Programmable Energy, The lessons learned

In the previous post we have briefly analyzed the current state of the energy sector and its challenge.

Since the start of the blockchain people have been ideating how this new technology of distributed ledgers could be applied in the energy industry. Not infrequent inspired by the front-page newspaper articles on the disruptive use cases in the financial sector.?

In 2016 there was a realization that a fully open system would disrupt the economic order as we know it today. With the bitcoin having a mechanism of pseudo-anonymity for the transacting parties and public transactions. Quite the opposite of the traditional economic order with public known transacting parties and commercial private transactions.

Along the permission-less blockchain solutions, like bitcoin and Etherium several permissioned implementations, like Hyperledger fabric, were created as well.?

In very strict regulated markets, the adoption of a permissioned blockchain seems a better fit, as it fundamentally supports the regulatory requirements, as upon joining the blockchain a role of the entity can be applied with designed rights and restrictions.

Deregulation of the utilities

Since the ‘80s there is a continues push for deregulation of the utilities, breaking up the vertical integrated entities into a series of regulated and commercial companies. Where the grids and systems operations remained in state owned entities, to support and control the commercial activities like energy generation, trading, retail, and consumption.

The new value chain that emerges out of the former integrated entities have a natural need for formal collaboration.?

Multi Party Intelligent Workflows

With the availability of blockchain in 2016 several projects were initiated to build a new way of value chain integration. Trying to cut out the middleman or solve an inherent lack of trust issue by providing data transparency in the value chain. Giving each party data visibility beyond their first party integration. A good example of the latter is the energy industry is the Crowd Balancing Platform initiated by TenneT and IBM, where electric vehicles are contributing to balance the grid at moments where there is less energy due to slow winds at wind turbines or cloudy conditions at solar farms. In this solution the system operator as buyer has full visibility of the aggregator with its pool of EVs from its clients down to the individual energy behavior of an EV. This solution is now brought to market by Equigy and active in five countries in Europe.?

Also there are a lot of projects that were less successful, or even never saw the light of day.?

There are multiple causes for projects to fail, but three catches my eye in blockchain related projects; 1) the business cases dynamics 2) Technology efficiency and 3) the in transparency of the technology.

Business case dynamics

The two basic blockchain technologies, permission-less and permissioned, have quite distinct characteristics. One very dominant is the internal governance. In a permission less blockchain there is a notion of a specific role for the “miner” that prevent fraudulent behavior of a participant of the network. These miners are rewarded their effort by means of a crypto currency. This ensures the independence of the role and competition amongst the miners and fair compensation.

For a user of these types of blockchain platforms, one needs to consider the variable price one needs to pay for processing a single transaction. It is not uncommon for a crypto currency when it becomes more popular to experience a price increase of 100x or even 1000x, your business model needs to be able to handle this.

In a permissioned blockchain network there is only a lightweight consensus algorithm needed typically run on standard servers supplied by the founding member of the network. So, there are no energy hungry mining activities going on, and no dependence of crypto currency exchange rates determining the transactions costs.

Technology Efficiency

In the activity of the miners the downside is that they need quite a lot of energy to perform their mining activities. The original solid "proof of work" consensus algorithm turns out to be very compute intens and as a result very energy hungry. International pushback for this energy consumption is changing the consensus mechanisms to less energy consuming alternatives, eg at the last Etherium change in fall 2022.

This separation of roles and the effort a minder must bring to the network, motivates their compensation by means of crypto currency.

In permission networks, the effort running a consensus algorithm to reach the same trust level, is exponential lower. Therefore, there is usually no need for internal explicit compensation for running the consensus algorithm (mining).

Transparency of Technology - Smart Contracts

The mechanism of a smart contract on the blockchain automate the rules associated with a transaction. It codifies the way of interacting between parties that use the blockchain. Smart contracts are very powerful and can be designed and programmed as needed. This power of smart contracts led people to realize they become dependent on the programmers of the smart contract, and without an understanding of the programming language hard to understand, audit and supervise.?

These and other properties of permissioned blockchain makes them appealing for application in the heavy regulated energy sector.

In the next post I will explain how tokenization is an attempt to address this and other issues.