May 4, 2020

Blockchain Technology in the Energy Industry

By Leon Donadoni

Executive Summary

Blockchain technology has the potential to revolutionize the energy industry in terms of energy transacting, regulatory reporting and compliance and asset management and optimization. Nonetheless, several technical challenges lie in the path of the technology’s full implementation in the energy sector. These include regulatory and technological uncertainty, technical challenges, cybersecurity and integration with existing systems. Until these issues are resolved through greater cooperation between energy and technology firms and regulators, the potential disruptive force of blockchain technology in the energy industry will remain limited.

A New Transition: Digitalizing the Energy Industry

The energy industry is currently undergoing a twofold transformation. The first, which has attracted much attention from business, politics, academia and public opinion alike, is the ongoing transition to renewables. The second, which has grabbed fewer headlines but has the potential to be equally as significant, is the ever-increasing digitalization of the industry as a whole. At the core of this transformation lies blockchain technology, which has the capacity to optimize energy management processes in almost all stages of the industry’s value chain.[1] Through cryptographic encryption, greater transparency and economic incentives, blockchains allow for a form of decentralized data management that enables the digital identification and tracking of transactions to a distributed network of users. While the prospective energy-related applications of this technology are far-reaching, to fully grasp them, we must first understand what blockchain is not.

First, blockchains are not synonymous with cryptocurrencies. The latter use blockchains as their technological base, not vice versa. Private blockchains can run without currencies, although public ones tend to use cryptocurrencies to attract users and disincentivize malicious behavior. Second, each blockchain runs autonomously from other networks, meaning that they cannot communicate with one another. Third, blockchains are not a standalone solution. They must be integrated within an already consolidated digital infrastructure that can support its fundamental mechanisms. In simple terms, blockchain technology can then be understood as a growing decentralized ledger that contains all the data entries that have ever been made within it by its network of users. This renders data records on the internet unique, non-traceable and non-copiable, removes the need for third-party intermediaries and allows for increased transparency, privacy and trust.

In recent years, several energy players have begun advancing blockchain-related processes. In the field of energy transacting, 23 European firms have joined a blockchain joint venture named “Enerchain” with the aim of creating a peer-to-peer wholesale energy market.[2] Supermajors such as BP and Shell have launched a blockchain-based energy trading platform named Vakt. Vakt processes contracts for five crude oil grades in the North Sea and could soon expand to include U.S. oil pipelines, gasoline cargoes and other oil products, with reports estimating a reduction of costs of as much as 30-40%.[3]  Energy transacting is not the only sector being disrupted by blockchain. Petroteq, a Canadian oil sand technology firm, recently launched Petrobloq, which aims to track and monitor on a transparent, unchangeable and secure blockchain ledger any petroleum-based product that passes through the entire oil value chain. Blockchain pilot projects have also been launched in the field of renewables energies. Acciona Energy has recently become the first utility company to use blockchain to certify the origin of its renewable energy to consumers. Estonia’s partnership with WePower allows consumers to purchase renewable energy directly from the country’s 100% digital energy grid. Similarly, South African startup The Sun Exchange uses blockchains to identify locations where solar panels could be more efficient, acting as a crowdfunding platform for small-to-medium scale solar projects in developing countries.

The Potential Benefits for the Energy Industry

The possible applications of blockchain technology in the energy industry are all-encompassing and span from energy trading to electric vehicle charging to payment systems to asset management. Put simply, any energy-related system that involves the sharing and updating of information by participants has the potential to be impacted by the emergence of the technology. Nonetheless, one of the most evident areas of the energy industry that will be most likely not only transformed but revolutionized by blockchains in the years to come is energy transacting. Accordingly, blockchains can enable peer-to-peer trading through smart contracts, which automatically validate trades without the need for human intervention.[4] Smart contracts would increase the direct relationship between producers and consumers and incentivize a greater market participation of small energy providers. A blockchain-based power market could not only match the demand and supply of energy purchases but also immediately settle transactions and monitor and process corresponding payments.[5] Moreover, the creation of delocalized transaction networks would eliminate the costs associated with third-party intermediaries such as trading platforms or even banks, enabling greater cooperation for the provision of energy balancing and shared investments.[6]

A second area in the energy industry where blockchain may prove to be a significant paradigm shift is regulatory reporting and compliance. In order to  detect non-compliance and other regulatory issues, energy-related regulatory agencies request vast amounts of information from energy providers on a periodic basis. This information is sensitive and may be exposed to data breaches and other cybersecurity issues. Moreover, with current technologies and methods, gathering and cleaning up the required data is a considerable burden both for regulators and energy companies.[7] Blockchain technology could potentially eliminate these issues, allowing regulators to access tamper-proof data in real-time while enabling energy companies to retain strict control over who is allowed to view and share sensitive, business-critical information.[8] Moreover, through blockchains, regulators would be able to create a single set of regulatory standards for all players, something that is currently not achievable with traditional ledgers.

A third area of the energy industry that could be revolutionized by blockchain is asset management and optimization. The energy supply network is a highly siloed environment that involves numerous steps and different players, each with their own competitive incentives. This intricate chain of interacting actors drives up the overall complexity of the industry and hence increases associated costs. Blockchain could enable big and small actors alike to monitor compliance from both suppliers and consumers and facilitate the purchasing and selling of power across broad geographies on a low cost and automated basis.[9] In turn, this could alleviate systemic inefficiencies such as transmission line losses, congestion and volatile price formation.[10] Moreover, increased transaction speed, reliance and the elimination of data duplication have the potential to increase the operational efficiency, return on assets and overall profitability of energy providers.

