Business - 07/July/2021

Traditional rules do not apply in this experiment

Five years ago, technologists excitedly started suggesting how to use blockchain for energy applications and a raft of start-ups followed, sporting distributed ledgers for the power sector. Today, the word "blockchain" is seldom heard in energy circles. While the hype may have been overblown, work continues instead on a quieter revolution to the one that was promised


Adapting distributed ledger technology to be better suited to the energy sector’s needs could see it still play a role in the energy transition

BITCOIN BUST Excitement over cryptocurrency misled the sector to invest in the technology before it had developed sufficiently

LEDGER TECHNOLOGY Other distributed ledger technology networks, similar to blockchain, are being developed that could be better suited to the energy sector’s needs

KEY QUOTE Five years ago, everyone assumed that blockchain was the answer, but I don’t think they knew what the question was


 

October 2017, on a hotel rooftop terrace in Barcelona, Spain. The Cryptofriends Netup industry event is in full swing. Nobody has a clue where the next keynote speaker has gone and the already relaxed schedule appears to have gone out of the window. The audience, chatting and sampling free refreshments, seems unconcerned. After all, in the world of blockchain, traditional rules do not apply.

Just half a decade ago, blockchaina digital ledger or records system that is distributed across multiple sites, or nodes, instead of having a single ownerwas set to upend the world we live in. Some analysts claimed blockchain could revolutionise everything from finance to democracy. Threading through the crowd at the Cryptofriends Netup event was Lithuanian entrepreneur Nikolaj Martyniuk with a vision for what blockchain could do for energy.

His company, WePower, wanted to create a digital platform that would cheapen energy by bypassing the complexities of electricity trading, tracking transactions with nimble blockchain technology instead of bulky centralised trading systems. “By employing technology, WePower solves the following energy market insufficiencies: global access to capital for green energy projects and green energy investments and trading as well as speed and transparency,” gushed a white paper from the start-up at the time.

 

BLOCKCHAIN BOOM

Martyniuk was one of many who were thinking about how best to use blockchain in the energy sector. By March 2018, analyst firm GTM Research (now Wood Mackenzie) was tracking 122 energy-related blockchain start-ups, from companiessuch as WePowertouting trading platforms to schemes to improve solar energy production or make investment easier. Energy-related blockchain companies managed to raise $322 million in funding just in the six months up to April 2018, according to GTM Research.

Yet just three years later, blockchain is seldom mentioned in energy circles. Among American utilities at least, beyond using blockchain for energy attribute certificates, Isaac Maze-Rothstein, a research analyst with Wood Mackenzie Power & Renewables says he has not “heard anyone talk about how [blockchain] has improved any of their core functions”.

There are at least three factors that can explain why enthusiasm for blockchain has chilled in the energy sector. The first is that the technology was over-hyped to begin with. The energy blockchain start-ups of 2017 and 2018 were surfing on a wave of interest created by bitcoin and other cryptocurrencies, which made millionaires of a handful of technology-aware investors.

By mid-2018, potential backers were becoming wiser. They knew that not every blockchain scheme was going to become the next bitcoin. “The hype surrounding blockchain technology will recede sharply in 2018 as the cost and complexity of implementing blockchain solutions becomes apparent,” GlobalData, a research firm, predicted at the time.

 

 

MISSING MARKETS

Within the energy sector, many companies were targeting a market that did not really exist. A GTM Research analysis released in March 2018 showed 57% of the money raised by energy blockchain companies at that point was for schemes related to peer-to-peer trading.

This was no doubt an exciting prospect in view of rising levels of distributed energy generation and an experiment in Brooklyn, New York, showed how a blockchain energy trading platform could work in practice. But in most markets worldwide, there was no regulation regarding how you might trade energy with your neighbours. In Europe, regulations allowing peer-to-peer trading are only being ushered in this year.

Plus, even in 2021, the number of consumers who would probably feel moved to trade electricity with each other is vanishingly small. “In the United States, if you live in an apartment or a small house, you’re spending maybe $100 at most a month on your electricity bill,” says Maze-Rothstein. “Who wants to take up part of their brain space about trading that to save five bucks?”

This enthusiasm for small markets suggests some energy blockchain entrepreneurs may have prioritised the capabilities of their technology over the needs of their customers. “I think everyone five years ago assumed that blockchain was the answer, but I don’t think they knew what the question was,” says Anthony Boden from Charles River Associates, a global consulting firm.

 

TECHNOLOGY MISMATCH

A second factor working against blockchain in the energy sector is, despite the hype from devotees, early forms of the technology may not have been suited for the applications they were being applied. In the case of energy trading, distributed ledgers were supposed to be ideal because they were said to scale up to handle millions of transactions rapidly and cost effectively.

In practice, though, the blockchain technologies available in 2018 were neither fast nor cost-effective. For a transaction to be validated on a blockchain, it has to be registered on multiple blocks across the distributed ledger. On bitcoin in 2018, this meant registering a transaction on at least six blocks, at an average rate of around ten minutes per block.

 

 

At the time, the bitcoin network could only process up to seven transactions per second, which caused congestion leading to transaction confirmation delays of up to 16 hours. And at the end of 2017, bitcoin users were reporting fees as high as $16 for a $25 transfer. Transactions without a fee or with too low a fee during peak usage just sat in limbo, reported CoinDesk, a cryptocurrency sector website.

