Blockchain in Energy, how to gain Momentum?
There is a lot of buzz around blockchain and the many uses and innovative solutions that can be facilitated by this technique. I too believe blockchain can bring improvement, transparency, and efficiency and transform the way we work within energy in many areas. There are so many layers that could be automated with the use of blockchain technology and with the use of smart contracts. Why haven't blockchain taken off already?
Through smart contracts we can define sets of rules that when met execute operations like payments, delivery, nomination, transfer of title or origination of certificates to give a few examples. Smart contracts could pretty much cover anything. Through smart contracts its possible to automate much of the transaction life cycle. Clearing and settlement can be done by the transaction itself. Smart contracts can execute options and even create new contracts.
A smart contract is like a distributed robot, an algorithm embedded in a contract. Our excitement about blockchain technology is probably more about the possibility to embed information for automation rather than being excited about the distributed open and secure ledger. Do not misunderstand me. That is great too and necessary for the solution.
It is very exciting to think about future with small scale peer to peer trading or IoT´s (Internet of Things) and DER´s (Distributed Energy Resource) bidding for power or being part of a balancing scheme at defined conditions. A future market were big players can scope large volumes by accessing large numbers of small appliances automatically quotes prices and terms. With blockchain and robots it is possible to create a much more automated future with low degree of human interaction and inefficient processes.
However all this excitement creates a possible hype as we all discount the future development, eager to see all this potential implemented right now. Several initiatives have started and the development is underway but why haven’t we seen more yet? What is needed to gain momentum?
Early stage technique with hurdles to overcome
There are some hurdles to overcome in order to see real momentum for blockchain within the energy markets. Today there is no critical mass with rather few and fragmented players and interests. There is no clear market to turn to. No standardized format as several initiatives are developed in parallel based on different solutions and with different purposes. There are different standards on blockchain and on the content within the block. Different crypto techniques The technique may be fast for transactions between parties but slow for trading and steering in real time or near real time. At least as it is an open distributed ledger by today’s standards. There are some regulatory and legal issues as well that will gain in importance and have to be met over time. Right now how ever, the financial technology outpaces the regulatory work. There are some security issues as there has been some breaches like in the DAO case with built in back doors in the contracts.
Exciting start ups and initiatives but not enough to gain critical mass?
Realistically, blockchain may have received un-proportional attention from initiatives like small scale peer to peer trading and automated balancing through IoT´s. These are fantastic ideas! Very good ambition and important for many reasons. However, the potential as a starting point for a larger scale implementation in the energy markets may be limited as the number of potential active participants are fairly limited in short to medium time. The number of IoT´s currently able o participate as a counterparty in a balancing market are marginal currently and proof of concept needed before people invest in such appliances with that functionality.
There is a possibility to develop blockchain techniques that enables households to participate in energy transactions without a regular market place, trading directly with other households or with robots scoping bids in the market to accumulate larger and tradable volumes. I could very well be off in my assumptions but currently, the number of households that are interested to actively trade power or put some serious effort into this is fairly limited. The price signals to act upon are not currently that transparent on short-term prices to create an interest for active trading or more active behavior. Not even on longer term as the customer churn is fairly low.
Peer to peer trading is currently taking place in experimental form. The case in Brooklyn is well known today with trading of local solar power generation to local users. These types are fantastic projects driven by early adopters and entrepreneurial individuals who by innovation drive sustainability and efficiency forward. Great initiatives in my opinion that leads the way but may not be enough of a force to create a standardization to support a larger growth as they are in competition with other initiatives and thus a battle for standard.
If we turn to bigger traders to look for trading initiatives within blockchain , a market for robotic brokerages or trading with an automated deal life cycle would have a great potential. Efficiency to reduce in large volume trading spells automation. Robots could scan several markets to offer best prices and terms to industrials and execute fully automated contracts and automated deal processing. From the trader perspective the volumes may be reasonable for such development. Such contract wouldn´t have the need of a clearing facility and would nominate for example power directly to the grid operator without much need of interaction from a back- or mid office. The current solutions for a trade execution via an openly distributed blockchain may however be to slow, especially for larger number of transactions. For a closed peer-to-peer blockchain solution, speed could be much higher though. The buy side of energy, industrials, may not see the potential and efficiency gain and be as equally interested to move towards a solution like this as they do much fewer trades and the investment in change of processes and support will be to great relative the benefits initially.
Where to turn for standardization and a broader use to gain momentum?
In order to increase in growth, blockchain need to substitute existing solutions that are used broadly to gain critical mass for expansion. Maybe we can find a common point in the value chain that is similar for a majority of the mid to large size players. Where they meet and communicate on a standardized format on equal terms today already. If the market can agree on a standardized format at such a point, that point could very well be a starting point to build up-stream and down-stream solutions from.
If we consider the hurdles and find a process were the hurdles are low and the benefits of transformation are high we might find a great point to start at. We can probably cancel out the parts in the value chain were speed is crucial or were the users are to fragmented due to locally built solutions. Be it larger scale trading and isolated smart grids?
Developing blockchain technique for that point enables building other applications for trading and steering of energy. Take the power market for instance. A single location for exchanging information for almost all of the participants in the market is at the grid operator. To this single point, information of physical power delivery and usage is delivered and in a given format. With nomination and physical delivery as a potential starting point for development of a common standard for blockchain for the power market, it is highly possibly that further development would include a higher degree of automated steering of upstream assets as this would enable seamless communication throughout the value chain. Production planning could be done directly with records into a blockchain, committing assets to generate when terms are met and with automated nomination. Terms and conditions for optimization of assets or systems of assets could be added in the block in the form of smart contracts leading to fewer revisions of plans. The smart contract can monitor the performance of an asset and automatically trigger another asset to back up generation or purchase regulation power in the secondary market at failures to cover for any power loss.
The benefits are that the value chain becomes more seamless with fewer steps of human interaction. Automation, optimization, nomination and settlement would be part of the same process.
Given that most of the physical players agree to a common standard for nomination, the market could based on that standard, build solutions up-stream as well down-stream which would be interchangeable within the market. From the nomination standard, a format could be inherited to solutions aimed towards industrials, households DER´s and IoT´s. If so, all contracts could be interchangeable and scalable..
Copyright © Faston 2016