Blockchain Innovations in the Energy Sector, Explained

How do the blockchain and energy industries intersect?

For many observing and participating in the crypto industry, conversations that include “blockchain” and “energy” often revolve around the resources required to mine proof-of-work blockchains like Bitcoin and their environmental impact. In many ways, this is for good reason: Much of Bitcoin’s mining is done using cheap, coal-powered electricity in China. While initiatives like Soluna’s wind-powered mining farm provide a more sustainable path forward, energy consumption and waste remains a challenge for the proof-of-work crypto community — but this is only one of the ways that the blockchain and energy industries intersect.

For the past several years, there has been speculation into blockchain technology’s ability to actually make the energy sector more efficient. The energy sector today is a highly transactional and complex system with multiple sources, suppliers, distributors and middlemen, and several crypto startups have emerged to streamline existing processes and create new functionality. Areas of opportunity include commodities trading, peer-to-peer energy trading, elimination of middlemen retailers, data management, accounting and automation.

How does the energy sector operate?

Before diving into how blockchain can improve the energy sector, it’s important to first understand how this sector operates. In general, upstream generators produce raw material that is processed and transported by the midstream delivery network to downstream distributors, which sell to the end-user. While this seems like a fairly simple process at first, its complexity increases when considering the number of generators, different sources of energy (solar, wind, nuclear, oil, etc.), and the degree to which these processes begin overlapping.

For instance, when electricity is delivered to your home or business, it’s likely sold to you through a retailer (downstream) who contracts with the utility company (midstream) that owns the necessary power lines and purchases power from an (upstream) electricity generator. But where does that electricity come from? The upstream electricity generator itself is a downstream customer for oil, natural gas, solar and more to generate the electricity it produces.

On top of this supply chain system is an ecosystem of commodities traders, leading to highly competitive and efficient markets, but also greatly increasing the financial complexity of the energy sector.

Finally, there are the consumers, who need to use and pay for the energy they use. The bill arriving in the mail at the end of each month is the culmination of this entire process. Unlike most supply chain systems and commodities markets, the end-user of the process is actually directly using the commodity purchased.

Together, these elements make the energy sector a highly suitable candidate for innovation by blockchain technology. It comprises not only a complex supply chain with a need for increased transparency and improved data management, but also a highly transactional marketplace that would benefit from instant settlement. The transparency and immutability of blockchain can empower the end-users of this business- and consumer-facing industry.

How has blockchain impacted the industry so far?

With the potential synergies between blockchain and the energy system, it is unsurprising that many projects have been taken up at this intersection. A study in Renewable & Sustainable Energy Reviews published last year provided systematic analysis of over 140 blockchain research projects and startups in the energy sector, spanning countries across the world.

The study categorized blockchain initiatives within the energy industry in the following eight categories: 1) metering/billing and security; 2) cryptocurrencies, tokens and investment; 3) decentralized energy trading; 4) green certificates and carbon trading; 5) grid management; 6) IoT, smart devices, automation and asset management; 7) electric e-mobility; and 8) general purpose initiatives and consortia.

Given the complex nature of the energy sector and the number of areas of opportunity, it should not be surprising that this study has so many categories into which projects fall. At a higher level, however, blockchains can improve the energy industry in the same domains they typically do: data management and transactions.

How can blockchain improve transactions in the energy industry?

Commodity and offset trading

One of the first places where blockchain technology can make a large impact on the transactional ecosystem within the energy industry is in commodities trading. Companies currently spend millions to build and access proprietary commodity trading platforms that track and execute transactions. Rather than multiple proprietary systems, blockchain technology could be used to ensure security, immediacy and immutability of energy trading. Additionally, there is opportunity in the creation and trading of green certificates and carbon offsets, which are often costly to obtain. Automated smart contracts and metering systems could improve offset accessibility, an approach taken by Veridium Labs project.

Eliminating Middlemen

Blockchain transactions are also particularly effective at eliminating middlemen, which may serve to lower costs instituted by energy retailers. As mentioned above, these retailers sell users energy from the utility providers delivering the energy. A more transparent blockchain-based system may allow for users to purchase directly from the utility providers. United States-based startup Grid is utilizing the Ethereum blockchain to do just that, enabling users to purchase electricity wholesale rather than going through retailers.

