Historically, many conversations around the intersection of blockchain and the energy sector have revolved around Proof-of-Work (PoW) consensus mechanisms and their tremendous energy requirements and environmental impacts.
However, the scope of the relationship between blockchain and the energy sector extends well beyond this matter. The status quo of the energy sector involves a very complex and transactional system with multiple sources, suppliers, distributors, and intermediaries.
The advent of blockchain has provided the opportunity for greater efficiency and functionality within the energy sector, addressing a variety of opportunities such as P2P energy trading, financial energy trading, data management, energy financing, and many more applications and use-cases to be discussed further in this report.
Outlined below are some of the key applications of blockchain technology as it currently relates to the energy sector.
Financial Energy Trading
There are a slew of companies that have invested heavily in developing proprietary infrastructures for bespoke energy trading applications. These systems, which can cost millions to implement initially, also typically require substantial costs to secure, maintain, and update over time.
Energy trading inherently requires a large storage system to contain and maintain data related to energy prices, trades, and other relevant information at specific time intervals. Using a blockchain-based ledger system to record and store this information would add a layer of immutability and security, and would also likely result in reduced costs and greater efficiency over traditional proprietary systems.
The utility of blockchain in this regard could be further enhanced in situations where non-proprietary data can be shared between multiple firms, such as real-time energy price quotes.
P2P Energy Trading
Close to 60% of blockchain energy projects involve building P2P energy markets: shared networks of secondary market entities that trade energy amongst each other to fulfill their respective demand levels. These markets effectively democratize the distribution of energy by allowing entities to trade for desired energy levels as opposed to solely relying on the typically restricted and expensive energy allocations from centralized entities., who often take advantage of their market power as utility providers and upcharge on energy units to reap greater profits.
Such an approach is likely to gain traction as more and more countries reach energy parity, where the cost of renewable energy comes closer to the cost of traditional retail energy. Furthermore, this approach would incentivize many entities to produce their own energy, democratizing this process by establishing a primary P2P energy market.
In the future, many countries and institutions conceive of a future where national energy grids are subdivided into distributed microgrids, wherein primary/secondary P2P energy markets can exist and facilitate a more efficient and equitable allocation of energy among consumers.
Electricity Data Management
As touched upon in the Financial Energy Trading application described above, blockchain technology can provide an immutable, secure, and real-time infrastructure for electricity-related usage data.
Salient examples of such data include marginal costs of development, electricity market prices, legal compliance, sustainability usage metrics, and more. Institutions such as the Chilean government have launched Ethereum-based projects with a focus on employing blockchain for this application, with a focus on eliminating the financial costs associated with intentional data corruption and clerical errors.
The Chilean government’s blockchain implementation is publicly-accessible, which leads to heightened transparency that further reduces the likelihood of both intentional and accidental data corruption.
Wholesale Electricity Distribution
Wholesale electricity distribution companies focus on connecting electricity consumers with the larger electric grid infrastructure. Supplementing traditional electricity retailers with a blockchain-based distribution platform will allow significant cost-savings for electricity retailers which in turn can be passed on to electricity consumers in the form of lower prices.
Moreover, similar to the solution described in the P2P Energy Trading application above, this a blockchain-based distribution implementation would allow consumers to purchase electricity at the desired cost level, resulting in a more stable and equitable electricity market with lower aggregate costs for all market participants.
Utility providers are companies that generate energy via mechanisms such as solar farms, nuclear power plants, and hydroelectric dams; they ultimately generate and supply the electricity that is distributed to consumers at the end of the electricity supply chain.
Unlike in traditional industries, utility providers don’t tend to compete with each other over market share since they tend to have natural monopolies in the regions in which they operate. This lack of competition creates a strong opportunity for information sharing via a blockchain-based ledger.
There are three primary ways in which utility companies stand to benefit from a blockchain-based, information-sharing ledger system:
- Processing and validating data from many data oracles at the end of network grids prior to securing the data onto a blockchain network.
- Creating a strong record system of energy distribution-related transaction data.
- Developing a robust, decentralized system for transacting energy among a diverse set of entities and actors.
