Missing Link? How Blockchain Could Affect The Future of Energy

For many people, the concept of blockchain careened into realization due to the prominence of the Bitcoin cryptocurrency. The astronomical price surge of Bitcoin in the second half of 2017 seen via a peak unit Bitcoin price in the region of $20 000 coerced public attention. This ranged from long time cryptocurrency advocates, to would-be investors experiencing Fear of Missing Out (FOMO) and to general on-lookers attempting (and potentially still currently trying) to understand how Bitcoin exactly works.

What has however been of increasing realization is the revolutionary foundations that Bitcoin is based on i.e. Blockchain. The goal of the article is to describe how Blockchain fundamentally works and combine that with how its functionality is being and could be further applied in reshaping energy and its future.

What is Blockchain and how does it work?

Blockchain is a digital data storage concept that can be described by breaking down the two words contained. “Block” refers to a digital block of information relating to a transaction of any kind. “Chain” refers to how many of these digital blocks are linked together as part of a connected computer network (nodes) that agrees and validates the blocks that make up the total transaction information contained/stored on the whole network. Everyone participating on the chain has access to view this combined network and its transactions. In more technical descriptions, the chain part can be referred to as a form of Peer-to-Peer distributed ledger.

Each block of transactional information referred to above will constitute 3 main components to its structure:

Data: This depends on the type of blockchain i.e. what transactions it records and would also include a date & time stamp.

Hash: This is a cryptographically generated sequence of letters and numbers that acts as a digital fingerprint for the block and is based on the data contained in the block. A change to the data therefore results in a change to the hash.

Prior block’s hash: This is the hash of the block preceding the current block i.e. one transaction before.

Using this summarized structure of a block reveals the main theoretical and practical characteristics that make blockchain the sort of intriguing data storage concept it is.

The data record is secured by linking the information blocks such that if there is change to or tampering of information in a block, that change affects not only the block (via its hash) but all blocks succeeding it (via prior block hash part). Blocks that do not successfully fulfill the architecture are then rejected from the overall network or transaction ledger and the network then takes a form of consensus on what the agreed transactions up to that moment in time are. (See also Proof of Work mechanism to ensure tampered blocks aren’t accepted on network).

This inability to easily tamper with data records means that once a transaction block is successfully added onto the network, it cannot be easily altered and provides an exact record of data at the time it was created. This is why blockchain is usually referred to as an immutable record of data. This plays an important role in validation , fraud prevention and transparency. In addition, it can also reduce transactional timeframes and middle-man party dependence as data verification processes are built into the block creation mechanism.

Highly simplified end-to-end example

For illustrative purposes, we can imagine a blockchain being used to record transactions for wool. One of the many simplifying assumptions here being that this closed system has 3 parties: A sheep farmer, woolen hat manufacturer and woolen hat customer.

Having established this background here are some example of how blockchain is being applied in energy.

Supply Chain Traceability

One of the areas most associated with were blockchain can make a significant difference is in supply chain traceability. Blockchain allows the tracing of inputs and where products ultimately originate from. This can be seen as a source of increasing competitive advantage as Environmental Social and Corporate Governance (ESG) based investing gains traction and the tracing of inputs comes under increasing scrutiny. This is with respect to issues like counterfeit goods, usage of child or oppressed labor, environmentally damaging onsite production behaviors and other exploitative practices in the sourcing and manufacturing of products (extending to areas like food and agriculture as well e.g. IBM’s Food Trust). In early July 2020, Volvo announced it would be investing into supply chain focused blockchain Circulor in a bid to eliminate unethical sourcing in its supply chain particularly for the cobalt that goes into its electric car batteries.

Peer-To-Peer Electricity Transacting

As discussed in the Futurewattage article, Solar Flair, one of the beneficial features of solar energy is the ability to facilitate distributed generation by individual households and businesses. This means that the solar electricity they generate enables prosumer characteristics where households and businesses can consume electricity but also deploy excess production into a viable grid such as a micro-grid. This means that blockchain’s peer-to- peer nature can play a role in the process of transacting and trading this electricity. One can take this a step further and envisage a possibility where electricity from electric vehicles discharging into a viable grid can be tracked and transacted in a similar way. To this end, Thai renewable energy company BCPG has been piloting a solar rooftop pilot project and peer-to-peer trading platform at the T77 community in Bangkok in collaboration with Australian start up Power Ledger.

Guarantees of Origin  & Renewable Energy Certificates

A Guarantee of Origin (GoO) is a purchased digital document which proves that electricity originates from a renewable electricity generation source e.g solar, wind or hydro. The GoO mechanism was developed by the European Union in 2001 via legal EU Directive. By purchasing the GoO from an Issuing Body, electricity routed to the consumer is ultimately tied to the renewable energy sources identified by the GoO. In addition, the GoO is also tradeable which combines with its issuance to be a market mechanism that promotes renewable electricity generation preferences for household and business consumers. In the context of businesses, this has potential to tie into to ESG given that GoOs would allow quantification and disclosure of ESG targets and results. In other jurisdictions such as the US and Canada, the framework used is that of Renewable Energy Certificates (RECs) but the principle is broadly similar. Another variation of this is the International Renewable Energy Certificate (I-REC) which are at various stages of implementation globally.

Blockchain can enhance this process and some of its improvable elements which relate to the decoupled timeline between GoO purchase and electricity delivery. There is the example of Spanish utility company Iberdola which is employing block chain as part of improving the GoO mechanism and process.

Other considerations for the future

There is a whole lot more happening in the blockchain space. Other examples exist such as growing use in billing as well smart-contracts. Observed and extending examples do not however mean significant challenges do not still exist and require overcoming with blockchain. Beyond technical challenges e.g. scalability and privacy, other challenges relate to regulation given how regulation heavy energy is as an industry. The industry also has a legacy of high levels of inertia in enacting change. The overall belief though is that blockchain usage will continue to grow across the sector. As a technology, it allows a new path of how energy and indeed the broader internet can function. This means while the path to the future of blockchain in energy may take vastly different forms and intensities, it at least puts energy on a path of solutions previously not conceivable. This is the perpetual spirit of discovery that keeps mankind progressing towards evolutionary higher-level solutions.

By Tare Kadzura

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