We’ve already seen how emerging technologies like IoT, big data and analytics benefit exploration, production, distribution and delivery of energy—but now there’s another tech player in the energy arena: Blockchain.
Blockchain does more than connect renewable energy producers to end users; it’s enabling energy companies to settle futures trading considerably faster, and can even help energy companies improve how they track resources and maintain regulatory compliance.
Here’s a refresher on how blockchain development works, and how it’s transforming the way energy companies operate:
The Birth of Blockchain: How Does it Work?
Blockchain is a decentralized ledger system that originated from computer scientist Ralph Merkle’s “Merkle Trees”—a data structure used in computer science applications that, when used in cryptocurrencies, help encode blockchain data more securely. Although Merkle invented the Merkle tree in the ‘70s, it wasn’t until the ‘90s that people began using the trees to create a secured chain of blocks, or data records, that record every transaction and maintain a complete history of the entire chain.
But this system became even more interesting when “distributed ledger technology” emerged, providing a peer-to-peer network to verify each exchange. This technology, which allows the entire ledger to be managed securely without a central authority, underlies the blockchain technology that we know and use today.
In a nutshell:
- Blockchain records and tracks data exchanges. In the cryptocurrency world, this record is referred to as a “ledger,” while each data exchange is a “transaction.“ Every verified transaction is added to the ledger as a “block.”
- Blockchain utilizes a distributed system, or a peer-to-peer network, to verify each transaction.
- Once signed and verified, the new transaction is added to the blockchain and cannot be altered. Hacking a blockchain is virtually impossible because the data is linear and held across numerous distributed resources. You may fool one computer, but not all of them.
What are Some Benefits of Blockchain?
Advocates of blockchain technology say it makes Bitcoin transactions safer and more secure than other traditional transactional systems. But blockchain isn’t just limited to Bitcoin; numerous other companies—like Ethereum, Ripple, Hyperledger, IBM and R3—are creating blockchain-based platforms to help companies with everything from cryptocurrency to smart contracts.
Proponents of blockchain believe opportunities for a distributed, autonomous, secure transaction system are limitless because they make processes cheaper, faster and more traceable. And they’re right about blockchain’s versatility: from protecting the integrity of elections to simplifying supply chain monitoring, the use cases for blockchain are plentiful—especially for the energy industry.
Here are some specific ways that energy companies can use blockchain:
Microgrids: Peer-to-Peer Virtual Energy Trading Networks
Electric utilities and other energy producers are central suppliers of energy. They manage a grid where energy is produced at power stations, then distributed to customers through a wide transmission network. But as renewable energy has become more popular, an increasing number of smaller “distributed” power generators and storage systems—such as rooftop solar panels, electric vehicle batteries and private wind farms—have also contributed to the grid. These “off-the-grid” energy producers sell their surplus energy back to others in a physical microgrid, but at some cost.
Blockchain’s support of peer-to-peer energy trading reduces transactional costs and supports the creation of “virtual microgrids.” A microgrid can be created almost anywhere and is less dependent on market structures because they operate autonomously. They service local users with energy generated from local sources, and they allow consumers that produce energy on their own—via wind turbines or solar energy systems—to sell surplus energy back to peers on a pay-per-use basis. But how do they work with blockchain? This article from Deloitte best sums up how microgrids and blockchain work together:
“While physical microgrids are still rare, we do observe the development of virtual microgrids using peer-to-peer energy trading. Blockchain is just one element in the transformation of electricity supply, providing Distributed Ledger Technology (DLT) to members of a peer-to-peer energy network, or microgrid. It offers [or ‘provides’] a reliable, lower-cost digital platform for making, validating, recording and settling energy transactions in real time across a localized and decentralized energy system.”
Furthermore, renewable energy certificates (RECs) are currently provided to individual solar energy producers by a central agency and are typically based on estimates. Sensors paired with blockchain smart contracts could record actual usage and production data to a blockchain ledger with little or no manual interaction. This not only reduces costs incurred by central public agencies who administer the RECs, but also allows the RenTech (renewable technology) sector to grow more quickly.
Smart Contracts: Electric Vehicle Charging
Electric vehicles (EVs) are great, but we all know there isn’t a charging station on every corner. Many buyers shy away from purchasing electric cars because they worry about limited access to charging stations, which has slowed the growth of electric vehicles in the U.S. automotive market.
With blockchain-based applications, individuals can overcome this challenge by sharing their own EV charges with other consumers. They can use peer-to-peer EV charging platforms to share access (for a fee) during times their charger is available. But even more impressive is the incorporation of smart contracts: Smart contracts are computer programs stored in a blockchain that automate the transfer of crypto-tokens between users, according to agreed conditions. Unlike traditional centralized solutions, smart contracts can automate the entire transaction from payment to preference. In the EV instance, a smart contract could incorporate the driver’s planned route, battery status, traffic information and other criteria to request bids from personal and commercial charging stations along their intended route.
It is hard to say how long applications like this will be relevant. Commercial charging stations, which tend to charge much more quickly than private stations, are being built rapidly (Projecting 52 percent compound annual growth rate [CAGR] from 2014-2020 in the global charging infrastructure market). In the short term, however, access to private charging stations will boost adoption rates and pave the way for greater energy demand.
The Road Ahead for Blockchain
Like most emerging technologies, the impact of blockchain on energy could be best summed up in the following motto: “We’ll know when we know.” The energy sector is already embracing blockchain technology on several fronts, but the impact is likely to become more evident as blockchain and the energy sector evolve over the next decade.
GTM Research reports that as of mid-2018, at least 122 blockchain startups were operating in the energy space, with 54 new firms having launched since January 2017. In fact, energy-focused blockchain startups raised $322 million between the second quarter of 2017 and the first quarter of 2018, both from venture capitalists and through initial coin offerings.
While this growth indicates a bright future for blockchain, it’s important to remember that blockchain isn’t going to change the energy industry overnight. In fact, the benefits of distributed, peer-to-peer transactions are much clearer for newcomers to the market than for traditional players. While larger companies may take advantage of operational cost-savings in the short term, the ultimate value of blockchain may be grounded in future models yet to fully materialize.
Forward-thinking energy producers and utilities understand that their roles will evolve alongside technology and changing consumer demands. Most are investing directly and participating in the development of programs, research and collaboration hives to better understand the blockchain opportunity.
Our team is doing the same. AgileThought has a long history of success in helping large companies with complex business models, including energy and utility companies. The majority of our clients are now exploring the potential of blockchain, and of other emerging tools as well: Download our white paper, “Energy Sector Transformation with Advanced Analytics and IoT,” to learn what these other tools include, what’s holding energy companies back, and how to implement modern technologies in your own company.