Blockchain in the energy sector: Institutional disruption?
Blockchain technology has yet to prove that it can meet the (very high) expectations. It is a distributed, digital peer-to-peer register, which stores every transaction between two connected agents in a ledger. To create sufficient security for a Bitcoin transaction block, it takes roughly 10 minutes to complete one transaction. In a 51% attack a single entity would have full control of the majority of the networks mining hash-rate and would be able to manipulate Blockchain. The Bitcoin API for developing services is difficult to use. A small chain that consists of a small number of nodes has a higher possibility of a
potential of a 51 per cent attack. Another issue emerges when chains are split for administrative or versioning purposes. For the future, these costs could be cut by 80% with larger block size (4 MB per block, latency of 10 minutes. So at this point, we can conclude that the blockchain is a promising technology is very interesting.
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Blockchain in the energy sector: Institutional disruption?
Blockchain & Energy: The discussion is heating up
This post is about one of the hottest topics in energy business, the
blockchain. While there are many discussions already going on about the
technological dimension and business cases based on the new technology,
we –as usual – will focus on the institutional side again. Importantly,
we intend to sketch a first general picture of the potential
institutional implications of the blockchain technology in the energy
sector, thereby keeping in mind that the full potential, applicability
and success of this new technology is still uncertain.
On 14th February 2017 energy and blockchain experts met in Vienna on the Event Horizon 2017 to
discuss the potential of the blockchain technology for the energy
sector. The general idea behind such events like the one in Vienna seems
to be very compelling: Can we apply a decentralized ledger technology
like the blockchain to a system that currently develops towards an
increasingly decentralized structure (due to the diffusion of renewable
electricity supply and new applications on the demand side, like
electric vehicles), like the electricity system? Today, blockchain is a
niche topic in energy business, with less than 2% of all startups
that focus on blockchain technology targeting specifically the energy
sector. However, the incumbent energy business becomes aware that
blockchain is an important topic with huge potential.
Now, if we
take a look at the debate on the Event Horizon, we see very passionate
people from different startups and a lot of enthusiasm. This is because
the blockchain is based on a very good selling idea: At low costs, it
uses a transparent distributed system that is based on democratic
processes and replaces less transparent intermediate services. These
three components (cost saving, transparency and democratic decision
making) are very compelling and are, at least from our point of view,
the main reason why blockchain gains some much audience at the moment.
Still, blockchain is in its infancy, with many obstacles to overcome
(for a more details see this post). Especially on the technical side, the blockchain technology has yet to prove that it can meet the (very high) expectations. Yli-Huumo et al. (2016) give a nice overview of the current challenges for the blockchain technology:
- Throughput: Bitcoin network is currently maximized to 7tps (transactions per second). VISA (2,000 up to 48,000 tps) and Twitter (5,000tps)
- Latency: To create sufficient security for a Bitcoin transaction block, it takes currently roughly 10 minutes to complete one transaction.
- Size and bandwidth: size of a BitCoin Blockchain is over 50,000MB (February 2016). When the throughput increases to the levels of VISA, Blockchain could grow 214PB each year.
- Security: The current Blockchain has a possibility of a 51% attack. In a 51% attack a single entity would have full control of the majority of the network’s mining hash-rate and would be able to manipulate Blockchain.
- Wasted resources: Mining Bitcoin wastes huge amounts of energy ($15million/day).
- Usability: The Bitcoin API for developing services is difficult to use. There is a need to develop a more developer-friendly API for Blockchain.
- Versioning, hard forks, multiple chains: A small chain that consists of a small number of nodes has a higher possibility of a 51% attack. Another issue emerges when chains are split for administrative or versioning purposes.
From our perspective, especially the energy intensity is very interesting. Croman et al. (2016) calculated
for BitCoin that the energy costs related to each transaction add up to
6.2$, given the current design of BitCoin (1 MB per block, latency of
10 minutes). For the future, Croman et al. (2016) project that these
costs could be cut by 80% with larger block size (4 MB) and higher
latency (12 seconds).
So at this point, we can conclude that the blockchain is a promising technology, but far from being ready for the mass market.
The Blockchain: A brief introduction
In a nutshell, the blockchain is a distributed, digital peer-to-peer
register, which stores every transaction between two connected agents in
a ledger. This ledger is distributed globally on all connected nodes.
