How blockchain can change energy markets forever
Whether blockchain had come along or not, energy markets are undergoing unprecedented change. Global initiatives are recognising the benefits of renewable energy and through uptake, the cost of solar, wind and battery power has dropped below that of fossil fuels. Distributed energy resources (DERs) are more widespread than ever before.
But for all the change, we still have a system where, increasingly, consumers are frustrated about paying so much for electricity and not getting a fair return on their solar investments. A system where strong winds can black out 20,000 homes. Where renewable infrastructure investment is limited to sophisticated investors and carbon initiatives are restricted by clunky registries.
These problems are asking questions of today’s energy markets. And if we let go of preconceived views on what the solution should look like, blockchain can answer several of them.
Better energy system management
Using the blockchain means consumers can sell their battery sourced electricity to their retailer in peak periods, and provide energy services to help retailers manage their price risk, and receive an enhanced price for their energy, and be paid that same day.
Projects that benefit from this type of arrangement are already in progress, empowering customers to alter usage habits to consume energy at off-peak billing periods.
If electricity is expensive one evening because everyone is taking a shower, the price mechanism can kick in and manage the system so that it heats the water up a little later when the spike is over.
If there is a high price in the market, you can have your system set up to automatically dispatch your energy and be paid instantly for it.
Cross retailer trading – a bona fide market
Today, households with solar panels can sell their excess energy to an energy retailer for a fixed price, and the retailer then sells it to other households. This is only possible if both customers use the same energy provider, not to mention the payment to the household selling the energy can take months.
By contrast, using the blockchain can provide a fast, cross-retailer peer to peer trading and settlement system which can pin the financial transaction to the physical transaction, regardless of who the energy provider is. Using a blockchain mitigates the risks of a single party controlling the central repository of sensitive information, as would be required if using traditional database technologies. A blockchain negates the need for a central authority to settle the transactions.
When it comes to regulators, access to immutable and validated market records offer the potential to help streamline disputes and complaints, reducing incidents of ‘unders and overs’.
Low cost and low carbon energy for all
If we can enable more peer-to-peer interactions across networks, we can build an economic framework and marketplace where owners of solar and batteries are incentivized to keep supporting the overarching system, rather than defecting from the grid altogether. This keeps costs down and customers happy. Customers without solar panels can purchase renewable energy from their neighbours, which allows them to contribute financially to the renewable energy economy.
Currently, the issuance of carbon credits and the registry for renewable energy credits, is managed on spreadsheets. Secondary market trading of credits is largely handled via aggregators and brokers, making it a manual, opaque and expensive process.
Tracking tokenized carbon credits on the blockchain has the added benefit of ensuring retired credits can’t be traded, or that one credit can’t be owned by two parties at the same time, thereby reducing the incidence of error and fraud.
An example of blockchain in action can be observed in the US with the Low Carbon Fuel Standard (LCFS), a clean fuel program run by California Air Resources Board (CARB), which allows companies that are refueling electric vehicles in California to claim credits that they can then sell.
Silicon Valley Power, owned by the City of Santa Clara, is using the blockchain to track solar energy from solar panels to electric vehicle charging points to validate LCFS credits automatically, simplifying the process and reducing intermediary costs.
Secure registry that can unlock market based liquidity
A blockchain based credit registry reduces the incidence of fraud or mistakes but most crucially history has shown us that when market based liquidity is added to large fragmented markets a lot of value is created for all. A blockchain enabled tokenised carbon register creates the preconditions for this kind of market.
Transparent and liquid markets
By tokenizing credits on the blockchain, eligible participants are able to trade credits easily, instantly and transparently via an exchange, where the price of each token is public and the market can be more liquid than over the counter markets where each transaction is negotiated on a bilateral basis.
Energy Asset Financing
According to the International Renewable Energy Agency (IRENA), “renewables need to be scaled up six times faster for the world to meet the Paris Agreement goals.”
If the world is going to turbocharge this growth in renewables, we need investment, and the blockchain presents an opportunity to access previously untapped capital in this space.
More buyers and smaller capital
Around the globe direct investment in large scale renewable energy assets is typically only available to ‘sophisticated investors’. As an example, in Australia only people with an annual income of at least AUD250,000, or net assets of AUD2.5 million can invest in this type of asset.
Fractionalising assets on the blockchain makes them available to everyday retail investors, not just high net worth individuals.
Issuance and management cost efficiencies
The blockchain can facilitate fractionalised ownership of large-scale renewable energy assets in a way that is economical. The cost of issuance these financial products to market and the maintenance of the legal and accounting structures for the assets can also be reduced by using the blockchain as an asset and income register.
There are a number of ways the blockchain creates further efficiencies. For example, by reducing the cost of verification of each individual investor via blockchain-enabled know your customer (KYC) solutions.
Developments in identity technology have the potential to reduce overhead costs related to compliance and fraud prevention, as each user only needs to be verified once. This ensures personal information is kept safe and only real, verified investors can gain access, but can do so quickly.
Reduced mistakes and fraud
Making mistakes in the asset registers is costly. The blockchain mitigates this risk as it is not possible to issue any more than one hundred per cent of any particular asset.
Faster settlement and more liquid
These benefits extend into the secondary trading of investments. If you were to purchase a share today, you won’t own it for two business days because of the settlement delay. The blockchain enables investors to own their investment instantly, making trading more transparent and cost efficient. Essentially it condenses the two steps, of purchasing an investment and of transferring the ownership of that investment into one step.
Eventually this will allow issuers of investments to lock in capital without locking investors into one investment as its tradeable and therefore liquid. This makes the asset more attractive, as investors are able to trade in and out of investments using tokenized representations of ownership.
Its early days but the signs are good
How long it’ll take for blockchain to make a formidable impact in energy markets remains to be seen. We’re only beginning to scratch the surface on the improvements blockchain technology can make, but it’s clear the prospects are there and the technology can achieve what’s being asked of it.
Blockchain presents an opportunity to allow consumers to be part of a market where households that generate renewable energy can trade with their neighbours, or energy companies, and get a fair market price on their investment. It can enable more efficient carbon markets and provide new opportunities for injecting much-needed capital into renewable energy assets.