Blockchain has been a buzzword in many industries over the last couple of years, including the energy sector. However, despite best intentions, blockchain for energy continues to struggle to get beyond the hype and provide any real benefit. Instead, it adds complexity to the electricity system rather than solving the critical systemic challenge to provide people with clean, reliable and low cost power – the energy ‘trilemma’.
Blockchain is a fantastic technology, but does it work in energy?
There is no denying that as a technology, blockchain was a breakthrough. It is an elegant protocol enabling people to verify information and transact directly with one another in a trustless environment, without needing a central authority. Without a third-party, transaction costs can be reduced and market efficiency improves. It could be applied to almost any market, in theory. In the energy sector, dozens of companies are attempting to use blockchain for asset registers, peer-to-peer trading, grid-level transactions, energy financing, electric vehicle charging and renewables tracking.
Trying to apply an existing technology to new systems has become a common fast-track approach to delivering incremental gains, but this approach is fundamentally flawed. You need to understand what the problem is that you are trying to solve before applying any technology – such as blockchain – to achieve the optimal outcome. Otherwise, we risk path dependence and will inevitably limit potential solutions rather than enabling them. Technology is a tool that should complement systems, not constrain them.
What is the systemic challenge we are trying to solve?
The current electricity architecture relies on central control to maintain system balance. Previously, this was achieved through the inertia of thermal generation – essentially, dialing the knob up and down to balance what was a more predictable and controllable system.
Since the foundations of this system were laid, the way we generate and use electricity has drastically changed. Today there are around 1 million points of energy generation in the UK, up from just 80 as recently as 2004. At the same time, energy use is exploding, with substantially more demand driven by technology, including digital consumption and now electric vehicles and artificial intelligence.
The power flows in the system between sources of supply and demand have fundamentally changed, but the infrastructure we use to support this – the grid – has not. It has remained fundamentally the same for more than 130 years. The result is a centralised, rigid system that cannot effectively manage the variability of distributed energy resources and modern energy use. Managing this grid is like trying to centrally control the internet.
A more open and decentralised system is urgently needed, where the grid itself becomes the ‘internet of energy’. A platform based on decentralised control and permissionless innovation, while maintaining the strict reliability and security requirements essential to such critical infrastructure.
The optimal outcome is an energy system where everyone has the greatest amount of freedom. One in which participants can efficiently buy, generate, store and trade electricity as they please, with maximum reliability and minimal cost and environmental impact. A system that adapts to and enables new technologies and patterns of use, not the other way around.
This cannot be achieved within the current architecture, where maintaining balance becomes increasingly difficult as more complexity is added to it. Complexity such as blockchain.
Is there an opportunity for blockchain in energy?
The energy industry has to face the fact that while blockchain technologies can make incremental improvements within the existing energy system, they are inherently limited in solving the systemic challenge of the energy trilemma.
There is merit for blockchain in specific marginal use cases where it can optimise existing processes, such as storing, recording, and validating information about energy usage. This can only bring incremental benefits because blockchain – like any technology – is only a tool, not a solution in itself.
However, blockchain can be integral to a systemic energy solution in one way: using the technology to better manage the connection between the physics (the electrons) and economics of energy, taking into consideration both the time and location of energy within the system. This requires sufficient visibility within the system itself, which can only be achieved by embedding the technology into the grid. No current blockchain for energy applications take this approach, let alone have the capability to deliver upon it, according to the World Energy Council’s recent blockchain report.
Delivering a fit-for-purpose energy system
The energy sector needs to focus on the fundamental challenge we face: to provide people with clean, reliable, and affordable power.
What is needed is a fit-for-purpose solution that is specifically designed to overcome the energy trilemma and deliver a sustainable energy system for all. This may be an architecture that inherently balances itself, using decentralised control of energy exchange enabled by blockchain, or something similar, but the solution must be determined by the system characteristics, not the other way around.
Blockchain is an interesting tool, but it is not in itself the answer. The industry buzz should really be about what the system will look like – the details can follow.