This distributed data set consists of a collection of historic data
about all transactions made. Each transaction is added to the dataset as
a new block (in a linear and chronological order), which results in a
full record of all transactions made between two parties. As each
connected note carries the same data set, algorithms can be used on each
computer to verify transactions. If you want to know more about the
technical details you can take a deep dive here.
Currently, many different blockchains pop up. Basically, we can differentiate these chains using two criteria:
- Supervision and control: Is there an institution that controls the blockchain (e.g. decides who joins a blockchain, can delete or alter the data set in the ledger)?
- Visibility: Either a blockchain is public and thereby visible for everyone or private and therefore only visible to the members of the blockchain.
Today, most blockchains are public permissionless ledgers, i.e. there is no central supervision of
the ledger and the responsibility to manage the system is with its
users. With permissionless blockchains, everyone can connect to the
blockchain and use it for transactions.
Figure 1: The difference between private and public blockchains
The public blockchain uses a public and distributed ledger to verify
transactions. If there needs to be an adaptation of the public
blockchain, this requires in most cases consensus (or at least majority)
decisions by all users. On the other hand, one institution or a group
of institutions supervises a private and commissioned blockchain. Access
to the private blockchain is restricted, verification is based on the
private blockchain and the hosting institution is responsible for the
management of the blockchain ledger. Figure 2 gives a first overview of
prominent examples for permission and permissionless public and private
blockchains. Obviously, a permissionless private blockchain is a
theoretical construct. So far, this approach has not been used in the
Figure 2: Some examples for permissioned and permissionless / public and private blockchains
The blockchain might change or even disrupt many sectors as it challenges the business case of intermediaries. Merz (2016)
here refers to “disintermediation”. So far, many business models are
based on the fact that two parties that want to execute a transaction do
not have enough information about each other to process the
In different markets, disintermediation has been an
issue for retailers due to new digital platform providers, e.g. amazon,
Uber and AirBnB (Merz 2016).
Now, the blockchain technology offers the potential to substitute
service of intermediates in more than just the retail business.
What’s in it for the energy sector
Expectations are that private as well as public blockchains can significantly alter
the electricity sector if the underlying blockchain technology proves
successful. In Burger et al. (2016),
experts from the incumbent energy business identify the largest
potential of the blockchain in retail business. Especially Peer-2-Peer
trading offers an interesting potential for the electricity sector.
The Brooklyn MicroGrid project by LO3 Inc. as well as Power Ledger
activities in Australia nicely illustrate the potential of blockchain
for local p2p trade based on the blockchain technology. In these
projects decentralized energy providers (households with PV) sell
locally produced electricity to their neighbours via blockchain. The
combined processing of transactions of physical energy and financial
resources seems to be a very promising application for the blockchain
technology. However, these projects go beyond retail. They show us the
potential of blockchain technology to operate the grid based on a
decentralized ledger technology. If we imagine that most devices that
are connected to the electricity grid have access to the same
blockchain, it seems possible that these devices autonomously coordinate
(e.g. via smart contracts) their electricity production or consumption
not only according to market signals, but to stabilise the distribution
grid. IBM (2015) uses the term “device democracy” to describe the autonomous coordinate between devices via the blockchain.
Given the assumption that the autonomous coordination between the electric
devices actually works (meaning that enough transactions per second are
possible etc.), we can imagine that the blockchain reduces the
complexity related to network operation. For example, the DSO could
operate a (private) permissioned blockchain and all devices that are
connected to the DSOs electricity grids have to use this blockchain to
track transactions. This would give the DSO the power not only to
supervise, but to intervene into the processes in the blockchain in case
of emergencies. If the stability of the grid is challenged (even if
smart contracts are working), the DSO could either use automated
processes to secure grid stability (which he can do in any blockchain,
private or public), or even stronger measures (resets, stop transactions
or “hard fork” i.e. delete all transactions for a certain period).
The institutional implications of the application of blockchain in the energy sector
If the blockchain proves to be applicable in the energy sector, we can
expect this to have significant effects. Obviously, the degree to which
the blockchain might or might not change the energy sector strongly
depends on the specific applications of the blockchain, the regulatory
framework and many other aspects. Due to the early stage in the
development of blockchain technology, it is not possible (at least for
us), to foresee if and how exactly this technology will change the
energy business. Some important changes, however, seem foreseeable.
