Blockchain: at the Core of the Energy Sector Revolution
Inese Dosé, Senior Consultant at PricewaterhouseCoopers Latvia.
The Blockchain has created an exceptional hype around its utilisation by many industries. The technology facilitates transactions between parties by using computer algorithms without the need for third-party involvement. It increases flexibility and cuts costs in trading and operation. It is a genuine sea change, where new and potentially better forms of collaboration can replace current intermediaries. Blockchain will enable the Revolution in the Energy sector, supporting its shift from a Producer-centric, top-down model, to a Prosumer-driven distributed model.
A Paradigm shift: From Consumers to Prosumers
The current top-down model is based on a simple paradigm: producers produce power and sell it to consumers who consume it. With the substantial price decrease of solar panels and battery storage, consumers are beginning to produce electricity, turning into prosumers. Today this is predominantly driven by self-consumption, but it will eventually lead to peer-to-peer trading. The current top-down model will be replaced by a distributed model because of this shift in power generation. The new system will see the emergence of an “information grid”, paralleling the physical electricity grid (an emergence of “Digital Twins”). This information grid will generate an enormous amount of data that need to be processed. This model change is a revolution, and, as with any revolution, it will create new issues and opportunities.
Blockchain is the key enabler of the revolution
Bi-directionality of electricity flow and transactions will be at the core of the new distributed model. Systems will be needed to record all the peer-to-peer trading transactions, in a secure and flexible way. Furthermore, the security of the transactions (alongside the security of energy supplies and distribution), the storage of the associated information, and the relevant data privacy will need to be preserved. Dealing with the explosion of the number of market participants and the data volume generated from multiple sources of production and smart metering will have to be addressed.
Blockchain and its components will fuel the transition to the new distributed energy model, by providing an answer to these questions. Blockchain is a decentralised ledger of all transactions. In other words, this is a system enabling the recording of mutual transactions without third-party verification - a flexible, efficient, secure and cheaper solution. It implies the role of intermediaries will diminish. It is therefore critical for established, legacy market players, whose business model is often based on some role in intermediation, to choose their future role in the new distributed world. We believe that it will soon become business-as-usual in the energy sector.
Successful stories of Blockchain initiatives in the Energy sector
This is really a big upheaval, comparable to the introduction of mobile phones in the Eighties and the disruption the Internet brought to most industries in the late Nineties. Similarly, Blockchain will change the shape of the energy industry. It promotes a new approach to doing business where new types of collaboration will replace intermediaries. Blockchain applications have started spreading in the financial sector, and the energy sector is now following suit. Both established, legacy energy market players and start-ups, sometimes in combination, are testing pilot Blockchain-based projects.
A few examples: BP and Shell are on track to develop a Blockchain-based digital platform to enable commodity trading. It is due to commence its operation in late 2018 and is expected to revolutionise oil and gas trading (as the energy giants claim). More than 30 European energy companies have joined the Blockchain-based peer-to-peer trading system in the wholesale energy market, powered by Enerchain. The first trade took place at the end of 2017. LO3 Energy in collaboration with Siemens have developed a peer-to-peer trading for Brooklyn households in the US, although it still needs to clear regulatory hurdles.
Obviously, emerging Blockchain-based business models are still fraught with many issues and questions. For instance, the question of who owns the liability when a transaction fails has still not been resolved, as Blockchain removes intermediaries so none is left to blame. The image of the Blockchain is stained by the wildly fluctuating Bitcoin, making headlines far too often. Regulations need a significant review and update. These are just some of the emerging issues. Yet, where there are new challenges, there are always new business opportunities.
The aims of established market players and new players are antagonistic: legacy players defend their market position whilst start-ups try to dislodge them. But both sides need to adapt to the changing energy sector and leverage the emerging opportunities to create value.
- Consumers will become Prosumers. That creates tremendous business potential for helping them navigate through that transition (e.g. sale of solar panels and batteries, financing of these assets, servicing the appliances, apps to optimise energy flows, consumption data resale, EVs, etc.).
- An impressive information grid is emerging, on top of the physical electricity grid. Ensuring the smoothness and the cyber-security of the information exchange and storage will be key.
- Improving the physical security of the grid will be obviously critical (being the blood in the economy) with the diffusion of power generation.
- Collaboration between start-ups and legacy players, and amongst legacy players from the energy sector and other industries, are yielding interesting business models. Legacy players provide their market access whilst start-ups contribute their creativity and technological expertise. For instance, collaboration between ZF (automotive), UBS (finance) and IBM (IT), led to the creation of an EV car eWallet, to fill all the needs of the emerging electric car, from charging and storing electricity, to paying tolls and parking charges.
- Smart and close cooperation with regulators will help shape the energy future in the direction in beneficial ways for new players and, hopefully, for prosumers.
The only thing we are sure about the future is that we are not sure about what the future has in store for us. It is hence always essential when launching new initiatives to revert to the mantra: Test, Fail, Repeat, Succeed.