It can be incredibly interesting watching different sectors try to keep up with each other. Technological developments can outpace policy, politics can take unexpected turns because of popular opinion and businesses have to adapt to all of these changes and energy is no exception.
Being at the forefront of the energy transition has been a key priority of the European Union for over a decade. Most recently, on 7 November, President of the European Parliament Antonio Tajani introduced the concept of an ‘Energy Revolution’. He underlined that the EU would have to take on the role of leader in a world increasingly affected by climate change, and in an energy industry affected by new technologies where decentralization and decarbonisation are at the core. A new technology that could have an impact on both is blockchain: another technology the internet has gifted us which, whilst still seemingly in its infancy, may have lasting implications for the energy sector.
Blockchain is the technology that underpins the Bitcoin cryptocurrency, but its applications reach far beyond. At its most basic, it acts as an alternative to typical databases – it’s a ‘distributed ledger.’ What makes it so special is that it records all transactions across lots of different computers (opposed to a single database or server) so the record cannot be altered retroactively without the alteration of all the previous ‘blocks’ and the agreement of all the computers on the database. It records every action, is virtually impossible to hack with current technology and has no central authority – all of which add trust to transactions that centralized databases cannot. Fundamentally, blockchain eliminates the need for data to be monitored, collected and verified centrally.
A decentralized ledger allows for self-executing ‘smart contracts’ – where a computer program runs a code which determines whether an asset (such as energy) should go to one party or be refunded. Unlike contracts written by lawyers and signed by all parties involved, a smart contract is between two devices (or the people that own them).
Consumers & Producers:
So with the introduction of smart contracts, all members of the database can, in theory, transact with each other easily and safely without the need for intermediaries. In the energy sector this means produces and consumers making direct transactions. If energy producers and consumers can transact directly, the need for trading platforms and energy companies is reduced. In the EU’s Third Energy Package changing supplier was an area outlined as needing improvement and, with some development, distributed ledger technologies could make supplier-switching times far quicker than the existing processes, removing red tape around purchasing (and selling) electricity.
It also allows smaller producers to enter the market, improving market flexibility and opening up a much larger market to smaller renewables producers. This presents an opportunity for increased market flexibility, with control of data handed back to the two parties making a transaction. In fact, the first live gas trade facilitated by two parties on a blockchain system was made in 2017 but making transactions between producers and consumers easier is an important and encouraging trait for the renewables sector. Flexibility of the energy market is something pushed heavily in the Electricity Market Design bill and, as it stands, producers can only participate in energy markets if they have a capacity of 500kW whilst the average size of photovoltaic (solar) power plants is far smaller – in Germany a photovoltaic power plant has an average size of less than 50kW.
In the future these improvement could mean two neighbours purchasing renewable electricity directly from each other and, on a wider scale, that renewable electricity could be centrally verified as being legitimately ‘renewable’ for the purposes of accounting, all without the need to go through the grid.
Transaction history in energy markets:
Rather than the technology itself making huge changes to energy, it’s the indirect effects that could make the difference to the energy sector. The fact that transaction history is stored and unchangeable allows in depth analysis to be done on markets which improves predictability and stability. Moreover, a complete history of where the energy a consumer buys comes from improves transparency too. In the European renewables market, it could completely overhaul the inelegant (to say the least) guarantees of origin tool for tracing the production and consumption of renewable energy.
Stakeholders and governments alike are moving to utilize blockchain technology, with the EU’s Horizon 2020 scheme having already pledged 5 million euros in funding to blockchain projects, and it’s easy to see why: the effects of wider digitization are stark when looking at the bigger picture. Fifteen years ago mobile phones became smart phones the way we foresee contracts becoming smart contracts and grids becoming smart grids.
Uptake of the technology would appear to be the clearest issue with this development so far, but with a stable regulatory framework and solid investment there is huge potential for it to compliment the broader changes in energy and in society.
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November 4, 2022