Oil & Gas Industry
Akin to financial trading in electricity markets, the implementation of blockchain technology can help reduce the costs associated with implementing and updating proprietary trading systems focused on oil and gas. Moreover, cost reductions can also be observed by oil and gas companies across a wide array of functions, including: settlement, data visibility, data management, labor, and intersystem communications.
In essence, an Ethereum-based implementation will allow for swift integration of any energy commodity type by a simple reprogramming of the initial commodity’s smart contract. That being said, specific to the oil and gas industry, the benefits of blockchain can be classified in terms of the three distinct oil and gas verticals: upstream, midstream, and downstream.
The upstream oil and gas vertical refers to resource exploration and extraction. This vertical is essentially controlled by four primary parties: oilfield services, independents, National Oil Companies (NOCs), and majors (i.e. – large oil and gas companies that manage/own oilfield/well activity).
This vertical typically requires a coordinated effort among dozens of companies within each of these four primary groups; each relying on mission-critical data provided by other firms. Hence, a blockchain solution that is designed for large-scale, multi-party data use would be a tremendous asset in facilitating this collaborative process.
The midstream oil and gas vertical involves the storage and transportation of oil and gas products once they have been extracted, as well as regulation and the management of transportation networks (i.e. – follows the upstream vertical). Due to regulation intensivity and the volatility of oil/gas assets, risk mitigation is a key component of this vertical. By extension, functions such as decentralized oil/gas tracking and monitoring stand to uniquely benefit oil/gas companies within the midstream vertical that are subsequently enabled to share this information among each other to manage risks appropriately.
The downstream oil/gas vertical includes companies that refine intermediate oil/gas products or sell final oil/gas products to entities at the end of the supply-chain (e.g. – gas stations). Moreover, the downstream vertical incorporates dozens of different products, each with different environmental regulations, different customer bases, and a variety of different transportation methods. A blockchain system that stores data on each of these attributes across products could be a great asset for downstream oil/companies to tailor products to the variety of different end users they cater to.
Energy Project Financing
Though this is a more general feature of blockchain networks and cryptocurrencies, it’s importance cannot be understated, particularly given the cost-intensive nature of the energy industry. For instance, clean energy projects have historically faced a roadblock in terms of raising the large amounts of capital needed to finance both the large fixed setup costs associated with projects, as well as the longer-term variable costs until traditional energy price parity is reached for their respective energy products, leading to larger scale usability.
As seen across a huge swathe of existing applications, blockchain networks and cryptocurrencies could alleviate the burdensome fundraising process by broadening the pool of potential investors in clean energy projects, essentially crowdsourcing project funds. Depending on jurisdictional regulations, this would also give exposure to a class of smaller, retail investors that may be interested in clean technology (i.e. – CleanTech) projects. Moreover, even if only partially financed via crowdsourcing, CleanTech projects may be able to entice traditional investors with the opportunity of lower risk/funding amounts to complete their project financing following a crowdsourcing round.
Use-Cases & Examples
Building upon some of the General Applications described above as well as other related applications, below are some specific examples of companies currently using blockchain to innovate within the energy sector.
WPP Energy has created a token with the intent of streamlining payments for all functions associated with the renewable energy sector. Effectively, the company’s chief aim is to enable the trading of energy from green energy producers at more affordable prices. WPP token will also enable high levels of transparency on both energy demand and transaction volume, which will lead to better data insights to clean energy producers.
Prosume is a private venture founded in 2017 that uses blockchain to create self-monitoring and self-regulating decentralized energy systems with a goal to create an autonomous network that helps energy users to exchange energy more democratically. Moreover, they aim to establish a new, community-oriented energy model that works alongside clean and eco-friendly energy endeavours. Through the use of smart contracts, they aim to facilitate payments, automate billing processes, and simplify settlements.
Bitwatt is focused on creating a standard blockchain protocol that serves as a matchmaker between energy markets, connecting actors such as consumers directly with electricity distribution system operators (DSOs). Their ultimate goal is to serve as a decentralized platform that uses blockchain to link consumption metrics and other such usage data in order to eliminate the middlemen in the industry (e.g. – electricity retailers) and effectively remove unnecessary fees resulting from associated market inefficiencies.
