Blockchain in the Energy Sector

It is a well-known fact that energy markets sustain both our economies and our daily lives simultaneously. The necessity for all companies and every household's constant energy requirements are paramount today. In numerous countries worldwide energy market regulation already exists, and hence this results in energy suppliers enjoying a monopoly. However, liberalization is moving forward here, and hence this will ultimately have an impact on energy pricing in conjunction with both supply and demand. Within today's energy markets, blockchain is predicted to reach a market size of around US$ 7,110 million in the next 3 years, at a compound annual growth rate, (CAGR) of 78.32%, from an estimated US$ 394 million only 2 years ago in 2018 [ ]. The increasing prevalence of blockchain technology in the energy sector has played a large part in the acceleration of growth, together with the requirements for improved infrastructure management and global security concerns. 1 Challenges in Energy Markets One of the major challenges today is with regard to fossil fuels and where their future usage now lies. A distinct transformation recently has been a diminishing reliance on coal and the insurmountable advantage of oil in energy markets, this phenomenon is well known within the industry and is classed as lock-in. Various large projects in Canada’s Teck oil sands were canceled [ ], and the Australian Bight offshore oil fields [ ], along with the abandonment [ ] of the Williams companies gas pipeline venture in New York; and the generally declining allure of oil equities all point to a more difficult path forward for fossil energy [ ]. 2 3 4 5 Furthermore, numerous coal power plants in the USA are planned to be decommissioned within the next 5 years, resulting in a loss of 27 gigawatts of power, [ ] regardless of support from the current US administration. 6 Environmental concerns and opposition to big projects from state governments are considered to be the root of fossil fuel’s recent challenges, and also from the growing competitiveness of alternatives like wind and solar power, which are often the cheapest sources of new electricity generation. However, on a positive note, this has also resulted in a major source of new jobs in this field [ ]. 7 Renewable energy will continue to grow, although it is likely to become a mainstream part of the energy industry, it will continue to face headwinds. These challenges to be overcome are mostly based on the intermittency of solar and wind power. Intermittency can be addressed by reducing the cost of electric storage batteries, and by the buildout of extensive electric transmission lines used to transport electricity from high windy areas, to where power demand is greatest at any given moment. Both solutions would help counteract the variability of solar power. However, new power line projects which are planned to run over long distances from state to state, have encountered opposition in the U.S from certain states geographically located in between that have little demand for additional power. Demographic changes are also likely to influence climate politics, and furthermore, the longer-term role of natural gas is unclear. This is due to the fact that natural gas is considered as a kind of transition or bridge fuel. This has become an area of concern now as the push to decarbonize is very much in the spotlight, so this does not bode well for natural gas. In the future, this will depend on how the renewables can be controlled. If renewables including solar-plus-storage become competitive, this will result in the demise of natural gas usage over time. Research [ ] has shown that in many cases solar-plus-storage can provide electricity more cheaply than gas peaking turbines, and battery storage alone will be cheaper than gas-fired electricity in the coming years [ ]. Finally, all energy-related industries that have trouble reducing emissions are already facing scrutiny, and these challenges are only likely to increase globally. 8 9 Benefits for the Energy Sector The introduction of blockchain into the energy sector offers numerous advantages such as improving visibility, increasing operating efficiencies, and streamlining regulatory reporting. In addition, blockchain can also provide further control and efficiency to energy consumers. As the energy industry generally consists of a networked infrastructure, this makes it particularly well suited for blockchain technology applications. In addition, with the rise of the ‘Internet-of-Things’ (IoT), the entire energy industry in the future will find its operations transformed into a vast global network of connected devices. As blockchain is an immutable ledger, this, in turn, provides real-time and secure updates of energy usage. For example, the Chilean National Energy Commission (CNE), launched a blockchain energy project back in 2018, which was designed in order to track, store, and record energy data. Furthermore, CNE plans to provide public access to the data containing prices and transactions. Hence, the possibilities of exploiting the data for nefarious reasons is greatly reduced due to the openness and transparency of public blockchains. Blockchain Increases Efficiency in the Energy Market The power industry is one of the major end-users of blockchain. In addition, this segment is predicted to hold the highest market share during the next decade. The management of distributed energy resources, coupled with efficient and cost-effective solutions is just part of the benefits of deploying blockchain technology within the power sector. Furthermore, on a broad level, blockchain enables real-time coordination of electricity demand and supply data, which can, in turn, improve demand-side energy efficiency. In addition, to increase the supply side efficiency, blockchain can also be used to accurately monitor and control energy performance in real-time, hence resulting in being mutually beneficial for both suppliers and consumers. Blockchain Prevents Data Manipulation and Boundary Attacks In today's