Making some sense of blockchain and its use for energy systems (1)

Integral considerations

So, buzzwords… you got a loving or a hating relationship with those? As a kid, deeply into IT and all the abbreviations & huge concepts (anyone remember „robust“ as a buzzword?), I used to be full of them. About a hundred conferences, seminars and discussions later, I’ve grown to learn people who use them generally know very little about what they’re talking about, and smartest ones almost make it too simple – because knowledge is in explaining complex things in simple terms.

I’m a master of electrical engineering, majored in power systems. The most boring topic ever. There’s the power plants, power lines, transformers, get to the wall plug, turn on your hairdryer, i mean what is there to talk about for crying out loud?! Throw in some physics, math, a teaspoon of economics, a bit of people management, and it still turns out electrons follow the path of least resistance, Ohm’s law can’t be changed, supply matches demand at all times or lights go off and in general people just don’t care about the whole thing – until they need to charge the new gadget’s empty battery that is.

Then one day your favorite news outlet reports that some guys made 34 million dollars in an initial coin offering (ICO) on something called a Power Ledger, an energy trading application for peer-to-peer energy trading. Eh, what’s going on? When I included „making sense“ into the title here, it reflects the same issue the Power Ledger team had – it takes them 10 pages of their excellently written whitepaper to start explaining what they’re doing, and seemingly every blockchain discussion starts with about half hour explanation of what a blockchain is, leaving little focus & room to get to talking about applications of it.

Oh well, at some point back in horse carriage days, I bet talks of cars looked about the same, yet today it’s exotic to talk about horses, isn’t it?

Other leading blockchain players in the energy industry include Grid Singularity, Grid+ and LO3 Energy. Then for a bit of an exotic try the “Earth token”. But before all that…

Grassroots knowledge – demystifying Blockchain

Blockchain in its conceptual essence is really not that complex – the technical execution is, but that’s okay, Windows are also really complex yet it’s not difficult to explain what an operating systems is.

Here’s the basics of the market below.

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Figure 1 – Concept of blockchain-based local energy trading between residential (source)

Remind you of say stock market trading? Owners of shares (in this case electricity) exchange stocks (in this case electrons), and do it through a physical channel (through power lines) and a virtual one (the market). The difference with introduction of blockchain is that the whole thing is done through a sort of a public ledger instead of through a central stock exchange database.

Next two illustrations below go a bit deeper. Traditional intermediaries, e.g. a bank, are no longer required under the blockchain model, as other participants in the network act as witnesses to each transaction carried out between a provider and a customer, and as such can afterwards also provide confirmation of the details of a transaction. All relevant information is distributed to the network and stored locally on the computers of all participants. So it’s like one huge town square where everybody knows everybody’s business.

Where a provider and a customer agree to enter into a transaction, they specify the recipient, sender and size of the transaction, as very basics. All information relating to an individual transaction is then combined with the details of other transactions made during the same period to create a new block of data. This is comparable to sending emails, which are also split into separate data blocks.

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Figure 2 – The blockchain process (source)

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Figure 3 – Traditional transactions vs. Blockchain (source)

From here on it can get technical, just like the simple 1+1=2 can be mathematically proven over a couple of hundred pages. So hang on and let’s do a reality check & plan a bit first.

Everybody’s talking Blockchain today – even about things which are really not Blockchain but a database-based system, it just sounds cooler and few people know the difference. Before approaching things deeper, it’s useful to refer to keep a bit of a skeptical eye to all this, having in mind the following:

  1. The most widely known blockchain implementation – cryptocurrencies – in reality still have a limited success as well as use. Yes, about 14 million people use or have used Bitcoin, and about a million are using Ethereum, the two most known currencies. Altogether, this is less then the population of say Mumbai or New York. And it’s been years and years and loads of media hype. Looking purely at prices one could argue 15 million people are either making killer returns or playing a fools game of “musical chairs”, waiting for the superpeak after which something will trigger the real-estate-market-like bubble burst & bust.
  2. If you ever traded bitcoin, you may remember how long it took for the first transaction to happen. In my case, it was nail-biting 30 minutes, during which I had absolutely no idea what’s happening to my money or when the transaction will be finished (I still remember googling like a mad person to troubleshoot the delay and only then learning this is an ongoing issue… this is before all the forks that happened recently). Then there’s the issue of various little fees to pay on entry or exit from any trading platform… not that accessible, is it?
  3. Since we’ll be talking about energy and blockchain, it doesn’t really make sense that bitcoin consumes enormous resources – check this graph out… is it going exponential? Yup. So in a day, about 2.6 million households could be in the dark because bitcoin is being processed… or looking at it another way, you can power a not-so-small American city instead of computing Bitcoins. That’s quite a steep price just to begin with… and governments are catching on the the model of putting data centers in countries with underpriced electricity. Not exactly sustainable yet, is it?
  4. It’s a new technology, sure, but some problems come with a high risk and high price to those who are on the losing end – have a look here, and also here. There was even a link to the wallet on which the stolen money was stored, like here– imagine being able to literally see where all the money went by the hacker/thief and being completely unable to do anything about it. Nuts.

