Many wonder, how does the blockchain and energy industries join? For most of the crypto industry observers and participants, conversations that feature ‘energy’ and ‘blockchain’ rotate around the tools and resources needed to mine proof-of-work blockchains. People also determine how these activities affect the environment.
The growing link between the two sectors is evident since even Bitcoin’s mining is done using cheap, coal-powered electricity in different countries particularly China. Although initiatives like the Soluna’s wind-powered mining farm offer more sustainable energy solutions, consumption and waste remain a major problem for the proof-of-work cryptocurrency community.
However, that is not the only way in which the blockchain and energy sectors interact. For several years now, there has been major speculation into the blockchain technology’s ability to enhance the efficiency of the energy sector.
Currently, the energy industry has become a majorly transactional and complex system comprising of many suppliers, sources, distributors, and middlemen. Also, many crypto startups have come up to streamline the existing processes and create new functionality.
Some of the areas with many opportunities include the elimination of middlemen retailers, commodities trading, data management, peer-to-peer energy trading, automation, and accounting.
How Does The Energy Industry Work?
Generally, upstream generators produce raw material that is processed and then transported by the midstream delivery infrastructure to the downstream distributors. These distributors then sell the raw material to the end-user. While the process appears fairly simple, its complexity increases due to the number of generators involved.
Different energy sources exist including wind, solar, nuclear, and oil. The process of energy production and supply varies in complexity when different processes start overlapping.
Electricity is delivered to the end-user by a retailer (downstream) who contracts with the utility company (midstream) that owns the power lines and buys power from an upstream electricity generator. The generator itself is a downstream customer for natural gas, oil, solar, and many others to generate the electricity it produces.
Perched at the top of the supply chain is an ecosystem of different commodities traders that leads to highly competitive and efficient markets. Also, competition majorly increases the financial complexity of the energy industry.
The consumers use and pay for the energy that they use representing the culmination of the whole process. As opposed to most of the supply chain systems and commodities markets, the end-user directly uses the commodity bought.
In combination, all these elements make the energy industry a majorly suitable candidate for innovation by the nascent blockchain technology. It features a complex supply chain with a need for increased transparency and enhanced data management. The highly transactional marketplace may also benefit from the capabilities of instant settlement that blockchain can introduce.
Transparency and immutability of blockchain can successfully empower the end-users of the business and consumer-facing industry.
How Has Blockchain Impacted the Energy Sector So Far?
With many potential synergies existing between blockchain and the energy system, many projects are taking up this intersection. A recent study in Renewable & Sustainable Energy Reviews that was published in 2019 offered a systematic analysis of at least 140 blockchain research projects and startups in the energy sector cutting across many countries globally.
That study categorized blockchain initiatives within the energy industry in eight categories including:
- green certificates and carbon trading
- general-purpose initiatives and consortia
- metering/billing and security
- electric e-mobility
- cryptocurrencies, tokens, and investment
- IoT, smart devices, automation and asset management
- decentralized energy trading
- grid management
Due to the complex nature of the energy industry and the many areas of opportunity, thus the study has many categories into which projects fall. Nonetheless, at a higher level, blockchains can enhance the energy sector in the same domains they normally do: transactions and data management.
How Can Blockchain Enhance Transactions in the Energy Sector?
One of the key areas where blockchain can improve in the transactional energy ecosystem is commodities trading. Most companies currently spend millions to create and access proprietary commodity trading platforms to track and execute different transactions. Instead of many proprietary systems, blockchain could guarantee security, speed, and immutability of energy trading.
Also, an opportunity exists in the creation and trading of green certificates and carbon offsets that are otherwise expensive to obtain. In that context, automated smart contracts and metering systems could benefit by improving offset accessibility, an approach that is already taken by the Veridium Labs project.
Blockchain transactions can eliminate the need for middlemen which may lower costs instituted by energy retailers. A more transparent blockchain-based system may enable users to buy directly from the utility providers. US-based startup Grid is using the Ethereum blockchain to cut off middlemen letting users buy electricity wholesale instead of going through retailers.
