowns as Extreme Vehicle Battery Technologies Corp.), a company that specialized in batteries and blockchain has been taking steps towards investing in infrastructure to incorporate blockchain in electric vehicle charging. In October 2021, Cryptoblox Tech acquired CryptoPlug Technologies Inc., a blockchain company developing a smartphone app for crypto, in hopes of allowing electric vehicle drivers to charge their vehicles using cryptocurrency . In December 2021, they acquired development rights to power and infrastructure for over 1000 ASIC miners in western Canada [7-8]. This is a company that really believes in the potential synergy between blockchain based technologies and energy in the consumer market.
One of the biggest technical roadblocks to the implementations of blockchain is the speed and scale compared to conventional electronic payment. Bitcoin, the biggest blockchain enabled cryptocurrency is still two orders of magnitude slower than a conventional electronic payment system like Interac, clearing around 101 transactions per second compared to 103 transactions per second for Interac . There are technical and system level solutions to overcome this, but they require careful design and implementation due to their higher complexity.
Another massive roadblock is that it is difficult to radically transform existing energy markets in a short period of time. Especially one where there are many powerful players heavily invested in maintaining the status quo. The resistance to decentralization from government bodies and energy companies, especially in the US poses a significant challenge to the implementation of distributed ledgers . The EU on the other hand is looking to be global leaders in this field with a total budget of €580 million for digital skills over 7 years, helping fund the high-level skills needed for blockchain integration . For blockchain integration in the energy market to be successful, regulators and lawmakers need to be on board.
From a business perspective the number of energy-blockchain startups that failed to scale during a boom in the later half of the last decade has hurt the credibility of blockchain[9,11]. The enthusiasm of a large-scale overhaul of how we think of the energy market has mostly faded and blockchain now finds a place looking to make parts of the existing structure more efficient, with the key use cases surrounding carbon credit, auditing, wholesale energy and supply chain management . Lacking the trust needed from companies is the biggest roadblock to adoption currently as the competitive collaboration would require a significant investment of resources initially .
Blockchain is often called a “disruptive” technology, changing the way people interact with the markets and keep ledgers. There are many potential benefits such as an unprecedented level of transparency, coordination and information sharing as well as optimizations to the energy use. But to fully take advantage of the capabilities of distributed ledgers in the energy sector a concerted effort on many fronts to collaborate will be needed. For now, blockchain can still be utilized to increase the efficiency within the existing system to deliver energy from the producers to the customers, so we can all keep our lights on while we ponder whether cryptocurrency is the way of the future.
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