Decentralisation and the blockchain: it is here, it is now and it can’t be blocked
For many years, the voices clamouring for the decentralisation of energy and utility systems, the adoption of new technology and the democratisation of energy have been shouting in the ears of government, regulators and energy companies across the UK and been largely unheard.
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Often regarded as isolated point solutions – solar PV, wind, ground source heat pumps, district heating, storage, electric vehicles, smart home – they have been easily dismissed by board rooms and managers alike as marginal and unlikely to affect the traditional, slow, asset intensive and non-switching customer business that have underpinned their careers and profits for the last 20 years.
But that attitude is turning out to be flawed and decision makers are beginning to wake up to the fact that their world is changing rapidly. The problem is, that whilst they were busy ignoring it, the change has already happened and it may be too late to save their business models.
So, why is this change happening?
“The institutions and processes upon which we rely are rapidly becoming obsolete”
There are many factors driving this change, of which three are arguably the most significant:
There is a fundamental mistrust of anything established and “large” (government, big business): from the unfolding anger on both sides regarding how to make Brexit happen, to Donald Trump’s use of twitter, expectations about the citizen’s role in how decisions are made on their behalf has become polarised and changed forever.
Everything must work on a smart phone or not at all: this is not a “strategic choice” for business or government; it is a given.
User experience for services, things and content must be immediate: entertainment accessed anywhere, anytime, on any device from Netflix and Amazon; algorithms deployed by Facebook and Google to tailor content to the individual; artificial intelligence in everything to enable service and utility for all at an affordable level.
The situation, then, is that technology, previously seen as isolated point solutions is becoming much more connected and able to be bundled together in ways that actually work, and fundamental factors in play that are favourable for mass adoption by individuals at a fundamental level.
But until now, there has been one thing missing; an underlying fabric that allows frictionless interactions between individuals and devices to occur, removing the barriers created by a lack of trust, out of date processes and closed systems that exist today. In short, the phenomenon widely known as the Blockchain.
It is the emergence of the decentralised internet of value, represented by blockchain and distributed ledger technology, that will provide the platform for true disruption of business models globally, and the energy and utility industry will not be safe from this disruption.
“The three pillars that will underpin decentralisation and disruption: distributed ledgers (blockchain), digital identity and trusted execution environments”
Although widely known as the blockchain, the technology enabling the complete restructuring of everything from payments, healthcare, retail, criminal justice, energy and utilities, banking, real estate, government, to the homes in which we live, consists of three pillars.
Distributed ledger: a secure way of making and recording transactions, agreements and contracts. Rather than being kept in one place like the more traditional ledger book, the database is shared across a network of computers. The use of complex algorithmic governance and the decentralised nature of a node-based network, enables the distributed ledger to provide an immutable record of the truth of a transaction. A blockchain database consists of blocks and transactions. Blocks contain batches of transactions that are “hashed” and encoded. Each block contains the hash of the block before it, which links the two and forms the chain. This process validates each block, all the way back to the original, and is integral to the database’s security.
There are three types of distributed ledger models in existence:
- Public blockchain: a distributed ledger that uses a native digital currency to incentivise the operation of a network without the need for trust, for example Bitcoin, Ethereum.
- Enterprise (private) blockchain: a distributed ledger that relies on consensus achieved via a network of trusted nodes, for example Hyperledger, R3, Ripple.
- Hybrid model: the basis of many of the use cases currently in operation, built on public blockchain infrastructure but with some form of permissioned node governance in place.
Secure digital identity: in a digital world, who we are and who we trust matters. Unless we have absolute confidence that the individual or device we are transacting with a) has a recognised set of credentials and b) is authenticated and authorised on a persistent ongoing basis, then a trust less decentralised network will breakdown. A “reputation layer” on top of the blockchain with the appropriate Level of Assurance (LoA) will be required; at the highest level this will involve private keys and three factor authentication (something you have, something you are, something you know).
Trusted Execution Environment (TEE): a secure area of the main processor in a smart phone (or any connected device). It ensures that sensitive data is stored, processed and protected in an isolated, trusted environment. The TEE's ability to offer isolated safe execution of authorised security software, known as 'trusted applications', enables it to provide end-to-end security by enforcing protected execution of authenticated code, confidentiality, authenticity, privacy, system integrity and data access rights. Along with end to end encryption of data, the TEE is essential for ensuring decentralised applications (Dapps), secure identity, authentication and algorithmic governance can be run securely without interference and fear of hacking.
“The energy and utilities sector is ripe for disruption and use cases already exist”
To imagine the parts of the energy and utility business model that will be affected by this technology, simply think of those activities that rely on third parties or processes to verify and validate the truth of a transaction, contract or exchange of value. Four areas are of immediate interest:
1) The energy retail system and peer to peer energy trading
For both domestic and business, the ability for trades to occur directly between consumers, prosumers through smart contracts stored on a distributed ledger/blockchain, is already here. LO3 with Consensys, with the backing of the State of New York have successfully concluded trades between neighbours in Brooklyn using an instance of Ethereum in their Transactive Grid Platform; Electron recently secured £400k of seed funding, with the stated (and highly ambitious) aim of redefining the structure of energy trading across the UK system covering grid, settlement and switching among others. This author knows of several proofs of concept in energy companies across Europe and the US that are simulating P2P trading with a view to launch.
The changing economics of battery storage, mobility of assets, and the need for the individual to charge their car anywhere is set to accelerate the decentralisation of electricity grids. On the back of a successful proof of concept with Slock.it, Innogy have taken a bold step to joined forces with UBS and ZF, the automotive technology company, to provide a blockchain-backed Car eWallet. The application opens up mobile payments for services, but has significant implications for energy retail and the intelligent grid with the ability to charge and discharge assets at multiple points on the grid and secure value direct to the individual.
Currently the connected home is dominated by a small number of ecosystems which are, in reality, isolated: Thread, All seen, Smartthings, Apple Home kit are examples of ecosystems that only work if you are a member of an alliance using a particular protocol; they are not interoperable and so not truly connected. The three pillars of decentralisation, through true M2M “economically independent machines” are set to transform this space. Bosch, Cisco and Gemalto at the recent New Horizons (Blockchain IoT Summit) in California announced their intention to collaborate on blockchain and IoT.
4) Asset Management
There is little public evidence of distributed ledgers being currently applied to asset management within the energy and utility sector. The potential for applications from other sectors, however is significant. Everledger’s platform for tracking diamonds across the globe; Propy dealing with property; Provenance through their white paper on supply chain4; all show the way to how traditional asset management and supply chains in energy and utilities can change radically in the future.
With all the opportunities for significant change using this technology, there is a risk that we only focus on disruption. The technology can have profound effects on the economics and user experience within established companies and sectors. From reducing the risk associated with ‘know your bank’ and ‘know your customer’ to transforming the credit risk equation associated with prepayment through secure digital micropayments on an hourly and daily basis. The area of micropayments has huge potential to deliver benefits which will grow further with the rollout of smart metering.
In conclusion, it is impossible to ignore the transformational potential of the distributed ledger and blockchain; it is here; it is now; it will grow; it can’t be blocked. The rate at which it will grow will depend on solving several fundamental issues including scalability, governance and security. Of these, identity security is perhaps the most fundamental challenge of our global digital age; it will be the source of control and value for the individual; this is true from the global challenge faced by the UN with ID2020 to the development of Self Sovereign Identity at the decentralised level; who we are and who we trust matters.
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