Blockchain for Local Energy Systems: is it really going to change the world?
Delta-EE has been looking at blockchain for a while now but, despite the hype, has so far found little evidence that it is making any significant contribution to new energy.
So why is there so much hype around blockchain?
Given the current level of hype we would expect to see myriad game-changing applications, and it is true that blockchain does offer some significant features and benefits in many applications, not least in cryptocurrencies like bitcoin.
But blockchain is not synonymous with bitcoin and whilst the key attributes of blockchain such as immutability, security and democratisation are of fundamental value to cryptocurrencies, it is less clear that these features will translate readily to energy applications.
What about energy?
It is believed by some that the convergence of AI, big data and blockchain will herald the IoT and become some kind of unstoppable force in transforming everything into an automated, disintermediated future.
A future in which consumers are able to choose their source of supply based on locality, green credential or even social characteristics. At the very least we might expect to see innovative services being offered to consumers, based on this technology.
But the one application which is the alure of blockchain in energy seems to be disintermediation.
Peer to Peer (P2P) trading
According to Delta-EE research, the single biggest application of blockchain in energy today has been that of automated energy transactions, most notably in P2P trading.
P2P trading is the transaction of energy between peers, typically between prosumers and consumers. P2P makes it possible for individual prosumers to transact energy directly with other prosumers and consumers without any need for an intermediary, at least in principle. In practice the current energy system requires at least a balancing responsible party (BRP) which immediately reintroduces an intermediary. But that may not always necessarily be the case.
And if it were possible to fully disintermediate energy trading so that all consumers could transact directly with all generators at any scale, would there any longer be a need for the traditional energy supplier?
It is this question which probably keeps some suppliers awake at night as they consider the plethora of challenges to their traditional role and business models.
How does blockchain make P2P possible?
Let’s start by looking at what blockchain is, and what it can facilitate.
Essentially, blockchain is a Distributed Ledger Technology (DLT). That is, instead of using a centralised, single authority to manage the transactions between consumers and generators, using a centralised ledger or record of transactions, it uses distributed records, each held by every participant. The following diagram illustrates the traditional system with a single trusted central authority managing and recording all transactions through a central ledger.
It is argued that, whilst this process works for a centralised energy system with relatively few participants, it will become increasingly unwieldy as the number of participants, particularly individual prosumers grows.
However, in a blockchain architecture, there is no central authority. Authority is derived from the consensus between all nodes in the network as shown in the second diagram. Every member holds a copy of the ledger. In this arrangement, there is no need for trust in a single authority as each member has a synchronised copy of each transaction.
In practice it is unusual to have a fully democratised architecture and there are usually certain nodes known as validator nodes which have the authority to access and record transactions. This enhances scalability but reduces the effectiveness of the other fundamental attributes of blockchain.
How do the key attributes of blockchain facilitate the game changing potential of disintermediated energy trading?
The key attributes of blockchain are generally cited as being:
- Trustless. Somewhat counterintuitively refers to the lack of need for trust meaning that transactions can take place between peers who have no knowledge of nor trust in each other.
- Immutable. Due to the distributed nature of encrypted blockchain records it is possible to maintain permanent, immutable records of all transactions.
- Secure. The existence of multiple records improves security and should also prevent malicious attacks on energy transactions.
- Democratic. In theory, all participants have equal access without the need for intermediaries, although in practice most systems have privileged actors.
- Transparent. All transactions are permanently auditable.
Now, whilst these attributes have real value in applications such as cryptocurrencies, how relevant are they to energy transactions? For example, immutability is clearly essential to maintain the value of a currency which has no physical value whatsoever. However, for energy transactions, there is a real value of the service of energy which requires no immutable record. Indeed, it is arguable that the ever-increasing volume of transactions will eventually become an unsupportable burden of obsolete data.
Perhaps the key benefit of blockchain in the P2P application, is that of being able to tokenise several different characteristics of an energy transaction simultaneously. For it is not only possible to identify the amount of energy (kWh) and its timestamp, it can also record a geographic (or energy system topology) location, the type of generation (e.g. solar, wind or fossil) and the individual who has produced it. This facilitates trading based on locational pricing, certificates of origin or simply a preference to trade with a given member of an energy community, for example.
So far, such a comprehensive set of parameters has yet to be commercialised, but a number of trials involving at least one or two have been trialled in many schemes across Europe and further afield.
In the UK, for example, the EdF supported CommUNITY project in Brixton allows consumers to trade energy with their neighbour of choice whilst the LEM Cornwall project uses P2P trading to provide flexibility services to the local distribution network.
But is blockchain the only solution?
Already we can see what service providers are starting to offer. As mentioned earlier, the dominant use case is that of P2P trading. However, even here there are non- blockchain technologies which are being used to deliver the same or similar services. Not only that, but often whereas the blockchain solutions are mainly confined to pilots. the non- blockchain applications are relatively mature and being commercialised at scale. P2P communities such as PowerPeers and SonnenCommunity, for example, have well over 10,000 users each and the European Energy Certificate System is the industry standard for verifying the origin of green energy.
Even when blockchain solutions are offered (such as the Brooklyn Microgrid with LO3), it is often overlaid on the incumbent system. In other cases, trials based on blockchain are later commercially implemented using non-blockchain technologies.
Early days for blockchain
In its defence, it should be noted that blockchain is still a relatively immature technology and that there remain many regulatory obstacles which, if resolved, may accelerate blockchain solutions considerably.
However, this again raises the key challenge to blockchain which is that of reality. Whenever blockchain meets either the physical realities of interfacing with energy or the interface with the existing regulated energy markets, there are many complex issues to be resolved.
Whether this can be achieved remains to be seen. It is a fascinating topic and one which we will continue to monitor within the Delta-EE Local Energy Systems Research Service.