Okay, so it’s not like when cars were invented people had answers to road congestion issues, security of vehicle or ideas on emission standards… but it may come for Blockchain too. Just that possibility makes it worth digging deeper.

To understand more, and set myself a plan of research & blogposts, these would be the bullet points:

  1. Relationship of cryptocurrencies and blockchain and their link to contracting in energy systems
  2. Initial coin offerings and how they work for energy projects
  3. Regulating for Blockchain success in energy systems
  4. Communicating 1-3 to executives (probably the top challenge right now!)

Plan is to cover one point per week. Research is on!

5 thoughts on “Making some sense of blockchain and its use for energy systems (1)

  1. Really interesting article!
    The use of Blockchain in the context of energy supply is the domain of intensive research which indicates that Blockchain very well can – and most probably will – revolutionize the energy markets.

    However, for this to happen, quite a few changes are required with regard to the energy provision.

    First, society needs to convert the energy supply system from an oligopoly with a small number of centralized energy producers to a decentralized system of prosumers in which any consumer can also be a producer. This shift is gradually happening but mostly still on a local scale, meaning that local consumers also start to produce energy and provide or sell any overcapacity to other consumers who need it. This way, the first local Smart Grids are being developed.
    This transition should however also be realized on a global scale, enabling consumers from one side of the earth to buy energy from decentralized producers at the other side of the world, if appropriate or necessary.

    Also, the capacity of decentralized energy production should be increased. At the moment, Belgium for instance is not yet able to replace nuclear energy production by distributed production of renewable energy .(e.g. wind, photovoltaic…). Although the technology to generate renewable energy evolves rapidly,it still will take quite some time to realize this transition from centralized to decentralized energy production.

    Then, there are also non-technical barriers, and these might prove to be extremely tough.
    The current companies that operate in and profit from the oligopolistic structure of the energy markets are likely to try to keep the current market model in place as long as possible. For example, the companies that operate nuclear power plants will want to keep in business as long as they can, and they are likely to use all the legal means they have to do so. In Belgium, a plan to close the existing nuclear power plants has been revised several times, and often to delay the decommissioning of nuclear power plants.
    Legislation is also a tough and complex roadblock for the transition to a new and decentralized energy market, because it is tailored to serve and facilitate the current oligopolistic market structure.

    However, the transition towards a decentralized energy market with prosumers has been initiated and it will not stop.
    A very important component in this context is Blockchain. This technology can facilitate this transition in several ways.
    First, Blockchain can be used to create a trading mechanism for prosumers who want to trade the energy they produce. For this purpose, Blockchain could enable the creation of a specific cryptocurrency which is tailored to the needs of a decentralized energy market. Several initiatives exist in this context.
    Second, Blockchain can enable the implementation of real Smart Grids by automating the interactions between prosumers by means of Smart Contracts. It is even conceivable that Distributed Autonomous Organizations could facilitate and optimize such operational models.

    To conclude, the energy markets are certainly on a path to disruptive change. Societal, systemic and legal inertia might slow down this process, but no more than that. Eventually, decentralized markets of sustainably produced energy that is being traded between prosumers are the future, because there most likely is no alternative.
    And Blockchain is one of the main technologies that will help to enable this.

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    1. Thank you Dirk, great to see such a passionate answer! I agree, it’s easy to say “this might work and let others solve the problems”, but here I might apply a bit of Dubai gov leadership strategy – set a long term goal which seems almost impossible and drive hard toward it – even if you don’t make it necessarily to the set destination, along the way discoveries might happen. For example, NASA wanted to get to the moon and on the way to it they invented WD-40 🙂
      I also look forward to exploring more on this topic in the upcoming weeks – and also catching up with reading other blogs from our cohort, including commenting.

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  2. I love the research that you are putting into your blogs – I’m always keen to learn about something new. My 8 year old will feasibly by the time she is heading into the adult working world could face a cashless society and not all determined in the dollar (pounds) that we know today – not wrong, just different !

    Liked by 1 person

    1. Thinking about my own future with kids, I know they’ll grow up in a world where virtual reality will be less virtual and more reality, now that’s almost scary yet exciting!

      I remember when cell phones came I was among the last to join the train as I didn’t like the idea of being available to anyone at anytime. Then I was resistant to touchscreen phones because a keystroke is a keytroke is a keystroke… today can’t separate myself from my phone for entirely other reasons (facebook / linkedin / online chess being the main reasons :)). And my kids will take touchscreens, using fingerprint for signing documents, blockchain and many other things that are yet to come as a default state of things. I feel old already 🙂

      Liked by 1 person

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