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Riding the Hype Cycle: Is Blockchain Still Key to a Better Energy System?

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In Brief

Blockchain proponents have argued that the technology can enable a more dynamic, decentralized electricity system, referred to as “transactive energy,” which would promote deployment and accurate compensation of distributed energy resources.

However, concern remains about blockchain’s suitability as a platform technology for electricity markets given its potential costs to efficiency, reversibility, and privacy.

The shift toward a more transactive energy system is already happening and will likely continue with or without blockchain.

Scott Clavenna kicked off Greentech Media’s Blockchain for Energy Forum by tempering audience expectations up front: “Blockchain is real, but it won’t be revolutionizing any energy markets soon.”

The most recent iteration of the annual conference took place in New York on September 25th, 2019. Clavenna is the chair of Greentech Media and Wood Mackenzie Power and Renewables, a leading source of news and advisory services in the energy industry. His observation represented a shift away from the unbridled optimism surrounding blockchain in recent years.

Some blockchain proponents have argued that the technology can enable a more dynamic, decentralized model for the electricity system, referred to as “transactive energy.” In a transactive energy system, electricity customers would be empowered to increasingly act as “prosumers,” helping to match electric grid supply and demand by transacting with their utility and potentially each other according to increasingly real-time, locational prices.

Blockchain is a system for exchanging digital assets, like currency or records of electricity generation and use, among untrusted parties without necessitating the involvement of a central intermediary. In the same way that cryptocurrencies like bitcoin can be traded among strangers without relying on a bank, blockchain-based transactive energy could enable peer-to-peer electricity trading by storing transaction records transparently and immutably on a public ledger.

Following the classic technology hype cycle, blockchain has fallen from its peak of inflated expectations, and its limitations are drawing greater scrutiny.

In the year leading up to the 2018 bursting of the cryptocurrency bubble, energy blockchain startups raised over $300 million, mostly through initial coin offerings. More than half of the money went to companies pitching transactive energy solutions. Greentech Media’s forum highlighted numerous small-scale pilots of blockchain-based transactive energy, including LO3 Energy’s Brooklyn Microgrid, Alectra’s GridExchange, and TenneT’s EV and residential battery charging platform.

But following the classic technology hype cycle, blockchain has fallen from its peak of inflated expectations, and its limitations are drawing greater scrutiny. As more traditional venture capital and strategic investors are beginning to evaluate the technology for the energy industry, feasible near-term use cases such as carbon credit tracking or management of utility assets may offer more immediate returns than ventures seeking to fundamentally reshape electricity markets around peer-to-peer trading.    

So, is blockchain still key to enabling a transactive energy system? And why is there so much excitement around transactive energy to begin with?

The Growing Distributed Grid

The grid is becoming increasingly decentralized, creating a need for new approaches to valuing energy and balancing supply and demand of electricity. Residential solar generation, electric vehicles, home batteries and smart home devices are rapidly growing in popularity. Solar panels have been installed at more than 2 million U.S. homes in the last decade, and another 46% of homeowners say they have considered installing solar in the past year. These so-called distributed energy resources (DERs) are projected to impact peak demand in the U.S. by over 100 GW in 2023.

Growth of DERs will pose challenges for a grid that was designed for centralized power generation and a unidirectional flow of electricity. Fluctuations in supply from residential solar, or in demand from electric vehicle charging, could potentially stress local distribution networks. A transactive energy system which exposes customers to more dynamic pricing could mitigate this problem by incentivizing the use of DERs at optimal times and locations on the grid.

In addition, DERs can play an important role in decarbonizing the grid. Distributed storage, in the form of home batteries and grid-connected electric vehicles, can be used to soak up excess renewable energy and supply it back to the grid when demand peaks. With the right market signals, smart thermostats and appliances could automatically shift their electricity usage to times when low-carbon supply is plentiful. Providing customers more opportunities to be compensated for the services their DERs provide to the grid promotes adoption and allows these benefits to be realized.

By coordinating DERs with other resources such as utility-scale wind, solar, and storage, “integrated clean energy resources” may even be able to perfectly replicate the grid services that new fossil fuel power plants would otherwise need to provide, according to Rocky Mountain Institute. Automated, synchronized dispatch of DERs could facilitate a shift away from centralized power plants and decarbonize the grid in the process.

Does Transactive Energy Need Blockchain?

There are differing viewpoints on the importance of blockchain in enabling a transactive energy system. Clavenna suggested at the Greentech Media forum that the shift toward transactive energy is already happening and will continue with or without blockchain. While blockchain might be necessary to enable truly peer-to-peer energy trading, much of the vision of transactive energy can be achieved without replacing centralized markets. At the forum, Colleen Metelitsa from Con Edison pointed out that trading on wholesale markets still involves fax machines and spreadsheets. Markets can be made more efficient and accessible to smaller DERs simply through advances in digitization and automation.

Some argue that blockchain’s decentralized model comes with significant costs to efficiency, reversibility, privacy.

For example, in a novel collaboration between Google Nest and energy startup Leap, residential electricity customers are sent wholesale market price signals through their smart home devices which are programmed to automatically reduce demand during at times of peak load. Leap acts as an intermediary by aggregating DER capacity and submitting demand flexibility bids to California’s grid operator.

In addition, concern remains about blockchain’s suitability as a core platform for electricity markets. Specifically, some argue that blockchain’s decentralized model comes with significant costs to efficiency, reversibility, privacy. A 2019 report from the Atlantic Council lays out some of those potential costs in detail.

First, blockchain typically requires the full record of transactions to be stored at each node across a network, potentially limiting the system’s transaction speed and increasing costs. Because the electricity grid requires second-by-second adjustments to ensure constant balancing of power supply and demand, achieving adequate processing speed on a blockchain network could be challenging. Additionally, with potentially billions of internet-connected devices participating in energy markets, keeping permanent records of all transactions at every node across the network might require data storage resources that few could afford. And if control over nodes were consolidated, a blockchain’s security would be undermined.

Second, the property of immutable-record keeping is at the core of any blockchain solution, but immutability may not be desirable for a market that will be dependent on physical sensors and prone to occasionally incorrect data and fraud. Mechanisms for correcting faulty transactions might be necessary in blockchain-based electricity markets. Transactions on a blockchain can be rolled back, but such changes often result in disagreement among network participants.

Finally, a blockchain-based transactive grid raises important privacy questions. Public blockchains achieve consensus by requiring each node to verify the compatibility of a new transaction with the shared ledger. This requires network participants to have broad access to granular energy data. Publicizing the location, timing and quantity of individuals’ electricity use may be risky even if the data are anonymized. Solutions for protecting data privacy on public blockchain networks, like zero knowledge proofs, multi-party computation, and secure hardware enclaves, remain under development. In highly regulated electricity markets, the transparency and decentralization of control brought by blockchain would require radical change.

Some blockchain proponents suggest that one of blockchain’s greatest value propositions for the electricity system is its ability to increase access to financing and community-owned energy by cutting transaction costs and removing intermediaries. These potential benefits are promising and may currently be greatest in settings where energy infrastructure and capital are lacking. For example, blockchain-enabled peer-to-peer financing is being piloted in disaster-prone areas of Puerto Rico to promote the deployment of microgrids and distributed solar generation.

With all the high hopes for blockchain, Clavenna admitted that it would be a disappointment if the technology failed to play a central role in the shift to transactive energy. But we are still in the early days of blockchain. Further evolution of the technology may yet give it the opportunity to reshape electricity markets in the future.

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