How Blockchain Is Being Used in Energy Trading
The relationship between centralized energy systems and climate change is rapidly becoming a hot topic for conversation and research. Such a large issue is bound to receive a multitude of proposed solutions, like distributed energy resources (DERs), renewable energy sources, and blockchain peer-to-peer (P2P) energy trading. This guide will explain how blockchain is being used in energy trading, including its platform, application, and impact.
The energy sector faces the important issues of ever-increasing energy consumption, an ailing planet, and constantly evolving technology. The blockchain solution is not, by itself, an immediate fix these problems, but it has the potential to help. Blockchain is commonly associated with cryptocurrencies and Bitcoin miners, but it can also be used in the transactive energy market.
Blockchain Application and Energy Trading
According to Dr. Hongbiao Li, et al., and their research on blockchain energy solutions, the centralized energy grid has several significant issues. These include its energy loss over long-distance transmissions and its low fault tolerance. The alternative to a traditional centralized system is a decentralized smart grid.
A decentralized smart grid relies on DERs like solar panels, windmills, and combined heat and power systems. DERs generate power at a local level, potentially solving the issues of energy loss and fault tolerance. These technologies are developing rapidly, but they need a reliable platform for energy trading. Like any power generator, DERs would like to sell excess energy and be paid in a timely manner. Current energy trading systems were not designed for this type of decentralized network made up of small energy providers, so a new system of energy trading is needed.
Blockchain platforms are fault-tolerant, but some blockchains also support so-called “smart contract” technology. This allows a simple buy/sell energy contract to be represented in code, and executed automatically on a blockchain-based trading system. This has the potential to significantly reduce energy trading transaction costs, as well as settlement times. A decentralized smart grid using blockchain technology could dynamically respond to supply and demand in near-real time and deliver payments within minutes. Solving the energy transaction issues can lower the cost of green energy, increase energy efficiency, fight climate change, and measure energy consumption and generation on a far more detailed level than ever before.
Blockchain in a P2P Energy Trading System
P2P trading is the direct exchange of surplus electricity between two parties on a connected grid. Blockchain offers a secure platform for P2P trading that tracks the transaction of assets, such as a unit of energy. Blockchain is a distributed ledger system that transparently stores data on a decentralized network. It is used to monitor transactions and track assets. Each block in the chain stores multiple transactions in a way that is easy to audit and verify, but very hard to edit or change. When combined with smart contracts that automate the buying and selling of energy based on supply and demand, blockchain has the potential to be a very attractive solution for distributed energy companies. It could greatly simplify the process of buying and selling power and enable highly localized energy generation. Existing energy companies can participate too, but they would have to adapt their existing technology and business plans.
One potential benefit of a P2P trading system is that energy consumers could choose where to buy their power from. For example, they could specify the type of power source (renewable etc) and the type of company they buy from (independent, large, government etc). They can also see real-time prices, allowing them to make informed purchases. Since the system would be largely automated, the cost to the consumer could also be reduced through the elimination of “middle-men” power brokers.
Blockchain Trading and Renewable Energy
Solar energy is one of the most common and accessible DERs. In a P2P trading system, people without solar panels could buy surplus renewable energy from their neighbors. A localized microgrid eliminates many of the inefficiencies of a monolithic centralized power generation system since it can respond more dynamically to local needs. Local power generation also reduces the power lost along transmission lines. DERs can lower costs, reduce waste and protect the environment.
Renewables are frequently critiqued for their dependency on specific conditions. Solar energy needs daylight and windmills need wind. Blockchain trading provides a solution to these problems by making it far easier for those with surplus power to sell it to those that need it. When renewables are unable to generate power at night, or on a day without wind, microgrid participants can easily purchase power from other sources. Solar and wind are the two most well-known DERs, but biomass, geothermal, and hydropower are also sustainable forms of green energy that could benefit from blockchain trading.
Blockchain and Fossil Fuels
Blockchain has important applications for the renewable technology industry, but it’s also applicable in the oil and gas industry. Dr. Hongfang Lu, et al., presented a review of blockchain in the oil and gas industry in 2019. They found that the upstream oil and gas segment suffers from equipment tracking issues and data leakage, the midstream segment suffers from erroneous and delayed transactions, and the downstream segment suffers from integrity and security issues. Hongfang explained how blockchain can improve the upstream segment’s data transparency, improve the midstream’s transaction efficiency and reduce costs, and improve the downstream’s data security. In short, blockchain has significant benefits for the large, established energy generators, as well as newer market participants.
Blockchain and the Changing Energy Industry
With new and updated technology, and increasing demand every year, energy markets are changing all around the globe. Australia is one of the most notable pioneers of renewable energy technologies, but it isn’t the only nation leading the charge for green energy and P2P trading. Countries like Estonia, Spain, Malaysia, the United States, and South Africa are all researching and applying new forms of energy transaction. Blockchain P2P trading has already seen several significant real-world success stories.
The Blockchain Solution in Research
Not surprisingly, the relationship between blockchain and energy trading is becoming the subject of more and more research. One of the most successful examples of its potential was carried out by Dr. Esther Mengelkamp, et al., who created a microgrid in Brooklyn. Their research imagined a communal energy network in which the grid is maintained by a traditional utility company, but the energy is produced, traded, and consumed by community members. This dual identity of the consumer and producer is often called a “prosumer.”
The Brooklyn microgrid project found that blockchain is a suitable technology for operating a decentralized energy market. Their research identified seven necessary components for building an efficient grid. The Brooklyn microgrid completely satisfied three and partially satisfied three others. Current regulations prevented the seventh component from being satisfied because P2P energy trading is not yet legal in the United States. Regulatory hurdles also exist in many other countries around the world.
