Blockchain is often thought of as bitcoin or cryptocurrency, but it has many other applications. Blockchain has an associated technology known as “smart contracts.” Blockchain and smart contracts are emerging as major applications to electricity markets and to renewable energy and energy storage as these energy technologies revolutionize electricity as we know it.
Most industries and markets struggle with a disruptive technology. Energy as we knew it—centralized, regulated utilities dominated by coal—is rapidly evolving as solar, wind, and energy storage revolutionize the business. Solar and wind have been growing rapidly, while coal plants are shutting down in large numbers because they can no longer economically compete, and their climate risk makes them wholly unattractive for investment in the United States.
Decentralization in terms of distributed energy and storage further contribute to a rapidly changing energy market. Storage is becoming cheaper. Blockchain and smart contracts are emerging at about the same time. Combined, these developments present an opportunity to distribute, decentralize, and decarbonize electricity all at the same time.
Background on Blockchain and Smart Contracts
Blockchain is a form of a distributed ledger where computers or nodes manage the blockchain and its transparency and accuracy. With a copy on each node, if any changes are made to the blockchain, it changes the last number in what is known as a “hash.” Thus, everyone knows if “cheating” has occurred, and the distributed or decentralized nature of blockchain allows for a means of maintaining the records on a blockchain.
Smart contracts are computer code that are managed on a blockchain, mostly on the blockchain know as Ethereum, so that when a particular input occurs, an action is triggered. The “If This, Then That” nature of the code allows for automatic actions based on the input. Thus, smart contracts might act as a form of “escrow,” paying out when a certain event occurs. This allows input from reliable outside sources such as government weather sites, GPS location, sensors, and the Internet of Things. With automation in smart contracts, dispute over the triggering event can be reduced or eliminated if the parties agree in advance on the source of the data.
Blockchain, Renewable Energy Certificates, and Carbon Credits
Blockchain and smart contracts have applications in renewable energy. An example is the use of blockchain to manage renewable energy certificate (REC) transactions. Through their renewable portfolio standards, states provide for the generation of RECs for each megawatt (MW) of renewable energy produced. On the private, “voluntary” side, private entities review and certify renewable energy generation. The resulting RECs from either source may be sold separate and apart from the electricity in what is known as “unbundling.”
When the buyer of the REC uses the credit to demonstrate an “offset” of the use of 1 MW of electrical use, then the REC is retired and can no longer be used by any other power user.
Blockchain as a distributed ledger provides a means of preserving the accuracy and avoiding fraud in REC transactions. One key concern in REC transactions is double selling of the credits. With blockchain, the second transaction would be recognized as invalid by the confirmation process and would not be verified; making double selling impossible. Thus, it brings greater reliability to the system.
Blockchains are also cryptographically secure. Hacking reports in the cryptocurrency market relate to exchanges, not the blockchain itself. Transactions recorded in a digital ledger allow more transparent tracking of transactions because they are available to all the participants in the exchange. Through cryptographic protection, transparency, and avoidance of double selling, the risk of fraud is reduced. Similarly, carbon credit sales and retirement can be placed on a blockchain platform. Companies are working on developing blockchain platforms for the trading of carbon credits and RECs that provide a more transparent and secure means of trading these critical assets that promote renewable energy and reduce greenhouse gas emissions.
Distributed Energy Resources and Blockchain
Energy is getting smaller. Smaller generation sources in terms of wind farms and solar farms are replacing large coal and natural gas plants. Renewable energy is reducing the size of power generation. This is more true with what is known as “distributed energy,” where power generation occurs at or near the point of use, such as solar panels on home or commercial rooftops.
With the decreasing cost of batteries, energy storage is entering the electric grid. Larger storage systems are being installed at solar and wind farms or as separate operations. Smaller systems are being installed at homes and businesses as a growing part of solar plus storage at a distributed level.
As energy is moving toward a more decentralized system—distributed energy and distributed storage—blockchain, at the same time, is an emerging distributed ledger for tracking transactions. Distribution and decentralization are key aspects of distributed energy resources and blockchain technology. These technologies, along with artificial intelligence, may enable each other’s development.
For a decentralized energy network to survive, it must have cyber security. Blockchain is cryptographically secure.
Energy evolution requires the ability to track and react quickly to rapidly changing grid conditions because over time there will be thousands or more distributed solar generation sites and energy storage sites. To manage a grid under such rapid change over time and to manage all of the millions of additional transactions, blockchain provides the technology to track and transact all of those transactions with a distributed ledger and to be more efficient than a centralized intermediary.
Individual and aggregated groups or energy generation and storage can interact with each other to produce outcomes beneficial to each other and the users of the distribution system in a particular area.
The small size of the transactions, limited knowledge of participants in the market, and the large number of such transactions require an automated approach. Blockchain married to artificial intelligence will allow algorithms to execute the trades and record those transactions on a blockchain. The algorithms will present questions to customers through smart phone apps to allow them to trade energy and energy storage resources to other third parties, such as other homeowners or commercial entities, or to utilities, retail electric providers, or grid managers.
These distributed systems managed by computer systems will be key to managing both the distributed energy network and the larger electric grid connected to wind and solar farms and utility-scale storage. These distributed systems are also leading to the emergence of what are known as “micro hedges” to allow the hedging of energy prices at small amounts in terms of kilowatts and for short periods of time. Small commercial entities may manage electricity price risks that vary over the year, season, and day. The networked computer system then matches the most attractive offers by small power sellers, from owners of distributed solar or batteries, or both, creating competitive markets for distributed energy resources.
The new, disruptive electricity network is emerging at the same time as blockchain technology, and they provide a mutualistic relationship; for the distributed energy resources to work with the grid and local distributed system, blockchain may be a key enabler of that energy network. The convergence of these two technologies may create numerous lucrative opportunities for companies focused on solving these energy challenges and enable greater use of renewable energy.