Peer-to-peer transactions which is one of crypto’s initial value propositions is a key avenue of enhancement for the energy sector. Blockchain systems can enable users to trade energy directly. This is quite promising for the renewable sources of energy like solar and wind that users can generate themselves.
The innovation would enable prosumers to enter into the energy market as a supplier. Australian company Power Ledger is enabling users to do just that with its microgrids, which enable the prosumers to sell energy to members in their communities.
How Can Blockchain Enhance Data Management in Energy?
In a supply chain that has many stakeholders with high stakes; having a shared source of asset and inventory management data can be highly powerful. Blockchain can unify the elements of the process that are normally siloed or obscure while also highly protecting the proprietary information and privacy of the parties involved.
VeChain’s partnership with Shanghai Gas is one of the projects making major progress in this field that services up to 90% of Shanghai’s energy. A successful pilot tracking transportation, storage, and order formation have resulted in a recent expansion of the partnership.
Including blockchain in the current metering and billing process may offer several benefits for energy suppliers and consumers. The origins and delivery of energy become much clearer for the consumers and easier to automate for companies with a unified ledger enabling traceability of energy delivery.
Engie, an energy management company has experimented with several tests in the space, including identifying issues that need repair and blockchain infrastructure connected to water meters to accurately trace flows.
The available solutions about data management are quite valuable as a result of enhanced transparency offered in the process. But, security is an equally important consideration. For consumers worried about their private data and corporations with proprietary data, blockchain can cut both ways in matters of shared data.
Many projects that strive to enhance the security of the systems and provide the best of both worlds exist; including protected private information and shared communal data. Electron, a British startup is looking for a new encryption technique for smart meters while Guardtime, a project that is funded by the US Department of Energy has come up with a permissioned blockchain solution that solves these issues.
Challenges and Risks
Though there have been many experiments in the energy field and blockchain fields, most of these projects have been small scale and challenges persist. Regulatory clarity is the main challenge affecting the blockchain field.
Although integrating blockchain in the energy sector can empower consumers and incentivize cleaner energy consumption; there is little guidance on how it will work out for blockchain projects especially in spaces like P2P energy trading.
Also, scalability, security, and speed needs are important in a sector that is as mission-critical as energy. Now, many public blockchains must sacrifice to enable one of these vectors; since each of them is a significant obstacle for the accelerated adoption of most existing solutions.
While a private blockchain may help solve some challenges. There are also major development costs for blockchain solutions; and the lack of security of success may undermine these efforts.
Eventually, the existing system is heavily ingrained based on a technological, infrastructural, and regulatory point of view. That is a considerable barrier for blockchain to overcome in any sector.
The Future for Blockchain in Energy
There is a huge potential for blockchain in the energy sector despite the several challenges that exist currently. A study by Global Market Insights predicts that the blockchain energy segment will grow from $200 million in 2018 to $3 billion in 2025.
Currently, it is unclear how the blockchain solutions will look like. But, research by Renewable & Sustainable Energy Reviews revealed that 60% of analyzed projects are majorly based on Ethereum currently. That number somehow distorts the number of projects being built on energy-use specific blockchains or private and permissioned systems.
VeChain’s recent success with Shanghai Gas may act as a template for how these blockchain projects will rise from small-scale pilots to reach a critical mass. Shanghai Gas is the biggest energy supplier in China. The project with VeChain started in 2018 with a test handling quality assurance. That project included order information, classification, transportation information, and tanker IoT equipment information.
On March 31, the project was given the green light to expand after the success of the pilot project. Plans are underway to incorporate a major Energy-as-a-Service ecosystem that features; energy trading, logistics management, and financial products for upstream and downstream stakeholders.
VeChain also strives to make its blockchain more attractive to many enterprise operations than other public blockchains; by using a fee delegation feature and their VeChain ToolChain. This feature operates as a Blockchain-as-a-Service platform; that has so far helped at least 50 corporate partners to integrate blockchain solutions into their systems.
The long-term vision appears to contain many of the opportunities offered by blockchain technology into one ecosystem. Nonetheless, blockchain and energy seem to integrate perfectly to offer a more efficient and transparent system. Time will tell is the proposition is strong enough for the systems to gain massive adoption within the industry.