Blockchain, hype or hero?

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Interest in blockchain or distributed ledger technology is building and this technology is already making the transition into the energy industry, where a number of trials are underway around the globe. But what is it and what does it mean for the energy industry?

What is distributed ledger technology?

Distributed ledger technology is the underlying concept which has been used to build distributed ledger databases such as blockchain. A distributed ledger is a digital record of transactions that is shared instantaneously across a network of participants. A blockchain is a technical component of a distributed ledger, and refers to the chain of transactions that reside within the ledger. Transactions are grouped into cryptographically secure “blocks”, and as they are verified, a new “block” is added to the chain of previous transactions. The blockchain is therefore an accurate and secure record of the history of the entire record[1]. Blockchain technology is currently used to support the cryptocurrency known as Bitcoin and is increasingly being used in other applications, including areas within the energy industry.

Emerging distributed ledger technology projects in the energy industry

Blockchain has become the catalyst for several recent projects within the energy industry:

  • The United States based Brooklyn Microgrid project[2]utilises the TransActive Grid, a decentralised energy trading platform developed by LO3 Energy. This platform uses blockchain to create a localised energy trading system to trade energy between neighbours, referred to as peer-to-peer electricity trading. The project involves a microgrid containing a number of homes (in one street) all fitted with smart meters and some with solar generation. When excess solar generation occurs at the same time as a demand exists among the homes in the microgrid, the excess solar is traded directly with those homes (i.e. neighbour to neighbour). A distributed ledger is used to manage and record transactions. LO3 Energy have also reportedly opened an office in Australia as part of a global rollout of demonstration microgrid sites.[3]
  • Slock.it in collaboration with German utility RWE is working on a number of projects[4] to investigate how blockchain can be integrated with RWE’s core business and how blockchain and smart contracts could manage public electric vehicle charging stations. The charging station project seeks to allow users to rent a charging station, pay a deposit, charge their car, then have their deposit refunded. Blockchain will be used to manage customer accounts (or wallets) and the transaction process. Meanwhile, smart contracts embedded in the blockchain will allow customer access to the network of charging stations.
  • Power Ledger, an Australian based organisation, has adopted distributed ledger technology to develop and test methods to provide an automated market trading and clearing mechanism for grid connected and non-grid connected microgrids[5]. The concept seeks to allow peer-to-peer energy trading for multi-unit or multi-tenanted residential and commercial developments, homes and businesses. Power Ledger is currently trialling this technology across sites in Australia and New Zealand.
  • Netherlands distribution utility Alliander is working on a project[6] to understand how energy transactions will look in the future, with an emphasis on how distributed ledger technology could change or influence future developments.
  • Energy Blockchain Labs is an investment fund in China which is piloting applications of distributed ledger technology within a distributed energy market involving solar, EVs, wholesale and retail energy trading. A test site has currently been set up in an industrial park in Ningbo, China to facilitate energy trading between solar PVs and energy consumers[7].
  • Grid Singularity is an Austrian start-up which is developing a blockchain-based energy data analysis and benchmarking, smart grid management, trade of green certificates, investment decisions and energy trade validation[8].

How might distributed ledger technology be applied?

These trials highlight the fact a number of companies are already taking the opportunity to explore the application of blockchain and distributed ledger technology in the energy industry. Distributed ledger technology offers significant potential to reduce the costs of managing transactions – which could be a powerful enabling factor in the development of distributed energy markets – including peer-to-peer trading and the efficient integration of distributed energy resources into the electricity grid.

Considering an Australian context in the application of distributed ledger technology, several opportunities come to mind. These include:

  • Energy trading: The establishment and facilitation of traditional trading platforms is complicated, costly and presents genuine security risks. Distributed ledger technology has been proposed to overcome some of these barriers. This technology could change how energy is traded, for example enabling P2P trading or enhancing the business case for microgrids, but it is only one piece of the puzzle. By far the biggest barriers to these markets in Australia are the current regulatory constraints and network pricing arrangements which limit the business model.
  • NEM Wholesale Market: Could distributed ledger technology be used to replace the verification and settlements processes behind the National Electricity Market (NEM)? Other market administrators, such as the Australian Securities Exchange (ASX) are currently looking to implement distributed ledger technology[9].
  • Market reform initiatives: The Demand Response Mechanism[10] reform (currently at preparation of draft determination stage) and Multiple Trading Relationship[11] reform (which resulted in a rule not made decision) are both examples of rule changes proposed to the AEMC where cost-benefit analysis was a critical success factor. Could the use of distributed ledger technology significantly change the cost-benefit analysis and simplify the implementation of these proposed reform initiatives?

The potential impact of distributed ledger technology on the energy sector is still highly speculative but there are some genuinely exciting prospects. If these prospects are further developed and supported by regulatory changes, it could help to unlock some of the trapped value of distributed energy resources and improve the efficiency of the electricity supply system.

What should you do?

Energy industry participates should, at the very least, understand the key concepts behind distributed ledger technology and the potential opportunities this technology may enable. Some questions to consider:

  • What position or group in your company is responsible for keeping abreast of distributed ledger technology developments?
  • What are the potential risks, opportunities and benefits of distributed ledger technology for your organisation?
  • How could distributed ledger technology enable your organisation to expand into emerging business opportunities?
  • Do you have a project that could be utilised to explore the opportunities of distributed ledger technology?

Projects and trails involving distributed ledger technology are gaining momentum. Organisations taking the leap to learn and test this evolving technology will undoubtedly learn a lot from their hands-on experience.

For more information on distributed ledger technologies and how they can be applied in your business get in touch with Ryan Wavish, our Technology, Innovation and Reform Practice Leader.

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Footnote:
[1] Blockchain Reaction, Allens Linklaters
[2] http://transactivegrid.net/
[3] https://onestepoffthegrid.com.au/p2p-energy-sharing-start-brings-brooklyn-microgrid-smarts-australia
[4] http://www.ibtimes.co.uk/rwe-slock-it-electric-cars-using-ethereum-wallets-can-recharge-by-induction-traffic-lights-1545220
[5] http://powerledger.io/
[6] http://www.visualmind.nl/portfolio/alliander/
[7] Bloomberg New Energy Finance (2016), Gridchain: will blockchain work in the energy sector
[8] http://gridsingularity.com/#/
[9] http://www.asx.com.au/about/media-releases.htm
[10] http://www.aemc.gov.au/Rule-Changes/Demand-Response-Mechanism#
[11] http://www.aemc.gov.au/Rule-Changes/Multiple-Trading-Relationships