Why blockchain solutions will drive the evolution of energy and electricity

24 May 2018 Authored by Consultancy.uk

The benefits of adopting blockchain technology are both understated and over-hyped. Blockchain has its strongest impact in areas where it can affect how a market works and facilitate value-creation across chains, argues strategy consultancy Emerton in a new report. This makes the energy sector ripe for transformation, but there are significant scalability challenges to overcome. 

Having come to prominence as the technology underpinning Bitcoin, blockchain initially made its presence felt in the financial sector. It has since made waves in the freight and logistics industry, while clients in every sector from insurance to retail are pressing their consultants for advice on how to exploit, or defend themselves, from its disruptive impact.

Boutique strategy consulting firm Emerton has contributed a deeper level of analysis to the ongoing debate over blockchain’s expected consequences. Rather than speculating about blockchain’s range of potential uses, the consulting firm has deployed its analytical firepower to assess the functional cross-sector impact blockchain has had so far, and how that might translate to one of the most dynamic industries on the planet – energy.

Blockchain is being used to build financial registries to enable micro-payments; operational registries to track and certify products; and smart contracts. It thrives in an industry which is open to decentralised data sharing and storage. These characteristics make blockchain a disruptive technology with truly transformative potential for the energy industry, concludes Emerton in its report “Rewiring energy markets: An opportunity for blockchain technologies?”

Blockchain holds a truly transformative potential for the energy industry

Sebastien Plessis, Sebastien Zimmer and Romain Bonenfant draw on their deep energy sector expertise to make the case that energy companies need to expand their blockchain knowledge. Only by doing so can they stay relevant in an era of disruption, and nudge the sector towards the next step of its evolution. 

The central focus of the analysis is the electricity sector – which is on the cusp of huge transformation as relatively new concepts, such as peer-to-peer energy transactions, renewable energy certificates, ‘prosumers’ (who create, use and sell electricity), and electric vehicle charging all take root among a range of disruptive influences. “In most cases, blockchain is competing with other technology solutions,” says Zimmer who, alongside his colleagues, interviewed dozens of senior executives in established energy companies. These thought leaders argue “that most of these projects could happen without blockchain and could instead rely on a more traditional central database.” Far from being the next big thing, “blockchain is not yet in the top of the merit order of the possible tools.”

Having established that blockchain is far from the only game in town (competing against mobile payments and other startup innovations), the authors provide evidence that a multitude of companies are at least experimenting with blockchain as a tool to optimise various processes in the energy sector.

These early trailblazers are divided into three groups – power producers & retailers; blockchain startups; and other actors. The first group contains some of the biggest names in electricity – EDF are using blockchain for back office tasks, while France’s ekWateur are testing it on payment systems. 

In the second category there is SolarCoin, a cryptocurrency available to individuals who produce solar energy, and Bankymoon, a software and consulting firm which built the world’s first smart meter for modern utility grids. The other actors in the third category include UBS, Microsoft, Siemens, and other giants with a huge capacity to reshape the face of the industry.

“Alliances are also emerging around the industrial use of blockchain in the energy sector,” says Zimmer. “For example, in March last year, major energy companies (including Engie, Elia, Shell, and Statoil) partnered with Rocky Mountain Institute and Grid Singularity, a Vienna-based start-up, to support the Energy Web Foundation, a non-profit organisation seeking to accelerate the introduction of blockchain-based technologies in energy markets.”

While there is a healthy dose of skepticism among the industry insiders contacted by Emerton about blockchain’s short-term benefits, the companies experimenting with the technology today are prudently betting on its medium to long-term impact. 

Aside from the fact that blockchain is an accessible development platform that enables startups to build an “information infrastructure” and thus the framework for market entry, a raft of expected advances in the electricity sector are highlighted that are believed to be closely associated with blockchain.

Blockchain provides a common language to share information securely along a value chain

Electric evolution

In the first place, “blockchain is a new technological option to manage the payment of electricity offers, charging of electric vehicles or renewable energy certificates,” notes Zimmer. Here he cites the case of South African startup Bankymoon which enables consumers to pay their bills in Bitcoin. Another blockchain services startup – Slock.it – helped pioneer the use of smart contracts to govern payments at EV charging points.

