Potential applications of blockchain have caused quite a stir in many industries. This technology enables two parties to use algorithms for completing transactions without third-party verification. Blockchain increases the speed of transactions and reduces operating costs. This is a true revolution with new and potentially better forms of collaboration replacing established middlemen. Blockchain is about to disrupt the energy sector by supporting transition from the current centralised model with producers and consumers to a distributed model with new market players: producer-consumers.
Producer-consumers instead of consumers
The current top-down model works on a simple principle: producers make electricity and sell it to consumers. However, a significant drop in the pricing of solar panels and solar cells will cause consumers to begin producing their own electricity as producer-consumers. While this shift is mainly driven by the necessity to produce for your own needs, it is likely to trigger electricity trading among producer-consumers, with a distributed model replacing the centralised one. In parallel with the physical electricity grid, a new network of information will emerge, creating huge data volumes to be processed (known as digital twins). These changes may be considered a revolution, which – just like any revolution – will create new problems and new opportunities.
Blockchain as the main driver of revolution
The distributed model is based on the need to make bilateral electricity supplies and trades. This will require systems capable of storing details of transactions between producer-consumers in a secure and transparent way. Particular importance will attach to the security of transactions (as well as the security of electricity supply and distribution), information storage, and security of related data. We will need to handle the exploding number of new market players and the resulting new volumes of data.
Blockchain and its components will facilitate the changeover to the distributed model by offering solutions to these problems. Blockchain is a decentralised ledger that enables two parties to record transactions without third-party verification, and this is done in a flexible, efficient, secure and much cheaper way. As this will phase out intermediaries, it is important that any established market players who are more or less acting as middlemen should now choose their position in the distributed model, which we believe will be the market model of the future in the energy sector.
Successful blockchain initiatives in the energy sector
Blockchain is such a significant revolution in the energy sector that it compares to the introduction of mobile phones in the mid-80s or to the changes that literally every industry faced with the advent of the Internet in the 90s. The disruption caused by blockchain will help create new forms of collaboration that will replace established middlemen. Blockchain has already entered the financial sector, with the energy sector now following suit. Established market players and new entrants (or their combinations) are already running a number of blockchain pilot projects.
For example, British Petroleum and Shell are developing a blockchain-based digital platform for trading in oil and gas. These two energy megaplayers are planning to put the new platform into operation in late 2018, which might also amount to a revolution.
Over 30 European electricity producers and traders have joined forces to create an electricity trading platform powered by Enerchain. The first transaction took place in late 2017.
In collaboration with Siemens, LO3 Energy has built a platform for electricity trading between Brooklyn households in New York, but its smooth running is subject to certain modifications to the regulator’s rules.
Of course, operating new blockchain-based models raises many questions, such as who will be responsible if a transaction goes wrong, since blockchain allows transactions to be completed without a middleman, who is usually held responsible. Blockchain is also affected by the somewhat tainted image of bitcoin, whose surprising fluctuations hit media headlines too often. Many of the regulator’s rules also need revision. However, where there are new challenges, there are usually new business opportunities.
Established market players and new entrants have opposite goals: the old players want to keep their position on the market, while the new entrants are seeking to oust them. The two sides will need to adapt to the changing energy landscape and take the new opportunities for creating value:
Consumers will become producer-consumers. This creates attractive business propositions to help them in this transition, e.g. through selling solar panels and solar cells, financing and/or servicing, electricity flow optimisation, resale of consumption data, sales and/or maintenance of electric vehicles.
In parallel with the physical electricity grid, an impressive network of information emerges. The security of this network (as well as cybersecurity) will be crucial.
The security of the physical electricity grid will also be vital as it forms the backbone of the entire economy.
New entrants are advised to collaborate with the established players since there are already some very successful collaboration models around. The established players provide their market access and expertise, while the new entrants offer their creativity and new technology expertise. For example, a collaboration between ZF (automotive), UBS (finance) and IBM (IT) has created an e-wallet for servicing electric vehicles, from charging and storing electricity to paying for toll roads and parking lots.
It is important to liaise with regulators to help them adapt industry rules, which would secure the transition to the new model and favour the new market players and producer-consumers.
When starting new initiatives, it is important to remember: try, get over failures, try again, and succeed!