SolarCoin is a non-profit foundation founded in 2014 that rewards solar energy producers with blockchain-based digital tokens (i.e. – SolarCoin; SLR) at a fixed rate of one SLR per megawatt hour (MWh) of solar energy generated. These tokens are in turn redeemable for fiat and other cryptocurrencies via secondary market exchanges. This reward is freely rewarded to producers, serving as an additional incentive for solar energy producers in addition to government subsidies or carbon credits. Moreover, it’s worth noting that the foundation is producer-agnostic: solar energy producers need not be a formalized company, as any entity/individual that demonstrates production of solar power is eligible for receipt of SLR.
Energy Web Foundation
Energy Web Foundation is a private institution founded in 2017 with a focus on the development of blockchain solutions with the mission of creating a more “decentralized, democratized, decarbonized, and resilient” energy grid. Particularly, this involves building scalable, Ethereum-based blockchain systems capable of supporting wide scale energy transactions and transmission. Ultimately, they intend to create a blockchain standard for interoperable energy grids in order to consolidate disparate decentralized energy market solutions in adherence to their core mission.
Risks & Challenges
While there have been many significant developments at the intersection of energy and blockchain, many of the developments have been relatively small scale and still have issues that need to be addressed.
The first issue involves greater regulatory clarity about blockchain. While the benefits of blockchain in terms of incentivizing clear energy consumption and consumer empowerment are clear, there is little clear-cut guidance on the regulatory treatment of these systems in practice, particularly in spheres such as P2P energy trading.
Secondly, energy is perhaps one of the most demanding sectors when it comes to a requirement for speed, scalability, and security in networks and markets. The status quo of many public blockchains that would likely stifle their growth in the energy sector (and many others) is that they typically have two of the three attributes above, but often have to compromise one for the other two in some regard (e.g. – increased speed and scalability with reduced security). A permissioned blockchain might alleviate this issue, but the immense development costs of such a solution paired with the uncertainty of success given limited past information may deter such efforts.
Finally, perhaps the largest challenge is that from an infrastructural, technological, and regulatory point of view, the current system is deeply ingrained and likely resistant to change. This in fact is a significant barrier for blockchain to overcome across virtually all industries that could potentially benefit tremendously from its implementation.
One study by Global Market Insights predicts that the blockchain-energy sector vertical will grow to $3B in market value by 2025 from its current level of roughly $200M. Moreover, around 60% of analysed projects are based on the Ethereum blockchain, though this figure may change over time as more companies turn to energy-use specific blockchain frameworks/platforms or native permissioned systems.
While it’s still unclear exactly which blockchain solutions will take precedence over others in the future and despite the significant Risks and Challenges as described above, it is certain that there is tremendous potential for blockchain to create a more efficient, cost-effective, transparent, and secure energy sector overall.
This research is for informational use only. This is not investment advice. Other than disclosures relating to GDA Capital this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates, and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate.
Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The price of crypto assets may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
The information on which the analysis is based has been obtained from sources believed to be reliable such as, for example, the company’s financial statements filed with a regulator, company website, company white paper, pitchbook and any other sources. While GDA Capital has obtained data, statistics and information from sources it believes to be reliable, it does not perform an audit or seek independent verification of any of the data, statistics, and information it receives.
Unless otherwise provided in a separate agreement, GDA Capital does not represent that the report contents meet all of the presentation and/or disclosure standards applicable in the jurisdiction the recipient is located. GDA Capital and their officers, directors and employees shall not be responsible or liable for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions within the report.
Crypto and/or digital currencies involve substantial risk, are speculative in nature and may not perform as expected. Many digital currency platforms are not subject to regulatory supervision, unlike regulated exchanges. Some platforms may commingle customer assets in shared accounts and provide inadequate custody, which may affect whether or how investors can withdraw their currency and/or subject them to money laundering. Digital currencies may be vulnerable to hacks and cyber fraud as well as significant volatility and price swings.