How Blockchain is Changing the Energy Industry

Co-authored by Philip Levinson and Steve Westly -- this article was published HBS (here) and BraveNewCoin (here).

Ever since Thomas Edison flipped the switch on the world’s first permanent power station in 1882, energy has flowed in a single direction: from large-scale, centralized generators out to homes and businesses.

For a long time, this hub-spoke model made the most sense. Large cities consume a lot of power, and it’s far cheaper to invest in a single, powerful centralized utility. Edison’s centralized system was economical, effective and convenient. But things have changed, and a new decentralized system has already started revolutionizing the energy sector.

Why Decentralized Power is Now Possible

Today, in light of the new U.S. government report about climate change and its impacts, there has been more emphasis than ever on new renewable energy technologies like rooftop solar panels, wind turbines, and affordable battery storage. This shift toward distributed energy has made it possible for energy consumers to become producers themselves. These prosumers are able to meet their own energy needs and even produce a surplus, which they can then reintroduce to the market.

As with any market revolution, however, this new model comes with plenty of logistical and political calculations. It’s natural to ask how this will affect energy prices. And, most important, how can prosumers distribute all that energy without a centralized network?

This is where peer-to-peer trading comes in.

Peer-to-Peer Power: Your Electric Bill Meets Airbnb

Peer-to-peer energy trading allows distributed producers to sell energy they’ve generated to other consumers. Just as with housing (e.g., Airbnb), cars (e.g., Turo) and financial loans (e.g., Lending Club), individuals gain a market share the moment they find themselves with a surplus.

But there are still some problems with this decentralized, peer-to-peer energy model. For example, how do you securely manage, record and make transparent an automated and decentralized system of energy and consumption?

As with the financial sector, the answer is blockchain — the secure distributed-ledger method of tracking and authenticating peer-to-peer transactions.  

Blockchain and Market Efficiency

We all know about blockchain powering the development of cryptocurrencies like Bitcoin. Elefund’s Serik Kaldykulov, an early VC investor in Robin Hood, summarizes one of its universal benefits: “With its decentralized public ledger, blockchain helps push markets closer to an ideal of efficiency.”

This ‘ideal of efficiency’ is now coming to the energy sector.

Blockchain is now proving to be a huge boon to the power industry, where there are tests, pilot projects and start-up companies working to weave blockchain into the peer-to-peer trading market. As outlined in a HuffPost piece, blockchain’s strength lies in its ability to facilitate smart contracts between energy traders and make transaction data more transparent than ever.

Companies like Power Ledger, WePower and LO3 Energy are already using blockchain to disrupt the energy sector. These companies are launching blockchain-enabled projects across the world, including applications for microgrids, electric vehicle (EV) charging and peer-to-peer transactions. These solutions will help resolve the new contractual, trading, transaction and data-management issues that arise in this fledgling distributed energy industry.

Come Old, Come New

In the midst of this energy revolution, traditional utilities are not going away. In fact, some are eager to participate in this new shift to decentralization. For example, Tokyo Electric Power Co. recently formed a blockchain-powered solar and storage unit called Trende to attract these decentralized power brokers and reverse the industry’s decline.

“Blockchain does not have to pit startups against utilities, or suppliers against consumers and prosumers,” says energy research analyst Johnathon de Villier. “In fact, blockchain is one of the only technologies with the potential to support a platform that aligns the incentives of the various stakeholders in the energy system.”

That’s what makes blockchain-driven energy decentralization so universally appealing. Noteably, 66% of utility executives now expect their company’s role to begin integrating distributed energy resources, according to a report by Accenture.

Consumer participants will save money. Plus, trading networks will drive more transparency, leading to more efficient pricing across the energy sector. In turn, these new technologies will accelerate the demand for renewable energy, thereby reducing the cost of power for everyone. The result is a virtuous cycle, made possible through blockchain technology. 

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Philip Levinson is Vice President of Marketing at EdCast, the Softbank-funded SaaS company with finance clients that include ANZ Bank and ING Bank and public-sector clients that include India’s NASSCOM and the World Economic Forum. His last article on blockchain was 2 Big Ways Blockchain is Changing Healthcare. Follow him on Twitter @plevinson.

Steve Westly is the former State Controller and Chief Fiscal Officer of the State of California and founder of the Westly Group, one of the larger energy-focused venture firms in the U.S. Follow him on Twitter @stevewestly.