How will blockchain influence the future development of the energy industry?

The first blockchain transaction to appear in the energy market occurred back in 2016 in New York. Only two years later there are now over 120 energy companies working in the blockchain space. In the last quarter of 2017, over $300 million was invested into energy businesses integrated with blockchain technology and since January this year, over fifty new blockchain businesses have launched within the energy market.

JD Ross Energy explores the rise of blockchain in the energy market, what we can expect to see this coming year and an insight into how blockchain could influence how energy companies develop in the future.

Energy analysts believe that a new business is entering the blockchain market nearly every week, which may be a signal that we are in a potential ‘bubble’ or simply that energy businesses are beginning to take blockchain far more seriously. Industry analysts suggest that blockchain is not just a system focused on cryptocurrency, but a tool that is both applicable and essential to other industries, including energy.

Back in 2015, the general perception was that the energy sector wasn’t really involved or interested in integrating with blockchain. Times have now changed significantly, with over $300 million raised by energy-related blockchain companies through venture capitalists and initial coin offerings (ICOs). Utility businesses are making considerable investments into blockchain, with further plans to implement transactive energy, customer billing, data collection and distributed resource management into their portfolios. Some of the larger utility businesses including RWE, Centrica, and Innogy have already made significant investments in blockchain startup companies.

Whilst the benefits blockchain can offer the energy industry are numerous, the key focus has really been placed on the transactive energy space. Energy businesses are now capable of utilising blockchain to verify and execute peer-to-peer transactions far more effectively. Some companies are implementing multiple uses of blockchain such as developing an entire blockchain platform that supports third-party applications. The key challenge lying ahead for these businesses involved is how they will work together in the future. Analysts believe that companies will continue to use multiple and varying platforms and so they need to be capable of combining together in the years to come.

Case Study: Blockchain in the energy market

Many energy industry leaders believe that blockchain is a vital technological requirement that can support a sustainable supply of energy for the future. It has the capability to connect millions of decentralised sites of clean energy, including small-scale household systems, and can result in the generation of a cost-effective, sustainable and efficient energy system. Households also have the added benefits of being able to produce and consume their own energy and potentially sell additional electricity that isn’t required.

Nowadays, energy is being produced in a more decentralised and sustainable manner, increasingly avoiding the reliance on conventional power sources. A combination of solar PV systems and wind turbines are contributing to the creation of a more sustainable energy generation mix for businesses and consumers. People are more aware and equally concerned about their energy consumption, and research suggests they are demanding further control over their usage and method of generating energy.

Decentralised energy generation is likely to continue expanding, allowing electricity to be produced and consumed directly or to be stored in batteries for a later date. As a result, the reliance on a constant power grid supply is reduced significantly, meaning less requirement for central power facilities. Despite the growth of decentralised energy systems, renewable energy does have its challenges which need to be overcome and this is where blockchain can play a further critical role.

The intermittent nature of renewables creates a somewhat volatile flow of energy which needs to be managed via a storage system. Whilst a complete transition to decentralised energy is still a while away, the growth of renewable energy systems into today’s electricity mix suggests there is a growing need for solutions to manage this volatility.

A fine example of how blockchain can assist with this issue is highlighted by a recent project developed in Germany. IBM has partnered with a transmission system operator called TenneT and the battery supplier, Sonnen to develop a decentralised home storage system that is integrated into the grid with blockchain. The new project will create a virtual flow of energy to the region. Any excess energy produced will be stored in virtual connected battery systems and at the same time, a decentralised storage system will discharge energy into the grid to compensate for potential lack of energy in other regions. The energy charged or discharged via the decentralised battery is collected and stored by a blockchain. The developers have explained that the process will start almost instantly with no communication required between grid operators and power plants. Each participant including grid operators and storage providers will be given complete access to the data collected.

Sonnen has explained that through its virtual battery system, it will be capable of delivering accurate forecasts on how much energy is available in each location and within a specific time. This project has considerable benefits to both the grid and the customer. Through this project, less energy will be wasted and so the associated costs with redispatch for grid operators will decline considerably. Customers have the opportunity to create a clean and cost-effective source of energy production and owners of storage systems will be able to generate additional revenue.

How will the blockchain industry develop this year?

Leading energy and utility businesses are creating stronger relationships with startup companies in the blockchain market and with a strong understanding of regulations and infrastructure, the utility industry will play a significant part in integrating blockchain into the wider energy market. If development and innovation continue at the current rate than 2018 is likely to be another strong year for blockchain.

Industry analysts believe investment into blockchain by utility and energy businesses will increase throughout 2018. ICOs currently contribute to approximately three-quarters of the funding in the blockchain market and are likely to be an essential fundraising tool. Analysts believe, however, that investment from venture capitalists will also increase as more energy and utility businesses move towards blockchain and launch further projects.

