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Disrupting the Utility Model: Blockchain-Based Energy

Kate Neal

What is Blockchain?

Blockchain is a technological framework that uses secure and incorruptible digital signatures to keep track of data. It has widespread applications, including cryptocurrencies such as Bitcoin or Dogecoin. As a framework, it is essentially an incorruptible ledger of digital records that manages data in much the same way an Excel spreadsheet does. The data managed in Bitcoin or Dogecoin are currency transactions, while other applications may include medical data or energy. But while the transactions included in an Excel sheet are managed centrally, in blockchain, the responsibility for maintaining and verifying records is distributed among individual participants. This is important because a centralized record system can be corrupted by the record keeper. Instead, a blockchain forms a public, permanent record that all participants in the blockchain can access.  Because it is shared and distributed among all users and does not rely on a central control entity to verify additions to the ledger, the system is near-incorruptible. Each bit of data is immutable, meaning it cannot be changed, and private, encoded through cryptography. As new data is entered into the system, it is verified by participants in the network and “chained” to the previous block of data.

Application of Blockchain in the Energy Sector: Transactive Energy

The energy sector’s future has been trending towards digitization and democratization. Utilities have invested millions of dollars on smart technologies, such as smart grids and smart meters to better measure and process data relating to energy use and demand. Electricity customers are increasingly sourcing their electricity from self-generation and local, distributed sources, such as private rooftop solar, rather than centralized fossil-fuel plants. Regulators are allowing consumers more choice in how they access electricity, and consumers are actively participating in demand-driven electricity usage and pushing for renewable energy access.

The changing energy landscape, however, presents the technical challenge of coordinating the usage patterns and production capabilities of many participants. Operating a decentralized energy system requires “smart infrastructure” to handle complex data exchanges. A microgrid is an example of a decentralized energy system, as it can harness energy produced locally and serve nearby consumers in a grid which can operate autonomously, or “island” from the national grid.

The energy sector is harnessing blockchain to make decentralized, peer-to-peer energy exchange possible. Credit: Anna Haefele

Blockchain provides a solution for the impossibly cumbersome task of operating a peer-to-peer microgrid not only because it is distributed, but because “smart contracts” provide the ability to make automated changes to a ledger when certain conditions are met, such as the balancing of energy flow on a microgrid or buying and selling electricity on specified terms. This new ability for consumers to trade energy, or energy credits, flexibly, on demand on a peer-to-peer basis forms the idea of “transactive energy.” Transactive energy enabled through blockchain allows consumers with self-generation capabilities to earn money by selling energy credits to their neighbors. This creates a stable, local return on investment for consumers with energy production capabilities and adds to the socio-economic incentive for later adopters of new technology to implement it. Transactive energy also makes it possible to establish a microgrid peer-to-peer network in areas of the world where there is no electricity supply[3]. There are many other potential applications of blockchain in the energy sector, but the current electricity market structure and regulatory landscape must shift before they can become practical to achieve.

A Case for Blockchain: The Brooklyn Microgrid

A community in Brooklyn, New York has piloted a blockchain application to support solar in their area. The project, called TransActive Grid, was developed as a collaboration between LO3 Energy, a New York-based energy technology start-up, and ConsenSys, a blockchain developer. TransActive Grid aims to create an energy marketplace between electricity prosumers (people who own solar panels) and consumers in their neighborhood. The system was built upon the assumption that some individuals are willing to pay more for green energy to reduce their carbon footprint since some people were already paying an extra charge per kilowatt-hour (kWh) to buy “green energy” from the local utility. The additional cost to “green” your energy, is passed along to consumers to cover the utility company’s cost of adding and supporting renewable energy within the main grid.

The TransActive Grid project tests the feasibility of blockchain-backed transactive energy using distributed energy resources (DERs) such as solar panels. Credit: Solar Builder Magazine

The Brooklyn pilot project aims to bypass that system by creating a mechanism in which neighbors can sell green energy “credits” to each other instead of paying the utility. As it is currently illegal for individuals to buy and sell electricity directly to each other, the blockchain system in Brooklyn installed smart meters to calculate the surplus solar energy that a prosumer sends back to the grid. Then, a consumer willing to pay an additional amount for green energy will instead pay their nearby neighbor through a blockchain-based automated auction process. Under this system, they are buying a “green energy credit” rather than energy directly.

TransActive Grid prosumer Eric Fumin (right) sells excess energy generated by his rooftop solar panels back to his neighbors. Credit: Eric Fumin

In the same way that paying the utility company a renewable energy tariff supports its renewable contributions to the grid, a person participating in a peer-to-peer transactive energy network supports their neighbor’s renewable contribution to the grid. This has financial benefits for the owner of a rooftop solar installation by shortening the payback period for solar panels. Depending on what the utility pays prosumers for the energy they contribute to the grid, they can decide to sell energy credits to their neighbors, typically at retail value, or continue net energy metering with the utility. The community further benefits as the additional charge per kWh participants pay to their neighbor stays local instead of going to the utility. The pilot project initially was limited to residents and businesses of the Park Slope neighborhood, and regulatory restrictions prohibited expansion to the additional 400+ interested parties in Brooklyn. The current barriers to a blockchain-based peer-to-peer energy marketplace are regulatory, rather than challenges with implementation or technical feasibility. The smart infrastructure and blockchain technology combination is primed to be put into use as soon as a consumer-driven regulatory shift occurs.

Cover image credit: Anna Haefele

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