The rapid expansion of digitalisation in the energy sector unlocks flexibility and will accelerate the transition into a smarter energy system. In order for the energy sector to become more digital and embrace new smart technology, such as blockchain, the energy market needs to adjust and become more flexible.
Blockchain is a distributed ledger technology where every full node in the network downloads a copy of the same ledger. The ledger is a collection of all transactions ever made on the blockchain. The original concept was to have all transactions on the blockchain viewable to all nodes in the network. All nodes in the network need to verify a transaction for it to be completed.
No third party verifies transactions, meaning that the power is distributed through the network. The transactions are stored in series in chronological order of blocks, as soon as the transaction is verified. The blocks are then put together creating a chain of blocks, also known as a blockchain. Once a block is added to the chain it cannot be changed, making the blockchain irreversible.
Figure 1 illustrates an example of a blockchain. The main chain (purple) consists of the longest series of blocks from the genesis block to the current block. Orphan blocks (white) exist outside the main chain and can be from a fork.
There are mainly two types of blockchains: the first is a public blockchain and the second is a private blockchain. A public blockchain means that anyone that downloads the blockchain is able to view transactions, verify transactions and make transactions. The first blockchain created and used for Bitcoin is called a public blockchain. When viewing transactions, the addresses of the ones making transactions are anonymous.
The information showing is amount transacted and time of transaction. In contrast to public blockchains, there are also private blockchains. In private blockchains, nodes have to be accepted into the network and not every node can view, make and verify transactions. These networks are sometimes called consortiums.
Resolving security issues with blockchain
The energy sector is facing several challenges associated with integrating distributed renewable energy sources into the existing centralised energy system. Digital opportunities such as the Internet of Things (IoT) and blockchain are acting as enablers for the creation of a decentralised energy system. Blockchain is being tested for several applications in the energy sector as a means of resolving security and transparency linked issues; as well as for improving the efficiency through the provision of a decentralised authority concept, thus creating a win-win situation for all the stakeholders. Figure 2 shows blockchain energy applications in private and public domains.
In energy trading applications either at the wholesale or local level, such as peer-to-peer (P2P) energy trading, blockchain energy applications will provide a reliable verification process for trading without needing authentication from a third party. Having a standardised global blockchain infrastructure can also provide frictionless cross-border energy trading. This will act as an enabler for prosumers to participate in the local energy market where they can rely on technology which has the potential to make the transactions faster, simpler, and cheaper than traditional centralised energy systems.
The technology is also being tested in electric vehicle (EV) charging facilities where it will enable access to all charging points for EV drivers by creating a network of EVs and charging facilities. The idea is to create an easy payment system that is also efficient. This in turn will advance the platforms for energy generation and storage and the emergence of local energy communities (LECs).
For blockchain to succeed in the energy sector the scalability problem must be solved and the market needs to be properly analysed. For example, who will pay who, when and how, and how often must transactions be made? For one city, a network could be built and tested repeatedly, but to test on a larger scale might be challenging. The energy industry has a lot of potential to become more decentralised as smart grids, small-scale energy production and LECs are being developed.
Use cases promote interesting scenarios
Today’s systems are based on the old billing and even smart meter systems cannot handle these changes and blockchain-based systems could be the only way of making it possible. An interesting use of the technology is to create a more flexible grid, allowing the private sale of excess electricity produced by e.g. solar panels to a neighbour to charge their EV. The other way around would be selling electricity from EVs to neighbours having a shortfall of production.
The goal is to create LECs that can trade their own generated or stored energy with each other. These LECs can also decide where they want to buy their energy from. This can be directly from electricity generators without the electricity supplier but this can also be from privately owned wind or solar farms. Consumers that actively participate in the energy ecosystem, by storing energy and/or generating electricity with solar panels or a wind turbine or actively joining an LEC, will be named prosumers. Consumers that are not part of a LEC will still be called consumers and they will get their energy through a traditional energy supplier.
FOR BLOCKCHAIN TO SUCCEED IN THE ENERGY SECTOR THE SCALABILITY PROBLEM MUST BE SOLVED AND THE MARKET NEEDS TO BE PROPERLY ANALYSED.
Prosumers will be able to join an LEC, which can be the neighbourhood, a business district or a family who live in different areas of a country. Prosumers will be able to join any LEC they want. Where the LEC buys electricity is determined by the LEC, which means if the LEC members want to buy cheap coal energy they can do so. The prosumers of an LEC will be able to sell their own generated electricity inside the LEC too.
Eventually, consumers are only getting raw energy prices for their generated electricity purchased. Trading from P2P inside a LEC will result in a higher reward for selling self-generated energy from rooftop solar or a small solar farm, or industrial decentralised energy sources. Blockchain would provide a transparent system to buy and sell energy from and to whomever without the need of a middleman (electricity supplier).
A possible long-term scalability solution is the use of state channels, also called off-chain networks or payment channels. This is a channel between two actors that conduct transactions between each other. At any time suggested any of the actors can connect to the blockchain to verify the transactions made.
Each actor would place cryptocurrency into a smart contract and then send transactions through the state channel. This would decrease the cost per transaction, compared to making all transactions on the blockchain. For every state channel, an amount of cryptocurrency is set aside for every new channel. This cryptocurrency is locked in the channel until the channel is closed.
Final word of advice
When relating to blockchain as an innovation in the energy sector, it is important to remember that the expectations around blockchain are high at the moment and this affects how blockchain is discussed. Also, it should be considered that blockchain is in its incubation phase, and blockchain solutions developed today will undergo some metamorphosis in the future.
The energy sector is a landscape of many actors, and blockchain can be a tool for creating a market for both new innovations and old ones taking new shapes in the smart cities of the fourth industrial revolution. Real value can be gained when working together across industry and company borders. This article recognises the potential in using blockchain in the energy sector for high frequency trading and the emergence of LECs.
To conclude, the LEC using blockchain for energy has two major benefits for its prosumers:
1. Lower energy costs as the LEC will buy energy directly from independent generators, including Eskom, municipalities, or other LECs. This means that where LECs produce excess renewable energy in the community, there is no energy supplier to take a cut of the money. Resulting in lower prices per kWh for those average costs.
2. Prosumers are able to actively participate in the energy market. They can use their storage for balancing purposes in the LEC and they can sell their energy for a higher price than selling it back to an energy supplier.