Peer-to-peer energy trading continues to be the focus for most new projects in blockchain. Some analysts, however, suggest that it may not be most economically viable option. Wholesale trading is gaining momentum as proven by two recent European projects supported by multiple partners. In January this year, BTL, one of the main participants in the project announced it would be developing a commercial trading platform known as ‘One Office’ which will operate on the blockchain. Ponton, the leading business of the other project plans to provide a full deployment service of its wholesale trading platform this year.

It is likely that more startup businesses will emerge in wholesale trading. One of the leading energy industry startups LO3 is currently testing a new approach to the wholesale market by running tests to connect consumers directly to the wholesale market and create a decentralised energy exchange system.

Industry experts suggest that throughout 2018, we will likely see electric vehicle charging and renewable energy credit (REC) trading as a potential area to generate a revenue stream. With minimal charging infrastructure available for the electric vehicle industry, along with a lack of a standard for billing and payments software, there is a good opportunity for new, innovative technologies to enter the market and support its development.

Looking ahead, Blockchain will face several challenges in the energy market in regards to regulation and technological barriers. Industry leaders are asking questions whether blockchain can be scaled and remain secure for effective use in the energy market.

Financial regulations could also potentially slow the rate of market development if new regulations prevent selected initial coin offerings (ICOs). For example within the US, the Securities and Exchange Commission has implemented rulings on security plans, preventing many ICO’s from being launched in the US market.

Whilst there are challenges facing the future of blockchain, industry experts do believe Blockchain will continue to develop further in the energy market and become an essential part of the future of the industry.

A recent report by S&P Global Platts researches how blockchain can potentially disrupt the energy industry. The report suggests that some areas of the energy industry, including the large proportion of intermediaries within the electricity chain, relatively slow times for financial process and increasing decentralisation of the grid are ideal for integration with blockchain technology.

Smart contracts are identified as one area where blockchain technology is gaining momentum within the energy market. Smart contracts allow agreements on future transactions via a series of technological codes. Each contract is stored on a blockchain and self-activated when specific conditions are met. Over half of the blockchain energy system is focused on Ethereum, a decentralised platform that operates smart contracts currently allows for 16 transactions per second.

The short-term challenge is reducing the transaction costs associated with Blockchain platforms. For example, a business that manages the charging infrastructure for electric vehicles via an Ethereum powered platform incurs a transaction cost of between $3-5 every time it is charged. Experts believe that over time these charges will reduce but may hinder the uptake of blockchain technology for some businesses.

Blockchain will promote sustainability in businesses...

Blockchain has the potential to improve business performance and support industries in becoming more sustainable. Blockchain can encourage environmental and sustainability policies by connecting to a smart system, collating data, and measuring the environmental impacts of a business via a series of sensors.

In this process, Blockchain could potentially mean businesses can adopt these practices. Receiving network incentives to be more sustainable and at the same time bring overall costs down as well as improve resource management.

Blockchain is a completely decentralised and distributed system that can be measured independently to analyse the reputation and performance of individual companies. This type of system would revolutionise consumer technology and promote new and innovative technology that is both sustainable and efficient. These systems would provide complete auditable information that would be available on the web from anywhere worldwide. This availability of real-time information would indicate the environmental impact of businesses and how they can improve.

If Blockchain is implemented with a focus on sustainability, it will allow the monitoring of how resources are managed and enable us to ensure they are being effectively utilised. Blockchain software can be used to activate smart contracts that monitor energy and environmental trends worldwide. For example, IBM and the Chinese Blockchain business Energy Blockchain Labs are focusing on the carbon asset market and allowing the trading of green assets via the IBM blockchain. China is the largest producer of carbon emissions worldwide but is also the biggest investor in clean energy and sustainability projects. Blockchain will enable the efficient measuring and monitoring of the trading of carbon emission allowances.

Could Blockchain cause a strong resurgence in the oil industry?

There is a lot of attention on how blockchain can influence the energy market and more specifically be integrated with energy businesses to drive the industry towards a sustainable future. Industry experts believe the technological benefits of Blockchain can be integrated into many industries, including the oil industry.

Some of the major oil businesses have started to diversify into clean energy markets, and technology is becoming more of an essential part of the day to day activities. It comes as no surprise then that Blockchain technology is likely to become integrated into the oil market. The same benefits of blockchain that apply to other industries can also be applied to big oil. Technology is currently used to in a range of oil exploration and drilling activities and according to the World Economic Forum, the industry is already experiencing a significant shift driven by digital technology.

Leading oil businesses, including BP and Shell, are developing plans to integrate blockchain technology into their portfolio and essentially transform how energy is purchased and sold.

