2008 was a watershed year for the global economy. At the same time that the market meltdown was happening, the birth of cryptocurrencies brought us Bitcoin, the first of the flood of cryptocurrencies (decentralized digital currency) now numbering over 1,500. The sector is growing fast partly due to the open source nature of the underlying software and the perceived opportunity. Cryptocurrencies are attractive because of the following attributes: distributed ledger, security, reliability, speed, accessibility, forgery proof, lower fees and an international reach and as we’ll see here, plenty of scope for making other industries including energy, more efficient.
Blockchain is the name of the digital ledger system that tracks a cryptocurrency. When Bitcoin initially launched in 2008, the “proof of work” algorithm on which the blockchain ledger is based offered 50 bitcoins for every block (a ledger of transaction data) generated. This number halves every 4 years and is now 12.5 bitcoins per generated block, still a valuable incentive to Bitcoin miners, computer hacker types who are able to compile and compute the blocks. Energy consumption for this activity is commensurately high. A recent Greentech Media article quoted the electrical consumption of Bitcoin alone at 32 Terawatt hours (TWH) annually, more consumption than 159 countries, including Ireland. Given that a single Bitcoin transaction is equal to the energy consumption of 4,000 credit card transactions it is not surprising that a smaller competitor, the world’s number 2 blockchain network, Ethereum uses less power at 11 TWH annually, still the same energy consumed by Zambia.
While Bitcoin and Ethereum apply broadly, individual industry specialized cryptocurrencies are springing up and the energy industry and renewable energy in particular offer cryptocurrencies a uniquely receptive market and an opportunity to change the way that electricity is bought and sold. Today there are over 122 organizations involved in energy blockchain technology and 40 projects in operation. One example is SolarCoin which wants to transition the energy consumption of blockchain to carbon-free resources and reduce power consumption, making it thousands of times more energy efficient than Bitcoin.
Renewable Energy projects offer a perfect growth industry for blockchain, offering to replace existing cumbersome, lengthy trading and clearing activities with a clean and efficient marketplace. The many different sources of generated electrons all merge in the grid, but the blockchain ledger could tell you which electrons came from which source. Certificates, RIN credits, tax credits and other guarantees are all mechanisms whose complex data and the cash flows are dealt efficiently by blockchain. Storage has brought with it a potentially complex distribution of cash flows from “value stacking”, a perfect target application for a blockchain. Additionally, blockchain can allow spinning reserve capacity used to back up intermittent energy sources, to be improved by more efficient energy transactions closer to production.
L03 Energy, a solar installer based in Brooklyn, NYC, launched in 2016 and claims the very first credited peer-to-peer energy transaction between two Brooklyn neighbors in April of 2016. In December 2017, L03 formed a joint venture with Siemens called the Brooklyn Microgrid Project based in Gowanus and Boerum Hill. This area of Brooklyn has a relatively high concentration of solar installations and with smart meters there is ample data to work with. Starting with 5, there are now 60 partners all using a trading app to timestamp small-scale trading of neighborhood power and microgrid electricity transactions. Blockchain is a great tool for an interconnected community of smart homes.
The National Renewable Energy Laboratory (NREL) is also working with blockchain and a blockchain web services provider called BlockCypher to explore supporting distributed energy markets. NREL sees blockchain as an enabling technology to facilitate continuous competitive pricing along with low transaction costs and efficient matching of energy demand and supply and most importantly to find a way to leverage underutilized energy capacity. There is a growing consensus that the underlying technology is here to stay because cryptocurrencies solve problems in myriads of industries.
Furthermore, In May of 2018, the Rocky Mountain Institute (RMI) announced that ten global energy companies had joined the Energy Web Foundation (EWF), a nonprofit, to accelerate the commercial application of a public, open source blockchain technology in the energy sector and eliminate the complexities surrounding the management of distributed energy resources. They raised more than $17 million in funding from 27 partners including Shell, Exelon and Duke Energy. The focus here is the smart contract between two devices and not between two groups or individuals. One smart meter can be programmed to buy solar power at x price or x cubic feet of gas from a pipeline, and another can be programmed to sell those items when the price is right. When that happens, a transaction occurs, and the devices execute the contract. All participants know that they are getting what they want. The transparent blockchain ledger guarantees that the electrons you buy are green ones. You have a producer, a consumer, and then blockchain certifies the transaction.
We are still in the early days and many pilot applications of blockchain have yet to be deployed, operated and analyzed before the vision is either realized or discarded. Given the power of the arrival of this new technology and the eagerness with which it has been embraced by so many market participants its longevity almost feels assured.