Bonenfant describes blockchain as a “natural instrument to manage renewable energy contracts which enables trust, high security, speed and lower transaction costs, and possibly simplicity compared to currently complex and expensive outsourced management systems.” A key example cited here is IBM’s launch of a blockchain-based carbon credit management system to be used in China. 

A second critical asset blockchain brings to the energy table is the capacity to enable “peer-to-peer” electricity exchanges. “This is the most intriguing and debated breakthrough blockchain may cause in the energy sector”, says Bonenfant.

“Assuming blockchain-based technologies could make numerous, small-sized energy transactions between two parties cost-efficient, consumers could have an increased incentive to act as suppliers of the excess energy.” Zimmer gives the example of a “virtual” microgrid in Brooklyn where consumers can trade energy they produce locally and purchase it from their neighbours. Despite the local sentiment, global giants LO3 Energy and Siemens provided the critical technology that underpins the distribution infrastructure. 

“Virtual micro-grid pilots are popping up everywhere,” explains Bonenfant, who believes blockchain’s central offering of a decentralised mechanism to manage a high volume of low value transactions makes it “both an enabler and a catalyst for the multiplication of such local systems.” While acknowledging that P2P electricity trading at a large scale might not employ blockchain, Bonenfant is enthusiastic about the prospect of giving consumers more choice and positively disrupting the energy value chain in favour of renewable solutions.

The third crucial benefit outlined in the report deals with how blockchain could make an enormous contribution to the inner workings of the energy industry. “Blockchain can provide a common language for companies to share information securely,” explains Bonenfant. He cites cases in other sectors where the technology has been used as “a tool to trace and share information between several companies along a value chain.”

Examples include Bureau Veritas working with Stratumn to devise a blockchain-based traceability solution for the tuna industry, and London-based startup Everledger using blockchain to secure the origin of diamonds.

“The true differentiator of blockchain in these instances is not the technology itself ...but using blockchain brings organisational benefits. Indeed, the practical burden of setting up common IT systems amongst different market players is highly challenging. In this area, blockchain provides a standardised, common language so that companies can exchange information between themselves in a secure manner, using an infrastructure which is shared by design.” 

Quote Romain Bonenfant, Emerton

Scales and ladders

Emerton’s report identifies the demonstration of scalability as the most substantial immediate challenge for blockchain advocates to overcome. “Technical, regulatory, and sovereignty issues must be solved before deploying blockchain-based solutions at a large scale on energy markets”, says Romain Bonenfant, Principal at Emerton. 

On the technical side, the priority issue is to “ascertain the scalability of blockchain-based applications”, he notes, arguing that “instead of a large-scale deployment, blockchain-based solutions could be introduced as a succession of small-scale deployments.” Things are more complex on the regulatory/sovereignty side, where the expert highlight that slow-moving frameworks “are far from offering good conditions for a progressive technology ramp-up and for enabling new business models to emerge and start-ups to develop.”

Acknowledging that “blockchain is not a ready-to-deploy industrial solution for the energy sector”, Bonenfant is nevertheless confident that it could “progressively enable peer-to-peer electricity exchanges and accelerate the transition towards a more decentralized electricity system.”

“The introduction of IT tools such as blockchain could facilitate the development of tailor-made electricity offers. With blockchain, end-users might be able to source a significant share of their electricity supplies themselves...Established energy suppliers could progressively lose the link with their customers, if they fail to adapt to possibly evolving customers’ expectations.” 

This value chain disruption would have a direct impact on the legitimacy of centralised power network operators, while the simple act of enabling blockchain in electricity markets “would require significant adjustments to the regulatory framework, ranging from what is necessary for consumers to sell their own electricity to a complete review of regulated players’ responsibilities”, notes Bonenfant. 

However the future of blockchain technology in the electricity sphere unfolds, the key message is that “its transformative potential raises major strategic and business questions for clients in the industry who wish to maintain their relevance and seize an abundance of new opportunities,” conclude the authors.

Related: Artificial Intelligence set to revolutionise energy & utilities industry.

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