This is the second of a two part series on blockchain in the energy system.
blockchain in energy – part one – what is blockchain
introduction, advantages, description of the system, proof of stake vs. proof of work, smart contracts, bitcoin & Ethereum
blockchain in energy – part two – blockchain and the grid
how far can we go with blockchain and the grid, perspectives of the system operator, consumers, generators, machines & regulators
The first part of this series introduced blockchain and concepts such as smart contracts and proof of work. In this second post I will theorize on how far we could go with blockchain and the electricity grid.
Today the most successful applications of blockchain are in cryptocurrencies such as bitcoin. Using blockchain to support the grid will offer additional challenges – some of which may necessitate keeping third parties in place.
It’s unclear how far we can go with blockchain and the grid. Currently applications of blockchain in the energy industry are limited to small pilot scale projects. Even in more widespread cryptocurrency applications the technology is still not considered mature.
Our transition towards a physically decentralized, small scale and clean electricity system is well underway. Blockchain is not necessary for this transition to happen. Yet it could be a useful tool in developing a more secure, efficient and open electricity grid.
The transmission & distribution system operator
I’m excited about the potential for blockchain to be the transaction and control layer for the grid. Blockchain could enable a living, self-organizing grid powered by smart contracts. Smart contracts would automatically match generators with consumers, balancing the grid in near real time. Virtual power plants and storage could also be dispatched using smart contracts.
A blockchain could make smaller scale (in both time and volume) transactions more viable. This would make a more diverse range of resources available to the system operator for real time balancing. It would also reduce the length of the settlement process – no need for complex and costly processes such as profiling.
This blockchain would provide an excellent database for managing grid operations. Data would be available for every transaction – price, quantity and time all down to a fine scale. This dataset would also allow more accurate forecasts of generation & demand. More accurate forecasts will reduce spinning reserve and imbalance costs.
Blockchain is the first technology that can identify of the origin of electricity. This would simplify certification of renewable generation or tracking carbon emissions.
It would also allow a system operator to see which parts of the grid were used to supply electricity. This would allow charging based on how the transmission and distribution system was actually used.
Theoretically a blockchain allows a fully decentralized system. In the context of an electricity grid it’s hard to see how the centralized role of transmission and distribution system operators disappearing.
A blockchain could create a more dynamic and competitive marketplace. A smart contract could purchase electricity from many different sources within the same day. An eaiser ability to switch should mean more competition and lower electricity prices. Combine this with the efficiency improvements of removing third parties and we would expect that electricity would get cheaper for consumers.
Smart contracts would also give consumers more power over where their electricity comes from. Environmentally conscious consumers could purchase 100% renewable electricity. Community focused consumers could prefer locally generated electricity. Price concious consumers could minimize costs by always purchasing the cheapest electricity available.
Allowing consumers more control over their electricity mix could increase customer engagement. Getting consumers engaged with where their energy comes from would be a powerful ally in speeding up our energy transition. It would also be fantastic for utilities looking for loyal customers.
A blockchain could also be powerful in developing communities. Imagine knowing all of the electricity you used was generated on your street. Money would be kept in the local economy, improving the business case for local generation. It’s a virtuous cycle that could accelerate our energy transition.
Using our energy system to develop a community spirit is potentially one of the most powerful impacts a blockchain could have. Technology often leads to more isolated communities – it would be great for technology to bring communities together.
It’s not clear exactly how far a blockchain system could go in completely removing third parties from the grid. A number of duties currently fulfilled by suppliers would need to be done by consumers themselves.
Take forecasting for example. Today electricity suppliers submit forecasts and get charged based on their imbalance. These forecasts are crucial for the system operator to schedule generation. How would this forecasting process be done when there is no supplier responsible for consumers?
Blockchain could be a major positive for electricity consumers in third world countries. Third world economies are often high inflation and low trust – a blockchain using prepaid smart meters could help with both these issues. Investements in solar panels can be made using cryptocurrencies with the generation supported by a grid blockchainm
Establishing blockchains in a third world countries could allow that economy to skip over the dirty & centralized systems historically used in developed countries.
A blockchain system could be very powerful for small scale generators. Removing third parties and their inefficiencies should improve the economics of all generators. We are already seeing impressive reductions in the cost of renewables and storage – an increased share of the value of electricity generated kept by investors will only make these technologies more lucrative.
A blockchain would democratize access to the marketplace, removing barriers that currently hurt small scale generators, flexibility, and storage. Today small scale generators often get a very unattractive fixed export rate. A blockchain would allow small scale generators to compete on equal footing in the same marketplace as a 2 GW power station.
Other technologies such as flexibility and storage are often locked out of the market through high minimum capacities or out of market subsidies. A blockchain is the antithesis of this.
The blockchain would also provide an excellent data source for investors in electricity generation. An investor could accurately understand the historical value of electricity generated through the transaction history of the blockchain.
The first role for machines in a blockchain system is to put the smart into smart contracts. The basis for this intelligence could be either a set of human designed heuristics or a narrow machine learning system. Reinforcement learning agents could be deployed as smart contracts, built to provide useful functions such as controlling voltage or frequency.
Blockchain also allows machines to do something quite interesting – own property. A machine with access to the private key of a blockchain account essentially owns any property associated with that private key. A blockchain could lead to the rise of a machine to machine economy, with machines trading and building assets within their blockchain accounts.
Regulators & the legal system
Regulators have a lot of work to do to prepare for a blockchain marketplace. Three broad areas require attention:
- protecting consumers,
- the physical nature of the electricity system,
- nurturing a technology to maturity.
Our current legal framework protects customers in centralized marketplaces. Additional protection is needed for a decentralized system.
The major challenge is the lack of a central authority. Today’s legal system involves a clear allocation of organizational & legal responsibility – this doesn’t really exist in a system where consensus is reached by the majority. It’s one reason why an electricity grid would likely be supported by a private blockchain.
As discussed in Part One the optimal mechanism for verifying blockchain truth is not clear. Mechanisms such as proof of work or proof of stake all have drawbacks. Another implication of verification mechanism design is the balance of power between miners and other nodes. Paradigms such as the tangle have evolved to adjust this balance.
Another issue is the boundary between the blockchain and the grid (the smart meter). Today suppliers appoint meter operators to install and maintain electricity meters. In a fully decentralized blockchain system it’s unclear who would be responsible for calibrating meters. A blockchain is excellent at ensuring only valid transactions are accepted, but there is still potential for fraud at the interface between the real and blockchain world.
The second area relates to the physical nature of the electricity system. The electricity grid is critical infrastructure that has additional layers of electricity supply security and physical safety.
Using blockchain in an electricity system requires an additional level of care over pure data systems such as cryptocurrencies. Managing the electricity grid involves not only data but the physical delivery of electricity.
Finally regulators will need to be careful in dealing with a technology that is not fully mature. Any immature technology can give surprising results as it develops and deployed at scale.
Thanks for reading!