Most energy blockchain companies were using a technology called Ethereum, which was seen as being more advanced than the bitcoin platform. But even Ethereum was poorly suited to support transactions of a few kilowatts, over time spans of minutes, with transaction fees in cents.

In fact, one challenge for using blockchain in such situations is that it is perfectly possible to build trading platforms without the technology. The Australian firm GreenSync, for instance, has a decentralised energy exchange that does pretty much all the things that blockchain companies promised, but without a blockchain.

 

FAMILY FORTUNES

The third factor clouding the value of blockchains for the energy sector was the success of the most famous blockchain concept in the world, bitcoin. Bitcoin’s appeal as a currency was that it could be exchanged without the need for intermediaries such as banks.

To do this, transactions are logged on the bitcoin blockchain and authenticated via a process called proof-of-work, which involves completing computing tasks that increase in difficulty along with the size of the network. The system makes bitcoin practically impossible to crack. But as the bitcoin network has grown, so have the energy needs of the computers used for “mining the virtual coins.

As of April 2021, the Cambridge Centre for Alternative Finance, at Cambridge university’s Judge Business School, estimated the bitcoin network’s power requirements were running to around 142 terawatt-hours a year, or more than the whole of Norway. Since much of bitcoin mining takes place in China, which got more than two thirds of its electricity from fossil fuels in 2019, bitcoin’s runaway power needs were an embarrassment for technologists claiming blockchains could help with the energy transition.

These three factors led to a rapid thinning out of energy blockchain schemes. One analysis of three dozen high-profile energy blockchain start-ups found only 55% were still active by mid-2019. Nevertheless, “I wouldn’t call it a failed experiment,” says Boden from Charles River Associates.

 

QUIET REVOLUTION

Energy blockchain companies may have gone quiet, but they are still out there. One of the main things that has been keeping them busy is finding a blockchain that is better suited to the energy industry than Ethereum. So far, the best bet is a blockchain called EW Chain, developed by Energy Web Foundation, a Swiss non-profit organisation.

Its main advantage over Ethereum and other blockchain platforms is that it does not use the proof-of-work validation system that has led to bitcoin’s soaring energy consumption. EW Chain went live in June 2019 and has been adopted by energy blockchain developers for applications such as tracking guarantees of origin, supporting electric car charging and integrating distributed assets into demand generation programmes.

Another contender is the technology being developed by the non-profit IOTA Foundation in Germany with backing from the European Commission’s Horizon 2020 programme. IOTA Foundation’s ledger is not hosted on a blockchain, but on a network called The Tangle. It is an open, scalable distributed ledger without fees for the burgeoning proliferation of internet-connected devices known as the internet of things (IoT). In The Tangle, each network participant has to validate others’ transactions before their own transactions can be validated. This means there is no need for “miners” and no cost for participating.

Florian Doebler, from IOTA Foundation, says a major advantage of The Tangle is that it is not restricted to a particular industry, as is the case with EW Chain. Because they can be used without the need for a central authority, “The potential for blockchain and, more broadly, distributed ledgers such as ours to revolutionise energy, sustainability and environment is quite obvious,” he says. “However, there’s just too many shortcomings in the first and second iterations of blockchains.” The Tangle is designed to work with low-power devices such as sensors, resulting in negligible energy consumption per transaction. But it is still in its infancy, with IOTA Foundation only launching a testbed for developers in June 2020 and a new release of the network scheduled in the first half of 2021.

 

EARLY DAYS

Given the early stage of adoption of distributed ledgers such as EW Chain and The Tangle, plus the immaturity of regulations for applications such as peer-to-peer trading, it is fair to say that energy blockchain and similar technologies are still a work in progress. It remains to be seen how useful they will be once the technology and regulation matures. For peer-to-peer energy trading, at least, a key benefit of blockchain platforms is that they make it easy to exchange cheap, low-carbon electricity production.

 

Many utilities in prime energy blockchain markets, such as the countries of Europe and the Pacific Rim, are already moving towards low-carbon generation and there is nothing simpler than staying with your existing energy provider. Even if technology and regulation fully supported peer-to-peer energy trading via distributed ledgers, it is still uncertain whether enough people would take it up to disrupt the utility sector.

Thomas Boermans, head of foresight, group strategy and innovation at E.ON, a German power company, feels such applications might only appeal to energy nerds, “If they are not designed and perceived to be fully convenient.”

He adds, “People will want sustainable energy at competitive prices in a convenient way. They want to use their hair dryer, not fiddle around with trading.”

 

STILL AN OPTION

Maze-Rothstein at Wood Mackenzie points out that back in 2017, “everyone” thought there was going to be a huge application of blockchain.  “My perspective, at the time and today, is that when it is going to be crazily successful is when it becomes this back-office software that no one knows is actually blockchain.”

It is telling that many major utilities, from Iberdrola in Spain to Kansai Electric Power in Japan, have investigated blockchain technology. But it appears the level to which it is being used by them today is limited. Now the hype has died down after the initial flurry of activity and the technology is slowly getting up to scratch, it is possible that blockchain could re-emerge in the energy industry as what it always was at heart: a relatively basic technology tool rather than an instrument for revolutionary change. •

 


TEXT  Jason Deign ILLUSTRATION Clara Terne

 

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