Blockchain can alter the role model in the energy sector
We identify a significant potential of blockchain to change the role
concept in the electricity sector. Therefore, we speak of institutional
disruption in the title. Some of the existing roles in the electricity
supply chain might become obsolete (Do we still need retailers if all
data is exchanged directly between the electricity producer and the
consumer?), new roles and tasks might evolve and some business cases and
roles might not be affected by blockchain applications at all (Does the
Blockchain change the electricity generation business case?).
How the blockchain could alter the role of retailers
Most prominently, the blockchain technology has the potential to influence
the retail business. The degree to how the blockchain might alter the
retail business can vary significantly. First, retailers could make use
of the blockchain technology to increase the efficiency of their
business by cutting costs. This application of the blockchain would be
comparable to the current developments in the finance sector, where the
incumbent financial institutions apply the blockchain technology to
their established products to reduce costs. While this might offer new
business opportunities in the retail sector, from an institutional
perspective, the blockchain technology would not change much. Rather, we
could expect institutional implications if retail becomes an autonomous
application sold together with generation assets (like PV), storages or
consumption devices. As a consequence, retail business would be
substituted by autonomous smart contracts that are provided together
with generation or consumption devices.
How blockchain could alter the role of (distribution) grid operators
Let’s suppose that network operation is based on smart contracts or other
autonomous processes that secure frequency and voltage control as well
as balancing. These autonomous processes might trigger a discussion
about responsibilities: The higher the degree of automation and the
higher the number of autonomous devices (generation and consumption)
that can provide network services, the lower is the need for
supervision. This might lead to the question how many network operators
are required and whether the responsibility for network stability could
be centralized or even completely decentralized. Such a development
would result in a new “market structure” on the network level with
either a very high concentration (with just one network operator) or a
very fragmented structure with very decentralized network operators
(potentially on the consumer level).
This might in turn require an adaptation of the institutional design as well, e.g. the way we regulate the network operators.
How the blockchain could alter regulation of network operators
Concerning regulation, the blockchain might offer the potential to simplify the process of regulation and increase efficiency. Giancarlo (2016) speaks
of the opportunity for regulators to get access to the golden record,
the real-time ledger(s) of all regulated participants (if the regulated
entities make use of the blockchains and the regulator has access to
them). Then, the regulator would become able to analyse and understand
all processes the regulated entities are involved in.
To apply the idea of the “golden record” to the energy sector could alter
regulation, for example of the distribution grid operators, to a
significant extent. As described above, the network operators could use
(private or public commissioned) blockchains to operate their network.
For all those transaction that are executed via the blockchain, the
regulator could gain full transparency by connecting to the blockchain.
Furthermore, the blockchain could simplify the interaction between the regulator and
the regulated entities. For example, an increased transparency for the
regulator via the blockchain about the DSOs activities could change the
way network operators can manage their grids. Here, current discussions
in Europe focus on the question whether and how the DSO could use
flexibility provided by market parties to increase the feed-in of RES.
From the regulator’s perspective, the network operator’s interaction
with market parties increases the risk of market distortions, at least
as long as network operators are not fully unbundled from the
competitive businesses in generation and retail (CEER 2015).
Such reservations by the regulator are primarily driven by the missing
transparency of company-internal as well as market processes. The
blockchain technology might provide the necessary transparency to the
regulator, which could drive the regulator to allow the DSO to interact
with the market (e.g. based on smart contracts) in the blockchain. Then,
the DSO might be able to more efficiently integrate RES, i.e. at lower
costs than today. Furthermore, less information asymmetry might reduce
the need for further unbundling of DSOs if they want to interact more
closely with market parties.
As discussed above, the introduction of blockchains could trigger some
institutional changes in the electricity sector. These institutional
changes could affect both, the retail and the network sector. We could
move towards a world where generators directly sell electricity to the
customers, which results in a stronger integration of generation and
retail business. Potentially, retail won’t remain an independent part of
the supply chain, but an automated and autonomous process conducted by
the generators and consumers themselves. Furthermore, the “golden
record” idea by Giancarlo (2016a)
provides a basis to reduce information asymmetry between the regulator
and the network operators, potentially leading to more unbundling than
is the status quo.
Originally posted here