Development of Business Models based on Blockchain in energy sector
Oliver Bodemer
Experienced Java and Blockchain Architect | Delivering Innovative Solutions for Complex Challenges
This research examines the potential application of blockchain technology in the energy sector. It evaluates the current state of the energy industry and explores three potential future scenarios to illustrate the potential impact of blockchain. The study also highlights the shift towards the decentralization of energy production, as private households become ”prosumers” that both produce and consume energy. The research underscores the importance of companies in the energy sector to re-evaluate their enterprise management strategies to effectively incorporate blockchain technology and remain competitive in a rapidly changing landscape.
Introduction
The results of the scenario comparison and summary indicate that the implementation of blockchain technology is viable even in a pessimistic scenario. The qualitative comparison reveals that while there may be some differences in the contents related to blockchain, the differences are minimal when viewed quantitatively. Energy Supply Companies (ESCs), which generally produce electricity (gas and district heating), have contracts in place to bill customers a fixed price per kWh and annual rentals for electricity meters. However, trends in recent years have seen private households and companies start to generate their own electricity using renewable sources, which is fed into the infrastructure and remunerated if not used. Similarly, the advent of blockchain technology has enabled secure and automated transactions and microtransactions.
By leveraging blockchain, a new strategy and business model can be created to adapt to the changing market conditions facing utilities. This involves continuing to serve the growing number of self-suppliers, buying and remunerating electricity generated by many small generators, and accommodating new trends such as the use of electric cars and electricity storage. The promotion of renewable energies and the replacement of fossil fuel-based power plants with renewable energy power plants are critical political changes for large ESCs. However, these changes also result in instabilities in power distribution due to the volatility of renewable energies.
Conceptual foundations
The energy industry is subject to extensive regulation and is divided into multiple sub-sectors, including the supply of gas, electricity, and district heating. The sub-sector of electricity generation and distribution, in turn, encompasses various functions such as generation, distribution, storage, and sales. The energy sector in Germany, with a focus on electricity generation and distribution, serves as an example for this illustration.[1]
The energy industry is undergoing a transformation driven by political and ecological factors, as well as advancements in information technology and research. The integration of digital technologies is leading to the digitization of the energy sector, including the exploitation of data for monetization purposes.
The advancement of electricity storage systems, in conjunction with local electricity generation through
photovoltaic systems, enables the optimization of electricity utilization and distribution. The functionality of smart meters, which are an integral component of smart grids, plays a significant role in this transformation. A smart grid refers to an interconnected network of energy participants, each connected through a smart meter, enabling optimal energy distribution.[2]
Blockchain, also referred to as Distributed Ledger Technology (DLT), is a digital system that dates back to the 1980s. It is composed of a decentralized network of nodes that hold and maintain a continuously growing list of records, referred to as blocks, that are linked and secured using cryptography. Each block contains a cryptographic hash of the previous block, a time-stamp, and transaction data. This structure creates a secure, transparent and immutable ledger of transactions, making blockchain a secure and efficient tool for maintaining and sharing data across a distributed network.[3]
Nick Szabo introduced the concept of smart contracts in 1994. He defined it as a computerized transaction protocol that executes the terms and conditions specified in the contract. The protocol involves encoding the contract clauses, such as collateral and guarantees, into executable code, which is then integrated into hardware or software. This approach reduces the requirement for intermediaries to enforce the contract and minimizes the risk of malicious or unintended actions by parties involved in the transaction.
To answer the research questions and develop a business model, the following definition is used:
“A business model is the method of developing and internally organizing a company to achieve the company’s ultimate goal. The company implements management’s idea(s) by realizing them into products or services and monetizing them through marketing and sales. The goal is to generate a profit with the business model and implement a long-term strategy toward sustainable growth.”[4]
Used market scenarios
Factual market scenario
Electric Supply Companies (ESCs) provide electricity to private households and businesses. They are primarily responsible for generating electricity and operating large power plants, which can be fueled by fossil fuels, nuclear energy, or renewable energy sources. Some private households and businesses have also started participating in electricity generation through the use of photovoltaic systems, thereby reducing their overall electricity consumption. The goal of the ESCs is to sell electricity as a commodity at competitive prices, with the business model being based on the trade of self-generated electricity.
Pessimistic hypothetical market scenario
The adoption of electric vehicles is at a moderate pace. Despite this, the energy demand of the industrial sector for fuel production has not experienced a significant reduction. There are a few private households and businesses that generate a significant portion of their electricity requirements through photovoltaic systems and stationary energy storage, however they are legally required to feed the excess energy back into the grid. This scenario has resulted in the replacement of fossil fuel-based power plants with newer generation plants and an expansion of nuclear energy. The aim is to maintain the current market position of the company while making minimal changes to the current infrastructure. To achieve this, the following sub-goals have been identified:
Optimistic hypothetical market scenario
The EU energy market has become deregulated over the past decade, enabling cross-border electricity provision and utility services by providers and transmission system operators (TSOs). The increased adoption of electric vehicles has led to reduced demand for electricity in the industrial sector for fuel production. Meanwhile, households and businesses generate a significant portion of their own electricity through photovoltaic systems and stationary storage. The majority of power plants now serve to balance the electricity load and ensure stability.