Peer-to-peer transactions

Finally, peer-to-peer transactions — one of crypto’s initial value propositions — is an avenue of improvement for the energy sector. Blockchain systems can allow users to trade energy directly. This is particularly promising for renewable sources of energy like solar and wind, which users can generate themselves. This innovation would essentially allow prosumers to enter into the energy market as a supplier. Australian company Power Ledger is allowing users to do just that with its microgrids, which allow prosumers to sell energy to members in their communities.

How can blockchain improve data management in energy?

Asset and inventory management

In a supply chain involving so many stakeholders with such high stakes, having a shared source of asset and inventory management data can be incredibly powerful. Blockchain technology has the power to unify the elements of this process that are typically siloed or obscure while also protecting the privacy and proprietary information of the parties involved. One project making real-world strides in this domain recently is VeChain’s partnership with Shanghai Gas, which services 90% of Shanghai’s energy. A successful pilot tracking storage, transportation and order information has led to a recent expansion of the partnership.

Metering and billing

Adding blockchain to the current metering and billing process could offer a number of benefits for both energy suppliers and consumers. With a unified ledger allowing traceability of energy delivery, the origins and delivery of energy become much clearer for consumers and easier to automate for businesses. Energy management company Engie has experimented with a number of tests in this space, including blockchain infrastructure connected to water meters to trace flows, as well as identify issues in need of repair.

Transparency and security

The above solutions regarding data management are often valuable due to the increased transparency they offer in the energy process, but security is also an equally important consideration. For both consumers concerned with their private data as well as corporations with proprietary data, blockchain can be a double-edged sword when it comes to shared data. There are several projects aiming to bolster the security of these systems and offer the best of both worlds: shared communal data and protected private information. British startup Electron is researching new encryption techniques for smart meters, and Guardtime — a project funded by the U.S. Department of Energy — has developed a permissioned blockchain solution that tackles these issues.

What are the challenges and risks?

While there has been a large amount of experimentation in the field of energy and blockchain, many of these projects have been of small scale and issues remain to be solved. The first and foremost of which is more general blockchain technology regulatory clarity. While blockchain technology in energy can empower the consumer and incentivize cleaner energy consumption — both goals of many legal and regulatory initiatives in the industry — there is currently little guidance for how this plays out in reality for blockchain projects, particularly in spaces like P2P energy trading.

Additionally, the need for scalability, speed and security are paramount in an industry as mission-critical as energy. Currently, most public blockchains must make sacrifices to allow one of those vectors, as each one is a major obstacle for the widespread adoption of most existing solutions. While a private blockchain might help alleviate some of those concerns, there are also huge development costs for blockchain solutions, and the uncertainty of success may deter those efforts.

Lastly, the existing system is deeply ingrained — from an infrastructural, technological and regulatory standpoint — which is a significant barrier to overcome for blockchain in any industry.

What’s next for blockchain in energy?

Despite the potential challenges, it’s clear that there is significant potential for blockchain in the energy industry. Research by Global Market Insights predicts the blockchain energy segment to grow from $200 million in 2018 to $3 billion in 2025.

While it’s uncertain exactly what those blockchain solutions will look like, research by Renewable & Sustainable Energy Reviews found that 60% of analyzed projects are currently based on Ethereum. This number perhaps distorts the number of projects that are being built on energy-use specific blockchains or private, permissioned systems.

One of the biggest questions is how these projects go from small-scale pilots to reach a critical mass, and we may see VeChain’s recent success with Shanghai Gas as a template. Shanghai Gas has the largest energy customer size, storage and transportation capacity in China. The joint project began in 2018 with a pilot handling quality assurance, including classification, order information, tanker IoT equipment information and transportation information. On March 31, it was announced that the project would be continued and expanded following the success of the pilot, with plans to incorporate a comprehensive Energy-as-a-Service ecosystem that includes logistics management, energy trading, and financial products for both upstream and downstream stakeholders. VeChain also aims to make its blockchain more attractive to enterprise operations than other public blockchains by utilizing a fee delegation feature as well as their VeChain ToolChain^TM Blockchain-as-a-Service platform, which has helped over 50 corporate partners integrate blockchain solutions. This longer-term vision seems to encapsulate many of the opportunities presented by blockchain into one ecosystem.

What is abundantly clear is how well blockchain and energy mesh together to create a more efficient and transparent system, though only time will tell if the value proposition is strong enough for these systems to gain widespread adoption within the industry.