Flip on a light switch or plug in to charge an electronic device and consumers don’t often think about the extensive system that enables electrons to flow their way. But more and more of the brightest minds in the world are doing just that — thinking of ways the digital economy might transform the traditional business of distributing and tracking electricity through the system.
One technology — blockchain — holds the potential to connect energy consumers with energy producers via a new market for real-time energy trading transactions. A digital energy transformation like this will take time to fully develop, but blockchain technology presents exciting opportunities. Blockchain is a decentralized ledger system similar to a database that records transactions made between peers in a secure and verifiable fashion. It has core capabilities for security, resilience, consistency and accuracy — immutable through consensus validation across the distributed blockchain architecture.
For now, blockchain is primarily being applied in the financial sector and for cryptocurrency like bitcoin because it is auditable and highly transparent, removing intermediaries and enabling efficient and nearly frictionless transactions in these markets. However, it is easy to envision how this technology could be applied to energy trading markets. It could enable disparate peers like suppliers and consumers to trade distributed energy resources. These transactions could function among commercial and industrial players, microgrids, owners of energy storage and even residential suppliers and consumers.
Blockchain can enable tracking of electrons through the system, which is vital in understanding how transactions will be cleared, as well as timing and validity of payment.
Let’s face it. Consumers today take power for granted. As a consequence, the power industry has not really changed much in the past 50 years. There were good reasons for this. Reliable service and stable prices for electricity based on system scale and capacity are the foundation of our modern economy. It didn’t make much sense to disrupt this system. But today, there are a number of match changers unlike anything the power industry has ever seen.
The biggest match changer is the increasing realisation that fossil fuel-based energy has an enormous environmental cost. As renewables are introduced into the mix, demand patterns are changing rapidly. Distributed energy resources such as rooftop solar combined with battery storage and fleets of fully charged electric vehicles now contribute power back on to the grid. These are only a few of the changes that will fundamentally and structurally reshape the energy sector and increase momentum toward a more flexible network based on a new model of distribution system operators (DSOs) as the next stage in the evolution from distribution network operators (DNOs).
A big question remains about the role of DNOs as the market transitions and transforms to a DSO model, away from centralized generation and toward two-way power flow. The DSOs will need to take an active management role and serve as unbiased third-party arbiters of electricity flowing through the network. Two-way power flow is indeed revolutionising the system.
At least some of those questions could be answered through blockchain-based technologies that would serve as an underpinning foundation to this digital grid economy. The distributed nature of the technology may replace what DNOs can do in a RIIO (revenue = incentives + innovation + outputs) regulated framework posited by the Office of Gas and Electricity Markets (Ofgem). The regulated framework and the definition of roles and responsibilities of regulators could potentially be carved away as consumers take direct control over their energy consumption and the resources around them. Regulatory uncertainty and bleeding edge technology may deter traditionally conservative energy market participants like DNOs, energy retailers and system operators from adopting this transformative technology as early as others.
New technology and emerging markets always pose inherent risks, but in this case, the potential reward is poised to overcome and outweigh these risks. Blockchain can remove some of the cumbersome overheads and inefficiencies that are commonplace in financial transactions. The technology removes error and inefficiencies inherent in most human interactions, allowing market participants to trade in a peer-to-peer, machine-based environment based on rules, contracts and real-time system conditions. The system will allow tracking and logging the mutual transaction and set contract or payment obligations in a secure and distributed manner.
The digital ledger concept can allow peer-to-peer transactions and contracts to flourish without intermediaries, banks and government regulation. However, it is precisely this potential lack of regulation and pending changes to regulation throughout world that poses the greatest risk. It is early in the adoption cycle and achieving scale and critical mass will be key to bring the adoption curve forward.
Cybersecurity has become a top priority of the energy industry. The nature of blockchain builds in natural security through ledger distribution and hashing — minimising systemic risk and ensuring the authenticity of transactions between parties. The cryptography available on blockchain technology can resolve many security issues to manage peer-to-peer transactions, enabling district grids or microgrids.
Electric vehicle (EV) charging points might be the first place for the industry to look in gearing a technology such as blockchain. Imagine a scenario in which a community of energy consumers looking to align closely with the UK’s clean growth strategy contracts to purchase energy produced by fully charged EVs plugged into the distribution network. The applications and markets in the power industry are endless.
It will take readily available technology provided at scale and at a price point for mass adoption. Many questions remain unresolved, however, such as the value of the grid and how this is paid for. Volumetric rates may not necessarily be the right mechanism to make utilities or other owners of gearbox and distribution whole. Still, the potential is clear. With the smart digital energy transformation, these applications will surpass our current imagination and projections of the magnitude of technologies impact on the network.
The UK power delivery system must address a host of additional network flexibility challenges as it transforms to a new model.