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The dilemma facing blockchain in energy

blockchain-abstract

The hype surrounding blockchain in energy has undoubtedly dropped off since 2017, as the realities of moving towards commercialisation has proved far harder than many expected back then.

Most of blockchain’s potential applications to new energy, like virtual community energy trading, EV charging roaming and green energy verification, remain as small pilot projects. Whilst it does still generate interest when brought up at energy industry and tech conferences, those working with blockchain day-to-day are trying to shift the conversation away from the underlying technology and towards the solutions it provides. However, the current reality is that it is ‘permissioned’ blockchains that make most sense for energy applications, and there are two key challenges that we think may hold it back.

The majority of blockchain applications in the energy sector are ‘permissioned’ to some extent – meaning that either a single private entity, or a consortium of entities, governs the network.

Governance of the network tends to involve validating transactions but can extend as far as approving new members and taking responsibility for updates or new applications. There are three key reasons why, in energy, permissioned blockchains are more common than public ones:

  • They have been developed by profit-seeking companies: To maintain control over the software platform, pilot it, update it and generally sell it to customers – it really needs to be based on a permissioned blockchain.
  • They are more scalable: The ‘Proof-of-Work’ consensus mechanism employed by Bitcoin and, currently, Ethereum, is hugely energy intensive. Permissioned blockchains can use novel consensus mechanisms which require less time and energy input.
  • They enable compliance with energy market rules and regulations: Energy is a fundamental strategic resource involving a vast amount of regulation, physical infrastructure and private data. Permissioned blockchains are more suitable for this environment than wholly decentralised public ones.

Two key challenges arise from the need to use permissioned blockchains – and these may hold back its journey into widespread commercial application in energy.

Firstly, permissioned blockchains remove, or at least limit, the technology’s key strength: decentralisation. The decentralised governance structure of blockchain ensures its ledgers are immutable (nobody can change the data recorded); trustless (no single entity controls the whole network – and parties can trade without needing to trust anyone); secure (no single point of failure); and democratic (updates and changes are controlled by users, not a third party).

However, there is a trade-off between the scalability of a blockchain and the level of decentralisation in its consensus mechanism. Private and Consortium blockchains have closed groups of permissioned actors governing the consensus mechanism. This effectively introduces a level of centralisation and takes blockchain from a completely immutable, trustless, secure and democratic technology, to one which is less democratic and susceptible (however slightly) to potential bad actors or hacks. This should not be ignored.

Secondly, the many alternative and proven solutions (e.g. conventional “centralised” database technologies) that already exist, and are in widespread use, will be difficult to displace. Blockchain needs to demonstrate that is not just equal to, but better than, these established alternatives. This means being faster, cheaper, more secure and more customer friendly. Right now, this does not appear to be the case. In the table below, there are only a small handful of ‘commercial’ (non-pilot) projects active using blockchain for these use-cases. Conversely, almost all the examples on the non-blockchain side are operating commercially (accepting customers at scale).

Application / use-case

Examples using blockchain

Alternative examples not using blockchain

Virtual community energy trading

LO3 (Exergy), Verv (VLUX), Open Energy Exchange, Power Ledger

Powerpeers, SonnenCommunity, Buzzn, Enyway, Vandebron

EV charging roaming

Share&Charge, Car eWallet, Slock.it

Hubject, OCPI, eClearing.net, Gireve

Verifying the origin of green energy

FlexiDAO, EWF Origin

European Energy Certificate System, PJM-EIS Generation Attributable Tracking System

Clearly, it is no longer enough for companies to use blockchain for the sake of it. Investors and customers are not that interested in which underlying technology delivers a product or service. They are far more concerned that it brings competitive advantage, that it delivers a great experience and/or that it is underpinned by a solid business case. In our view, it is not clear that blockchain, in its permissioned form, will be able to meet these needs any more effectively than non-blockchain alternatives.

 

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Sunday, 27 September 2020

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