Disrupting the energy landscape, block by block
Will blockchain overcome the hurdles in its way to transform the industry?
There has been a tremendous buzz around the potential for blockchain to transform the energy sector. But there are still a number of uncertainties surrounding the technology and a combination of technological, regulatory and other practical challenges could stall its growth.
In the latest World Energy Issues Monitor, produced by the World Energy Council, blockchain is identified asone of the most critical uncertainties within the digitalisation sphere, and is perceived by energy leaders globally to be an issue of both relatively highimpact and doubt.
Blockchain technology reduces transaction costs by keeping a single logical copy of transaction records—avoiding the need for reconciliation and settlement. Blockchain has the potential to change the way the energy sector arranges, records and verifies transactions, with the underlying model shifting away from a centralised structure (exchanges, trading platforms, energy companies)towards decentralised systems (end customers, energy consumers interacting directly).
Yet numerous questions remain. Will its early potential translate into robust and reliable practical applications?
Will industry-wide protocols and standards be needed before blockchain can become universally adopted and transformative, rather than niche and fragmented? How far away is widespread deployment of blockchain in the energy sector?
These key questions were addressed in a recent whitepaper: The Developing Role of Blockchain, produced by the World Energy Council in collaboration with PricewaterhouseCoopers (PwC) and with the support of our Future Energy Leaders (FELS).
The paper draws from interviews with a number of companies and organisations actively involved in blockchain projects in the energy industry from the US, Europe, China, Japan and New Zealand. It is designed to start a dialogue on potential obstacles to the uptake of blockchain and where the technology might be headed.
A disrupting force Blockchain is a new technology developed to enable peer-to peer transactions without an intermediary. Many see it as a catalyst for decentralised business models. "It will help companies adapt to a decentralised and digital market," says Dr Norbert Schwieters, PwC's Global Energy, Utilities & Resources Leader. "At the same time, it helps the democratization of the energy system, so small communities can perform power transactions without an intermediary [such as a utility company]."
Having seen its early application in the financial sector, executives are convinced it will have a significant impact on energy. In the survey, which forms the basis of the whitepaper, all but one of the interviewees agreed that blockchain will disrupt the functioning of the industry and contribute toward accelerating the speed of changes already taking place such as decarbonisation and the move to more decentralised energy sources. Notably, 87% of those surveyed anticipate that the most disruptive impact is less than five years away.
Still early days
Christoph Frei, who is a board member of blockchain organisation Energy Web Foundation, as well as Secretary General of the World Energy Council, says: "There are some areas of blockchain that are doable as of now but other things that require upgrading of the whole energy system are further out."
Dr. Schwieters adds that the early excitement, which typically surrounds a new technology, should be treated with caution. "Many are realising that there are still a lot of issues around it, and the initial buzz is calming down," he said. "I think it will take some time for it to really become a leading-edge technology.
It's still at a very early stage and many people say it will be five to 10 years before blockchain has a big impact." Regulation is seen as one of the key barriers to its uptake, according to two-thirds of the senior executives interviewed. "Regulation in many ways still prevents companies from doing peer-to-peer transactions," says Dr. Schwieters. "There are a lot of regulatory rules around trading data and trading energy. So energy laws will have to change."
This was echoed by Frei. He noted that three-quarters of the respondents in a separate survey undertaken for the World Energy Council's upcoming 2018 Issues Monitor said that the lack of robust regulations is an enormous obstacle which must be overcome if the technology is to succeed.
"If, for example, you need a trade from one household to another, there's no regulatory framework today that allows for that," he said.
Other problems include the lack of understanding of what a complex technology is, as well as the privacy and security issues that go hand-in-hand with data transfer. Blockchain will also have to prove it can work in practice and overcome scale, speed and other constraints that currently hinder its applicability in many situations.
"Speed is an issue right now because blockchain requires a lot of computing capacity—the more transactions you want to do, the more capacity you need," Dr. Schwieters said. "Also, the amount of energy needed just to run it is huge. So, at the moment it is still quite slow; and its energy intensity makes it a very expensive technology."
While this will no doubt change over time, other technologies will also develop that may challenge blockchain.
These technologies include IOTA and Hashgraph, which is quite similar to blockchain. There are also internal and external blockchains which could develop. "We cannot foresee which technology will prevail in the end" Dr. Schwieters said.
At this very early stage of development, the range of blockchain application cases under investigation is very broad. The most promising identified in discussions with senior executives were architecture for managing grids, energy trading, peer to peer trading platforms and payment systems (particularly those associated with renewable energy and electric vehicle charging).
"We see three main use cases that are very close to realisation. The first is enabling peer-to-peer, as well as device-to-device transactions," Frei said. "The second is in the area of certificate of origins: allowing individuals or organisations to trace the origins of emissions or renewable energy production. The third area is in billing and accounting."
Finding a business model
A more overarching question for the energy sector at the moment is which business model will be most suitable. "You see many start-ups but what we haven't seen yet is a valid large-scale business model," Dr. Schwieters said.
Utilities have historically generated most of their revenues from power generation based on healthy wholesale electricity prices and could earn money from depreciated plants that were run longer than originally estimated. But deregulation and decentralisation in many countries has seen the erosion of this main revenue stream, leading utilities to seek out new business models.
"Blockchain could be part of an answer." "It will play a big role but perhaps in different ways than is perceived right now," says Dr. Schwieters. PwC and the World Energy Council plan to continue to keep tabs on developments. "This whitepaper gives the early thinking," said Frei.
"We are systematically identifying the best innovators in the game and will work with them to understand their perspective on critical success factors."
Frei says their progress will be updated regularly, with blockchain featuring in the programme at World Energy Council events.
This article appears in the latest issue of World Energy Focus, the magazine of the World Energy Council, with content produced by Petroleum Economist. For more information, visit the site worldenergyfocus.org.