increasingly connected, data-centric environment, the management of sensitive data is paramount. Therefore blockchain's immutable, decentralized ledgers employ public-private key cryptography that supports granular read/write access controls to authorized users. This in turn prevents data manipulation, safeguards customer privacy, and data confidentiality. Furthermore, blockchain technology prevents unwanted attacks in the vast myriad of connected endpoints/devices. This is known as boundary or perimeter protection and is ranked as the top industrial control system weakness for the previous two years by the U.S. Department of Homeland Security. Boundary protection refers to the measures taken at the enterprise information perimeter, in order to protect internal assets and data. For example, the perimeter includes IoT devices that may be located outside a company’s physical domain but actually connect with an internal network. A recent report by Ernst & Young [ ], predicted that in the gas and oil supply chain, boundary vulnerabilities are set to multiply with the increased adoption of connected devices. For example, where an attack on a network device may occur, the associated recorded data cannot be manipulated due to blockchain's immutability. Furthermore, due to the decentralized nature of the consensus mechanism, it prevents any illegal transactions from being executed. In addition, the network can be configured to continue operating despite node failures. To conclude, due to its unique distributed design, blockchain technology provides a new line of defense in the face of rising threats and cybersecurity vulnerability. 10 Blockchain Technology Applied The Energy Web Foundation The Energy Web Foundation, (EWF) [ ] is a global nonprofit organization that focuses on unleashing blockchain's potential in the energy markets. Currently, they maintain offices in Switzerland, Germany, and the United States, and using blockchains decentralized technologies, are promoting a low-carbon, customer-centric electricity system. 11 Last year the first open-source, enterprise blockchain platform known as the Energy Web Chain was created and launched by the EWF, specifically for the energy sector. The EWF has taken further steps forward and created an Energy Web Decentralized Operating System, which consists of various decentralized solutions. The Energy Web Foundation has become somewhat of an authority on energy blockchain-based applications and is considered to be the industry’s leading blockchain partner. Some of the most well-known use cases for deploying blockchain technology consist of peer-to-peer energy trading, wholesale electricity distribution, energy data management to next-generation smart grids, and many more. These are described in further detail below. Peer-to-Peer Energy Trading A peer-to-peer energy trading model is another advantage of using blockchain technology. Distributed Energy Grids (DERs), offer the possibility for consumers to actually sell unwanted power, mostly generated by solar panels, back to the grid. Using the blockchain's decentralized approach, can assist in enabling customers to sell excess power to each other within a given area, and executing numerous, small-sized energy transactions in a cost-effective manner. Hence, consumers could have an increased incentive to act as suppliers of the excess energy, whilst simultaneously keeping an immutable record of all transactions. For example, their solar panels produce and take a more active role in their energy supply sourcing, such as favoring local and/or renewable production sources. Various utilities and startups globally are planning projects within this arena. For example, Grid Singularity, a European startup, is focusing on the exchange of granular and private data between different parties within the PSI of Switzerland's Energy & Environment division [ ]. 12 Furthermore, larger energy firms are also participating in energy trading platforms. British Petroleum p.l.c. and Austria's Wien Energy are among the firms that took part in an energy trading platform trial earlier this year [ ]. 13 Wholesale Electricity Distribution Another potential use-case is utilizing distributed ledger technologies in wholesale autonomous trading procedures. It is well known that the services of third-party intermediaries such as brokers, exchanges, trading agents, price reporters, banks, regulators, and logistic providers are required within the mass-energy markets. Hence, there are key entities and procedures that are required in any financial trades between companies. This currently involves manual post-processing and increased communications, in order to consolidate information that is held separately by each part of the transaction. As a result, current procedures are slow and time-consuming, as transactions need to be verified and reconciled multiple times from initialization to final settlement. This results in additional costs due to the low speed of transactions, which can unnecessarily impede small-scale and distributed energy generators. Energy Data Management With regard to data management, the blockchain acts as supporting technology and can perfectly manage all data collected through electricity meters, and facilitate real-time consumption monitoring. In addition, providing the ability for consumers to securely share subsets of data to the market, results in more efficient data management. Furthermore, blockchain offers the possibility to provide consumers with control over their energy sources, as being an immutable ledger, this offers real-time and secure updates of their used energy. The global energy markets solutions (Engie), has experimented with a number of tests in this space, including blockchain infrastructure connected to water meters to trace flows, as well as identify issues in need of repair [ ]. 