The primary objective is to provide blockchain-based energy services, with electricity serving as a commodity, and to generate revenue from blockchain transactions. The following goals can be established based on the current market conditions:
Politically independent hypothetical market scenario
In the EU, the electricity market landscape is highly deregulated, allowing for cross-border offerings of services by electricity suppliers and ESCs as well as TSOs. Private households and companies can generate a significant portion of their own electricity requirements through photovoltaic systems and stationary electricity storage, which can be fed into smart grids. The majority of power plants generating electricity from fossil fuels have been decommissioned and the electricity generated by ESCs primarily comes from renewable energy sources.
The ESC operates as a blockchain company with a focus on profit generation through subscriptions, trading, and leasing, while utilizing the commodity of electricity as one of many products. The use of blockchain is a key contributor to enterprise profit through transactions and leasing of blockchain platform components.
Comparison
Role of the ESCs
In all three scenarios, the role of the Energy Service Company (ESC) is undergoing change. In the pessimistic scenario, the ESC maintains its current operations and adopts blockchain technology only to the extent that it does not significantly disrupt the existing business model. The perception of blockchain varies by country, with more positive views in the EU where it is seen as a future opportunity.
In the optimistic scenario, the ESC perceives blockchain as an opportunity and actively collaborates with other ESCs and Transmission System Operators (TSOs) to develop cross-country collaborations.
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In the last scenario, the ESC is required to adapt and embrace blockchain technology to stay competitive and develop new growth. This involves standardizing blockchain in collaboration with other market players, changing its business model, and exploring new markets. This scenario requires the ESC to be flexible and able to reinvent itself.
Answering the research Questions
What competitive advantages does blockchain offer the company from a management perspective?
From a management perspective, blockchain offers several competitive advantages to the company. Adoption of a universally accepted blockchain within the energy industry provides the company with an opportunity to redefine itself by offering innovative services that challenge traditional business models. Additionally, implementation of blockchain within the company allows for different logging of financial transactions, independent of currency, and mapping of the company’s assets and values, including intangible ones, as NFTs.[5]
What are the requirements for the use of blockchain from a management perspective in an ESC?
To implement a blockchain strategy, the energy company (ESC) must have a clear goal in mind. The goal in this case is the development of a new business model utilizing blockchain technology. The implementation of the strategy requires the following prerequisites:
Moreover, management must document their knowledge and answer additional questions to ensure the success of the blockchain strategy.
What can a strategy for implementing and scaling blockchain in the enterprise look like?
One key step in the implementation of blockchain in the ESC is to re-structure and establish an architecture for the management and utilization of blockchain. The ESC operates as an intermediary between electricity consumers, itself, and electricity producers, characterized by its simple tariffs. The emphasis is on the administration of electricity, design of virtual power plants, and the creation of market-driven prices for both electricity consumers and producers, as well as tariffs for electricity storage usage. The focus is on retaining private households and businesses that generate their own electricity in the long-term. Currently, the ESC functions as a specialist in electricity generation for private households.
What operational measures are necessary as part of an implementation?
The implementation of blockchain in an ESC requires the establishment of a clear strategy that outlines the desired direction of the ESC. To ensure effective implementation, management and staff must be engaged and informed about the change process in advance. Additionally, active participation and contribution from management and staff in the development of ideas and concepts related to blockchain implementation can support a successful outcome.
What do future processes look like due to the implementation of Blockchain?
The implementation of Blockchain in an ESC can lead to the development of two business cases: (1) participant leases or sells electricity to the virtual power plant and (2) participant buys electricity from the virtual power plant. The Blockchain logs the transfers and operates as a fully automated system for tracking every part of the transaction, from electricity generation to delivery, billing, and entry into the ESC’s accounting system. This allows for tracking of every kWh generated and consumed. The processes can be broken down into sub-processes, such as a power-generating participant delivering power to a virtual power plant, which stores the power in a power storage facility owned by another participant. This is also logged in the Blockchain, including billing and invoicing. Automated billing can be generated based on the processes, indicating the amount and timing of electricity generated, consumed, or stored by each participant. In a standardized Blockchain used by multiple ESCs, the processes are similar, but each ESC has specific features protected by access rights, as recorded in the Blockchain.
How can Blockchain be used as the basis for a business model in an energy company to face the rapidly changing market parameters and remain competitive in the long term?
Blockchain technology enables secure and transparent exchange of values, and logs these transactions automatically. The implementation of blockchain in a company can lead to increased flexibility and freedom from traditional structures. The energy industry, undergoing significant changes, can benefit from blockchain’s potential to integrate a growing number of market participants through small and micro power generation systems. This integration offers opportunities for existing Energy Service Companies (ESCs) to create a new role and strengthen their position in the market. The implementation of blockchain requires significant investment and organizational effort, but has the potential to drive profitability and create new business areas and markets. The use of smart meters as part of smart grids in conjunction with blockchain technology can further stabilize and automate the creation of value in the market.
Conclusion
The ESCs’ collaboration and cooperation in establishing a unified blockchain standard results in the emergence of a decentralized solution. Despite the initial transparency disadvantage, this solution presents benefits in terms of settlements and virtual power plant development. Blockchain technology can facilitate external transactions between ESCs and other market participants, as well as secure and automate internal enterprise assets such as physical assets (e.g. buildings, machinery) and intangible assets (e.g. patents) through proper storage in the blockchain. The implementation of blockchain requires a specific architecture and the development of a standard to govern the storage, accessibility, and non-divisibility of information in the blockchain (NFTs).
References
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