BP began researching the potential of Blockchain and how the technology could give the business a competitive advantage and how to implement both the practical and ethical benefits of blockchain into the business. BP developed a blockchain pilot project and collaborated with Eni and Austrian based business Wien Energie on a trading platform. At the end of last year, BP joined a Blockchain partnership with other major businesses including Shell and Statoil, with added financial support from ABN Amro, ING and French Societe Generale. The Managing Director of ING highlights that blockchain technology can potentially eliminate the inefficient and outdated processes in the oil industry and overall enhance the efficiency and cost of industry activities.

Royal Dutch Shell has also shown its support towards blockchain technology by investing in a distributed ledger business that has experience in creating platforms across multiple industries. The new platform is expected to be live by the end of this year. Shell supports the growth of new technology and can see the benefits blockchain can offer the oil industry. Shell, along with BP are leading how the rise of blockchain in the oil industry can transform the way oil and gas is bought and sold.

Blockchain could dramatically reduce the costs associated with supply management and the logistics of business. Smaller businesses such as Petroteq, based in Canada are enhancing their daily operations by integrating new technologies to improve their potential of exploring new energy reserves as well as significantly reducing their overall environmental risk. Petroteq is specifically focused on improving the efficiency and safety of the supply chain management activities in oil. The industry involves a series of transportation and distribution procedures across multiple global networks. In the instance that something does go wrong then it can result in slower productivity and a considerable loss of money.

With the help of Blockchain, Petroteq intends to revolutionise this area and reshape the industry by tracking and monitoring the complete process on a transparent and completely secure blockchain. Petroteq has created its own consortium called Petrobloq and has already gained support from Mexican business PEMEX, the second biggest energy company in Latin America. PEMEX is the first petroleum business to allow cryptocurrency payments at its gas stations.

PEMEX will introduce a blockchain supply chain management platform and aims to completely transform its business processes.

Looking at the US, where the oil and gas industry is seeing a significant rise and further support from President Trump in the form of $1.5 trillion infrastructure plan. This means significant investment in aging oil and gas infrastructure and supports new innovations such as the new technology at Petroteq. Petroteq has the potential to really capitalise on this investment with Utah oil sands being viewed as a significant part of the energy future in the US. Petroteq also emphasises how environmentally efficient and effective their activity at Utah oil sands would be in comparison to activities at tar sand sites in Canada.

From major businesses such as Shell and BP to smaller innovative companies like Petroteq, the use of innovative new technology can potentially transform activities within the oil and gas industry.

Creating a blockchain that requires less energy...

If blockchain is to transform the energy market and become a significant part of future development then the major challenge for Blockchain is managing its level of energy consumption. The original blockchain which underlies bitcoin operates on a current algorithm that uses an excessive amount of energy.

Developers have highlighted that improvements to energy efficiency are critical in order to truly develop the potential of blockchain for energy businesses. Industry experts explain that it is very expensive to continue operating in the same manner applied to bitcoin technology and businesses should be motivated to avoid the waste accumulated by using these techniques.

Research at top businesses such as IBM and Intel in collaboration with top institutions like M.I.T. and Cornell University are creating a series of innovative, green blockchain technologies to tackle the efficiency issue and streamline a range of transactions. Improving energy efficiency will enable blockchain to develop further and provide services for a range of businesses.

Ethereum is trying to establish itself as one of the leaders in the blockchain network and within the energy market. Developers have been working on creating a new blockchain that would decrease energy consumption to nearly zero and at the same time allow it to scale and improve overall security. Developers explain that if ethereum scales significantly but energy consumption also continues to climb then we will reach a situation where it is literally requiring a level of energy that simply isn’t viable. 

If developers can create a blockchain that dramatically reduces energy consumption then it will set it apart from the current leading cryptocurrency bitcoin. The algorithm known as proof-of-work, or more commonly regarded as ‘mining’ is the main reason that contributes towards the huge amounts of wasted energy. As more systems work to mine bitcoin, the mathematical problems become more complicated and require even more processing power. The soaring prices of bitcoin last year encouraged more mining activity and as a result, has really focused a lot of attention on reducing energy consumption.

Developers are now exploring methods of securing public blockchain networks and at the same time significantly reduce energy costs, making the overall process more efficient and cost-effective.

Ethereum is creating and currently testing its own public blockchain with an algorithm known as proof-of-stake, which eliminates the cryptographic calculations involved with mining. Businesses such as Intel and IBM have developed their own blockchain solutions for clients, offering blockchain technology that doesn’t require proof-of-work or mining processes. The chief technology officer of open technology at IBM explains that an alternative was needed that eliminated mining, which to IBM is seen as an unsustainable option due to its cost and relatively slow processing speeds.

Major businesses are facing new competition from a wave of new startups and university researchers. The rise of new green technology is a welcoming shift in focus towards creating a blockchain system that utilises considerably less energy than the existing networks. The race is now on to deliver the greenest and most business-friendly blockchain of the future.