14 Commodity Trading Wholesale energy and gas markets require coordination between a wide range of participants including brokers, exchanges, logistics providers, banks, and regulators. Legacy data management tools make coordination between these participants slow and expensive. In some markets, current procedures require manual post-processing. In other markets, stakeholders have developed centralized proprietary trading systems, that due to high costs, effectively lock out smaller participants. Commodity trading systems built on decentralized ledgers provide the required security, immutability, and real-time view of pricing and transaction status. This is necessary to replace expensive proprietary systems, and hence open the door to a wider variety of market participants. Smart contracts can enable automation of processes like KYC and payment upon receipt, further improving market efficiency. The most unique advantage for this use case in the commodity and energy trading market is the creation of an ecosystem that encompasses the start-to-finish transaction life cycle, in essence, a private blockchain network. Finally, this results in potential cost savings coupled with improving processes more efficiently. Utility Providers In general, electricity power providers are usually large and complex organizations that generate their energy from power plants, solar farms, and various other energy sources. An opportunity exists here to utilize blockchain in order to provide shared, immutable data between the actual utility providers. This can prove to be beneficial for both the utility companies and the end customers, as unlike in the financial services and banking industry, these providers are happy to share their data, which could be implemented on a shared blockchain ledger. Distributed ledger technology offers distinct benefits to utility providers, as blockchain can process, validate, and secure the data from numerous network elements and devices at the power systems' grid edge. In addition, energy providers can utilize blockchain in order to create a system for transactions of critical distribution data. Oil & Gas Resource Exploration The gas and oil industry is a vast sector in its own right and consists of numerous companies worldwide. These companies can be broken down into three categories: downstream, midstream, and upstream. To acquire the actual end products this often necessitates that many separate companies and entities are involved, coupled with the required legal agreements and processes, so many possibilities to utilize the benefits of blockchain exist. Various use cases, such as digitizing crude oil transactions for one, which would ensure enhanced security, improved transparency, and optimized efficiency exist. A blockchain solution has already been developed for commodity trading for US crude oil transactions by a French corporate investment bank called Natixis. Furthermore, as the oil and gas industry is among the most heavily regulated in the world, with protocols deriving from various regulatory authorities from environmental to taxation; blockchain can augment the all-important compliance requirements. Improved visibility by the regulatory authorities within the industry can be achieved, as the transactional data can be stored in an immutable blockchain network. Furthermore, as oil is one of the most valuable non-renewable energy sources in the world, a cryptocurrency that is pegged against the price of oil could be a viable replacement for traditional financial transactions. Finally, deploying such a cryptocurrency could enable direct transfer of value between various parties within the industry, without the need for the usual trusted intermediaries such as banks. In the world of oil and gas, blockchain implementation in trading platforms offers the possibility to reduce associated costs regarding the maintenance of numerous trading platforms. Furthermore, additional costs with regard to data management, labor, inter-system communication, and settlement delays can also be reduced. A pioneering enterprise blockchain company, known as the BTL group, recently performed a pilot project with ENI [ ] and BP [ ]. The outcome proved that utilizing blockchain technology for tracking and facilitating gas trades resulted in an overall cost reduction of 30–40%. 15 16 Integrating Distributed Electricity Generation (DER) Another area of improvement exists with regard to integrated distributed power generation. It is well known that conventional power generation utilizes large-scale facilities such as coal-fired, hydro, gas, and nuclear-powered plants. Traditionally the power generated at these facilities is typically transmitted over extended distances, which limits the flexibility, and further results in significant costs being incurred in order to supply the power over a wide area. DER systems [ ], by contrast, consist of small-scale facilities such as solar and wind farms and are located close to the location which requires their generated power. DER has become more feasible nowadays especially with the latest technological advances. For example, solar panel installation is growing swiftly in numerous regions. However, using legacy data management tools, it is difficult to price, distribute, and integrate DER into both local micro-grids and wider regional grids. 17 Unfortunately, much of the aggregated power generated ultimately goes to waste, as conventional grids lack the flexibility to adjust output and accommodate the distributed energy input. Blockchain supported electrical grid management accelerates the integration of DER by providing an interoperable platform for secure, immutable, automated, and transparent transactions. The end result here translates to ultimately lower costs for the consumers, as the grid becomes more resilient; and furthermore offers a higher potential for the usage of renewable energy sources. Climate Finance Both the energy certification and the carbon credit markets face structural processes and political barriers that need to be addressed, and which cannot be rectified by using the existing governance and legacy data management systems. The result is an inefficient market where participants are unable to adequately quantify carbon risks. This in turn impedes the market from