Obstacles: What are the Barriers? 

Although blockchain has the capacity to deliver significant cost reductions, increase efficiency and transform business models, many obstacles currently lie in its way.[11] Among these, the most significant is the underlying uncertainty that characterizes regulator’s approach to the technology. Due to geographical differences, political fluctuations and economic volatility, the energy industry’s regulatory climate is extremely fragmented and could greatly benefit from a blockchain-based unified regulatory framework. Nonetheless, because of the technology’s disruptive force, many regulators have been reluctant to frame blockchains within a coherent set of legal guidelines. This is in part also due to concerns related to jurisdictional differences, privacy and data protection, cybersecurity, governance and taxation. Until regulatory uncertainty prevails, energy firms will continue to refrain from fully investing in blockchain technology, thus limiting its potential applications.

Another key issue is that blockchain remains at a fairly early stage of development. The grand majority of the projects launched by supermajors and small-to-medium firms alike remain at the pilot stage. This means that when blockchain is applied, the results delivered by the technology often do not meet its promises. Because the technology is still in its infancy, companies working with blockchain usually prefer frequent and small transactions, flexible transaction times and a high level of pre-existing access to historical data. These services may not deliver the expected results in terms of increased efficiency and cost reduction. Moreover, while blockchain promises “tamper-proof” security due to its decentralized framework, this does not mean that it remains immune from cyberattacks. Undoubtedly, greater testing will eventually lead to an exponential growth in the technology but until then, blockchain remains limited in scope compared to its potential applications.

Another issue, particularly relevant for the energy sector, is that blockchain ledgers require a massive amount of computing power to support an intricate database such as the one of the energy industry. One academic study showed that the cost of bitcoin mining was comparable to the whole of Ireland’s electricity consumption.[12] As a result, it is not yet clear if blockchains contribute to net energy savings or add to energy demand. Because blockchain applications will expand in both scope and capacity, the real costs associated with how the technology may change in the next decades cannot be fully projected. This issue is particularly salient in light of the energy industries’ current transition to renewables. As a result, many energy firms have preferred to adopt a “wait-and-see” stance and have refrained from launching large-scale pioneer projects.

Conclusion and Outlook

Blockchain technology is developing rapidly and will undoubtedly transform the energy sector by “democratizing” energy production. While numerous obstacles lie in the path toward the full integration of the technology within the industry, most energy players are realizing the opportunities that come with blockchain development. In recent years, an always greater amount of energy companies have decided to abandon the “wait-and-see” approach and embarked on blockchain pilot projects. While such projects have opened up new learning solutions and optimized decentralized energy systems, the full implementation of the technology still lies years, if not decades ahead. As a result, until regulatory and technological uncertainty prevails, blockchain development will continue to have limited growth and may even stall in the upcoming years. Only with greater cooperation between energy companies, blockchain developers and regulators will we be able to witness the full revolution of the technology in terms of sector disintermediation, the improvement of internal operations and the leveraging of new business opportunities in a revolutionized distributed energy environment.[13]

References

[1] Peter, V. 2019. “Blockchain Meets Energy: Digital Solutions for a Decentralized and Decarbonized Sector”, Florence School of Regulation, p. 2.

[2] Frei, C. et al. 2018. “The Developing Role of Blockchain: White Paper”, World Energy Council, p. 8.

[3] Slav, I. 2019. “Two New Supermajors Join Vakt Blockchain Platform”, OilPrice, Accessed Via World Wide Web: https://oilprice.com/Latest-Energy-News/World-News/Two-New-Supermajors-Join-Vakt-Blockchain-Platform.html [31, 03, 2020].

[4] Prokop, M. 2018. “Blockchain: A True Disruptor for the Energy Industry”, Deloitte, p. 5.

[5] Peter, V. 2019. “Blockchain Meets Energy: Digital Solutions for a Decentralized and Decarbonized Sector”, Florence School of Regulation, p. 11.

[6] Peter, V. 2019. “Blockchain Meets Energy: Digital Solutions for a Decentralized and Decarbonized Sector”, Florence School of Regulation, p. 11.

[7] Prokop, M. 2018. “Blockchain: A True Disruptor for the Energy Industry”, Deloitte, p. 5.

[8] Prokop, M. 2018. “Blockchain: A True Disruptor for the Energy Industry”, Deloitte, p. 5.

[9] Frei, C. et al. 2018. “The Developing Role of Blockchain: White Paper”, World Energy Council, p. 10.

[10] Prokop, M. 2018. “Blockchain: A True Disruptor for the Energy Industry”, Deloitte, p. 5.

[11] Frei, C. et al. 2018. “The Developing Role of Blockchain: White Paper”, World Energy Council, p. 13.

[12] Frei, C. et al. 2018. “The Developing Role of Blockchain: White Paper”, World Energy Council, p. 15.

[13] Frei, C. et al. 2018. “The Developing Role of Blockchain: White Paper”, World Energy Council, p. 6.

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