The Blockchain Solution in Practice
Blockchain energy trading isn’t just an idea. It’s already been used on several small scale projects. WePower is an electricity trading and blockchain startup that put over a year’s worth of Estonia’s energy consumption and production data into blockchain. Power Ledger, an Australian startup, creates microgrids that connect local green energy producers to new residential neighborhoods on a P2P energy trading system. This allows energy consumers to use renewable energy in a large country that is still heavily dependent on fossil fuels.
In Spain, two of the largest national energy companies are transitioning from a traditional centralized, fossil fuel–powered grid to a decentralized blockchain platform. The Spanish company Acciona Energy was the first utility company to use blockchain to track their energy sources, therefore increasing their transparency with the public. This is significant not just for its technological accomplishment, but it also shows how traditional energy companies can adapt to a changing electricity market.
Blockchain and Electricity Trading
Blockchain is often used interchangeably with cryptocurrency, but cryptocurrency is simply one possible use case for blockchain. In fact, blockchain has been adapted to many industries outside of finance. Blockchain is used to store ownership rights of digital media, land ownership, voting records, P2P insurance policies, and supply chain data. Dr. Khalimjon Khujamatov, et al., even studied the potential of blockchain-based 5G healthcare architecture. Considering the variety of these applications, it’s no surprise that blockchain can be used as a decentralized data platform for the energy sector.
Drawbacks of Electricity Trading
The current state of energy trading is plagued by inefficiency, which is caused by intermediaries and complex, often archaic, processes. Blockchain could solve a lot of these issues by eliminating intermediaries and streamlining transaction data collection. Blockchain saves money for the buyer by eliminating the need for broker fees. Blockchain offers solutions to nearly all the energy trading market’s issues, but that doesn’t mean it doesn’t have any of its own issues.
Blockchain has support all around the world, but like any new technology, it is often implemented more slowly than its advocates would like. And although blockchain is more secure than traditional ledgers, it isn’t immune to being hacked. Other issues include anonymity and the link between digital and physical conveyances of value. Blockchain is also often seen as a disruptive technology because of the monumental impacts it has on nearly every industry that it is applied in.
It is also important to consider the disruption to the business models of existing energy producers. Energy production at scale usually results in very close cooperation with government (and even outright ownership by government in some countries). As a result, there is considerable regulation of the energy industry, and some of that regulation is not conducive to rapid change.
Benefits of Electricity Trading
Blockchain is well known for transparency and security, but it also saves time. Blockchain platforms eliminate inefficient office practices like confirmations, actualization of volumes, and many forms of reconciliation. In a P2P blockchain system, all parties would have access to the same transaction data. Transaction errors are expensive, and this system would improve efficiency and reduce costs.
Blockchain would also reduce credit risk since there would be lower collateral requirements and increased settlement times. In short, there would be less human error involved in the process. Blockchain essentially allows companies to securely process more data with less time, cost, and risk.
Blockchain and Energy Sector Participants
Blockchain is just one of the many moving parts of a decentralized power grid. A decentralized grid requires a transactive energy framework, policy changes, and DERs. These components tend to complement one another. DERs are most useful for their owner when P2P trading allows them to sell surplus electricity, also known as net metering. However, regulations often prevent or limit net metering. New regulation will need to be proposed to deregulate P2P trading while protecting consumers. Forty states in the U.S. currently allow net metering, but these regulations change regularly.
Blockchain and Energy Companies
The energy sector is full of well-known legacy companies that have been around for decades, but the transactive energy market is full of new startups with big ideas. Both types of companies could flourish in a decentralized grid, which would offer a transactive energy framework that leads to improved energy efficiency, lower costs, and more renewable energy.
This is possible without blockchain, but blockchain offers greater transparency and greater security than other types of ledgers. Technology like smart meters already offers consumers insight into their energy consumption, but a blockchain platform would store this information publicly and permanently. This way, consumers could see what other consumers are spending on energy, preventing anyone from being overcharged. It isn’t impossible to hack blockchain, but it is significantly more difficult since it uses a decentralized network. A hacker would need control of at least half of a network’s computers to take control. This is a real threat to blockchain security, but researchers are finding solutions. Zexi Xing and Dr. Zhengxin Chen studied this attack and proposed a protecting mechanism called a Block Access Restriction mechanism.
Blockchain and Energy Consumers
The countless ideas for blockchain application in the energy sector are often highly speculative, like P2P energy trading using existing cryptocurrencies. Energy consumers in a decentralized grid would have more control over their energy sources, allowing them to compare costs. in addition to renewable energy certificates.
In contrast to speculative ideas like P2P trading, some renewable energy blockchain labs are attempting to tackle the challenges of managing an increasingly decentralized power grid. As the grid becomes more decentralized, energy consumers gain more control over their electricity consumption. In an ideal microgrid, a residential consumer would exchange power to and from their neighbors, charging their electric vehicle, powering their home, and making financial profit.
Learn More about How Blockchain Is Being Used in Energy Trading
The grid is becoming more decentralized. Blockchain and DERs are the technological backbones of this new kind of grid. Blockchain is secure, quick, and cost efficient. If you want to learn more about blockchain and its role in a transactive energy framework, read this paper from the IEEE Blockchain Initiative.
Interested in learning more about how blockchain is being used in energy trading? Get involved with IEEE Blockchain-Enabled Transactive Energy (BCTE). This program is series of regionally diverse virtual forums addressing Blockchain-enabled transactive energy in the domain of electrical power and energy application development. To learn more about IEEE Blockchain, join the IEEE Blockchain Technical Community to stay informed of latest activities.