effectively responding to growing climate risks. Using blockchain technology, a decentralized trading and governance platform can enable efficient trading, pricing, and management of carbon credits, low carbon investments, and renewable energy certificates on a global basis. Both international and local political barriers can be overcome with the implementation of a robust and transparent governance framework. A transparent, verifiable, and immutable ledger can provide market participants with both the confidence and required level of trust to initiate transactions. With the deployment of these features, this can in turn enable a reduction in carbon trading costs, which is highly beneficial if climate risk is to be priced into investments. Furthermore, the tokenization of low-carbon financial instruments can drive the uptake of climate-sustainable investments, and also increase accessibility for investors. Blockchain can be deployed to both carbon trading systems and green finance schemes, which are crucial to support the implementation of developing member countries’ nationally determined contributions; as agreed in the 2015 Paris Agreement against climate change. The annual financing in the energy sector by the Asian development banks [ ] is around $US 5 billion per year, of which around 50% is designated to clean energy, which can be determined as energy efficiency and renewable energy projects. 18 The remainder of these funds is allocated to distribution and transmission systems. With the advent of blockchain, the Asian development banks' energy sector activities can have even larger development impacts and finally provide further momentum throughout the APAC region, towards the ultimate objective of economic de-carbonization. Next-Generation Smart Grids Smart grids have the ability to manage and monitor the transport of electricity to meet the end-users' varying demands. This in turn enables all segments of the power network to operate as efficiently as possible, minimizing costs and environmental impacts, whilst maximizing system stability, and reliability. Smart grids coordinate the requirements and capabilities of all grid operators, generators, end-users, and electricity market stakeholders. A smart grid network encompasses numerous connected IoT devices, which can react to electricity grid signals by adjusting their power consumption accordingly, as and when required. Hence, certain devices, for example, water pumps and battery chargers exhibit flexibility in terms of when they actually require power. This offers the possibility to control them with regard to supplying their power requests, only when the power load and demand on the network is low, hence resulting in a lower price. The current centralized legacy grid management systems struggle to facilitate the integration of both IoT devices and distributed electricity generation. However, using blockchain to support these systems, enables these functionalities and processes to be realized in an efficient, resilient, and cost-effective manner. Conclusion The potential to decentralize energy markets and improve flexibility with blockchain technology is huge. Blockchain solutions can also be used to control energy performance and accurately monitor in real-time, which in turn results in increased supply-side efficiency. In essence, blockchain offers the possibility to provide energy companies with efficient and resilient methods, to efficiently track both energy usage and generation. Furthermore, identification of network issues and outages can immediately be tracked, resulting in improved response times. One example that has already been deployed by an existing energy company, is being used to monitor water, natural gas, and energy flows. In addition, further plans are in the pipeline with regard to implementing security and infrastructure solutions using blockchain technology. Energy systems today are undergoing rapid and fundamental changes in order to accommodate the embedded renewables, such as solar photo-voltaics and wind. These renewable energy sources are currently undergoing massive development due to the unbundling of the energy sector, which is further boosted by both energy and financial policy incentives. In today's world advanced communication and real-time data exchanges between different sectors of the power network on a nationwide scale are paramount. Local distributed management and control techniques are necessary to accommodate the new decentralization trends. The advent of blockchain, which plays a primary role here in facilitating distributed transactions, which negates the requirement of central management, will ultimately dominate the future infrastructure of the entire energy sector, thus addressing many of today's unwanted challenges. Benefits of the initiative: Enhanced management of the energy sectors growing complexity. Decentralized storage of transaction data, leading to increased security and greater independence from a central authority. Immutable operational and consumer transactions. Enhanced optimized efficiency and improved transparency. Reduced risks of cyberattacks. Lower operational and consumer costs. Elimination of third-party intermediaries by deploying new decentralized business models. Energy Market Blockchain Applications The energy companies running blockchain pilot projects are working towards the restructuring of information management that will reform supply chain management, security, and back-office processes. Testing and experimenting with blockchain applications is already well underway within the energy industry. A fundamental change here is the move from legacy processes and technical debt, to a new set of trust-based, scalable, and automated procedures. This has led to the elimination of current costly requirements such as third-party brokers and reconciliation practices, which at a time when an avalanche of newly available data; including the mass deployment of sensors, rising security threats, and increasing machine-to-machine communication is overwhelming the outdated legacy systems.