James Allen – Exponential Investor (United Kingdom) –
Talk about good timing.
I wrote yesterday about how blockchain technology is going to disrupt the energy markets right across the value chain, from producers to consumers and via distribution and trading.
As it turns out, I’m far from alone in thinking that, as was confirmed to me soon after pressing “send” on yesterday’s Exponential Investor.
Later that morning, a few folk here at Southbank Investment Research attended the London Blockchain Week 2018 conference, just up the road in the City. There was a panel discussion entirely devoted to energy.
All of the panellists – one from a startup that’s looking to connect electric vehicles and home batteries to an energy storage system for renewable energy; another from a fund that enables private individuals and investors to hold their own stake in solar power plants; and a third from a London-based blockchain startup that has secured funding from Shell – were clear and unequivocal in their message.
Energy, they said, is ripe for change. It is an industry where fax machines and analogue technology still rule the roost.
But not for too much longer
The energy sector is already being transformed by the rapid rise of renewables on to the grid, forcing utilities to reshuffle their traditional structures in an ever changing energy landscape, which will see them transform their business models as rapidly – and as digitally – as possible.
Blockchain has a vital role to play in this transformation.
Adi Ben-Ari, the founder and CEO of Applied Blockchain, the London-based startup with funding from Shell, perhaps said it best when he talked of blockchain being effectively a special kind of database that can improve efficiency.
“If you look at energy and energy supply chains, there’s a lot of complexity there so there’s a lot of potential to make things a lot more efficient,” he said.
“Energy has a lot of problems,” he continued later.
“There are big and small firms, and lots of different parties that need to settle and exchange information constantly. Energy can move quickly into blockchain, quicker than banking, for example. The energy industry has perhaps the most potential for radical change.”
Wholesale changes aren’t going to happen overnight, that much is obvious
Some in the industry will be resistant to change, not least all those middle men who currently get in the way of the producer and consumer, such as the brokers and other intermediaries I wrote about yesterday.
RWE chief executive Peter Terium has called blockchain “one of the biggest threats” to traditional energy companies given its ability to create a decentralised market with independent supply and demand.
Large utilities – already struggling with profitability amid low wholesale prices – will likely be reluctant to invest more in a technology at a time when their existing trading systems were recently adjusted to meet new EU regulations.
To be successful, the digital technology also requires the support of power network operators that act to balance demand and supply.
A new set of policies and standards will also be required, likely requiring regulatory reform.
Rolling out standardised, blockchain-based market policies and frameworks will require regulators to align on approaches for how transactions are cleared.
But as Ben-Ari noted in the panel discussion yesterday, blockchain technology can actually help in this process.
“The issue is usually about getting enough information for regulators to understand the risks… [but blockchain allows for the] potential for regulators to tap into more information than they’d normally be able to, enabling real time monitoring and transparency,” he said.
Pioneers are going mainstream
These common standards, or protocols, are currently proprietary but need to be opened to fully scale blockchain across the industry, Alexander Spuller – the co-founder of Green Energy Wallet, the blockchain startup that’s looking to connect electric vehicles to an energy storage market – noted in the discussion.
System pioneers will also need to address another issue, one that has already gained a lot of attention from the crypto sceptics determined to write off the new economy before it has even started: the large amounts of energy that blockchain’s computing power demands.
Although there is a debate over exactly how much power the mining process of validating transactions on a blockchain amounts to, some near-term concerns about energy consumption are certainly well-founded.
Future generations of blockchain technology will most certainly find alternative ways to validate transactions that eliminate or reduce energy-intensive mining, something that my colleague Harry Hamburg wrote about for Exponential Investor last week.
Other companies are already seeking to offer their own solutions, such as Calgary-based Iron Bridge Resources, which, as noted yesterday, has recently launched its own cryptocurrency mining and hosting subsidiary, powered by cheap electricity from its oil and gas field sites.
Before new technological advances are made, no doubt the cost of mining cryptos will fall so long as resources are allocated where power remains cheap and reliable.
Speed is also an issue
Energy markets with heavy trading activity or physical delivery require a blockchain-based system able to execute thousands or indeed millions of transactions per second, which is on the way but might not happen straightaway.
Harry also wrote about this last week. Cryptos, he said, need to speed up drastically if they are to get wide-scale adoption. But new technologies are coming that, as Harry says, are akin to upgrading to broadband.
What this all means is that we’re likely to see blockchain breakthrough first in markets where no physical delivery is necessary such as in the trading of some renewables certificates, where consumers buy certificates to prove that their electricity purchases come from green energy sources.
We can also expect blockchain applications to be integrated into electric vehicle charging infrastructure and, before we achieve the consensus required for establishing the requisite standards and rules, through relatively small or isolated markets such as in peer-to-peer energy exchanges at the micro grid level.
After that, applications will likely then branch out into demand response, wholesale market trading and dispatch, and fully distributed resource market automation.
Utilities new flux
Incumbent firms will certainly be surprised at the pace of change, just as they have been with the take-up in renewables over the last few years.
Utilities’ whole business models are in a state of enormous flux, as renewables expansion has decimated their profits.
But blockchain could help to integrate renewables into the market, according to a study by Trend Research in September, which polled around 200 experts from within the energy sector in the study.
Ultimately, as the panellists at the conference noted, the cost savings and the efficiency gains that blockchain allows will prevail.
“The energy grid of the future will be like a highway that every can access and use,” said Green Energy Wallet’s Spuller, speaking yesterday in the panel discussion.
“That’s where blockchain will make a lot of sense in the long run. In the short term, as a lot of renewables enter the grid, volatility will grow and balancing services will be needed… which is something blockchain can help with straightaway.”
There are obstacles, but the pace of transforming energy with blockchain is quickening, and this year we’ll continue to hear much more about it.
Until next time,
Associate Publisher, Southbank Investment Research