Blockchain technology could facilitate a fully decentralised energy system. Demand-side response would be a clear beneficiary, provided the industry cooperates, writes Electron chief operating officer Joanna Hubbard.
Blockchain technology has the potential to deliver more efficient, transparent and egalitarian transaction platforms that will unlock new business models.
In the energy industry, this promise is particularly compelling when applied at the grid edge, as we seek to create greater market participation and transparency.
We have already seen several instances of this technology enabling peer-to-peer trading and now it is also being touted as the solution to a more efficient market for demand side response.
What is it?
Blockchain presents an innovative decentralised method for validating and recording direct transactions between peers. All transactions are recorded in a single source of truth that is auditable, immutable and visible to all permissioned network participants. The technology was pioneered by Bitcoin in 2008 and is currently seeing widespread adoption by other industries that had previously relied on trusted central parties – most notably financial services.
However, blockchain is not just a technology. It is also a new way of doing business and its adoption will require the energy industry to self-organise and assume new models of co-operation.
Remove the middle man
The fundamental change is to the role of the central intermediary: it is not needed. Removing this function removes a cost base, a barrier to transparency and innovation, and a single point of failure.
The first publicised use cases for blockchain in the energy space all focused on peer-to-peer trading of electricity in micro-grids. Companies such as Lo3 Energy in the US and Power Ledger in Australia, have created blockchain transaction platforms on which energy consumers can source energy from local renewable assets.
This maintains the value generated from within the community. In theory, sourcing local energy should also mean cost savings from reduced storage and transmission losses, that being said, the benefits of peer-to-peer trading will not be fully realised until the energy system is restructured to account for localised pricing.
Blockchain and DSR
Another market that seems to be crying out for lower barriers to participation and increased transparency is demand-side response (DSR).
The build out of inflexible, intermittent wind and solar generation in our system has increased the complexity of balancing the grid, the cost of which is forecast to double to reach £2bn by 2020. A large and liquid market for flexibility on the demand side will ensure security of supply and keep the lights on while enabling savings both in terms of cost and carbon emissions.
At present the UK flexibility market is estimated to be only a tenth of its potential size and is struggling to scale fast enough. As a whole, the balancing market is overly complex, with more than 26 separate products, and illiquid, with only one real buyer for flexibility in the system operator.
It is also opaque, with little price discovery and trading is often conducted on an inefficient bilateral basis, as many products have prices set by auction months before they are needed.
An interesting feature of DSR is that multiple parties can benefit simultaneously from a single action. The same turn-down DSR could enable the system operator to rebalance the grid, a distribution network operator to reduce stress on a load-managed asset and a supplier to correct a trading imbalance.
Enabling collaborative trading will unlock cost savings for purchasers of flexibility and drive liquidity by enabling the execution of trades that would not have been possible on a bilateral basis. Collaborative trades need to be traded on a single platform to ensure simultaneous and complete execution. Historically that would have entailed creating one hell of a monopoly.
No single buyer
Blockchain could present an alternative solution. At Electron, we have created a trading platform that will enable flexibility to be traded collaboratively without handing the levers of power to any single entity.
The platform leverages blockchain to coordinate and record all trading interest in an immutable, auditable ledger. Moreover, its open protocols create results in a transparent execution and governance structure. All parties can see the rules that they are signing up to in advance and verify correct value allocation for themselves.
Collaborative trading could maximise the efficiency of the flexibility market and in turn the efficiency of distributed asset deployment – but only if the industry cooperates.
There are many reasons for cooperation, such as a more liquid, competitive market for flexibility purchasers; a fairer, more transparent market for flexibility providers; and, ultimately, cost and carbon savings for consumers. This will entail a mindset shift away from the central point of accountability model. It will be up to startups to prove that the technology works in the real world, industry to invest and regulators to engage – and it looks like this is starting to happen.
How long before blockchain might replace the system operator?
Whether blockchain gains traction in the energy system is highly uncertain. But Hubbard tells The Energyst that it could be embedded and fully commercialised within three years, depending on the number of market actors that build systems and processes around the technology.
“Whether the regulations move that fast, I am not sure,” she says. “With blockchain, we have to do it together or not at all.
“Can we persuade the industry that the trade off between this open, fairer marketplace with lower cost of interaction and single source of truth is worth losing the central point of accountability? Because that is the tradeoff and that is the key barrier: persuading people that [structural shift] is worthwhile,” she says. “It will not be decided by us, but by the industry incumbents.”
What does blockchain mean for I&C companies
All but the largest energy consumers would still engage in flexibility markets via an aggregator. In that sense, it would be business as usual, Hubbard tells The Energyst.
“Aggregators have done a fantastic job helping people to understand their flexibility, de-risk it and sell it into the market,” says Hubbard. “We would like to see a fairer marketplace [enabled by blockchain] for aggregators to operate in. Perhaps the largest energy users will want to interface directly with the blockchain platform, but I think we can do this without changing the way end-users experience [demand-side response provision]. They just benefit from more efficiency, transparency and liquidity.”
What and who is Electron?
Electron is a start-up with some early private backing as well as Innovate UK funding. In addition to its DSR platform, the company is building a blockchain platform for meter assets, that is, all UK gas and electricity supply points, via which it hopes to facilitate faster switching. If adopted, Electron has claimed the platform could make switching 20 times faster.
Chief operating officer Joanna Hubbard says Electron will have developed its proof of concept into “a fully scaled prototype that simulates trade and value transfer by next summer”.
This article was originally published in the Feb/March print issue of The Energyst. The magazine is free to end users involved in energy procurement and management within their organisation. Click here to see if you qualify for a free subscription.