Strategy & management

It’s one of the biggest buzzwords of the moment, but what is blockchain and what will it mean for the energy sector? Jamie Hailstone investigates.

The concept behind blockchain dates back to 2008, when the online payment system Bitcoin first appeared. In the past year there have been several developments relating to the energy market, including the Energy Web Foundation international partnership, which was launched in May.

Technology experts have hailed blockchain as a breakthrough in allowing digital and financial transactions to be carried out instantly and securely. It is often defined as a distributed digital ledger, which enables two parties to conduct secure, verifiable transactions without the involvement of a third-party intermediary such as a bank.

And with companies like Electron developing blockchain platforms and big players like Centrica, Engie and Royal Dutch Shell getting involved in the Energy Web Foundation, it is clear it could have major implications for the utilities sector.

Speaking to Utility Week, director of the Centre for Financial Regulation and Innovation at the University of Strathclyde Daniel Broby describes blockchain as “blocks of programming code that are linked together by secure public keys”.

“The programming code is what allows you to transfer digital assets in trading,” he says. “Because these cryptographic keys determine the integrity of the chain, it becomes a public ledger or a database. These programming codes are all linked together securely and can be used as a distributed database or an immutable blockchain record history.”

So what might blockchain mean for the energy sector?

1. Instant energy trading

One of the biggest benefits blockchain could bring, according to Broby, is sophisticated energy trading systems that could give generators “second-by-second prices”.

Broby believes these systems could be in place within the next ten years, or sooner, and that they will allow “instantaneous billing with the market rate as it is”.

“It will enable anyone with a solar panel on their roof to feed into the grid,” he says. “You can do that at the moment, but it’s not done on a second-by-second basis. It will also allow for better grid management. Fluctuations can all be better managed if you have an instantaneous pricing mechanism, which is part of a trading system linked into micro-producers.

“The technology is there to make an integrated network that facilitates power trading. It’s just a question of determining a protocol that is acceptable to market participants.”

2. Smart contracts

Blockchain platforms will allow the development of smart contracts that can automatically charge providers, according to Broby, who says that because it is transparent and the records cannot be changed, blockchain means third parties can access those records and determine whether someone is over or underpaying for something.

“That can be done by a programme or a smart contract, which means you could switch your energy provider minute-by-minute in theory,” he says. “I think the biggest beneficiaries in the short term are the micro-producers who can lock into the grid with more efficient pricing. It will take time for this efficient pricing to be built into programmes that benefit the consumer.”

3. Quicker and smarter switching

In May, Utility Week reported that the British start-up Electron had developed a nationwide blockchain platform, which it claimed could switch customers in seconds.

Company director and former Npower chief executive Paul Massara said at the time that the system had been fully-scaled to handle 55 million supply points and that Electron had been testing the system with dummy data and could switch customers in just 15 seconds.

“You can see a customer go through without any settlement,” he said. “This is not theory. We have a working model showing how we could do it.”

“At the moment, it takes 21 days,” said Massara. “What you really want is quicker and more accurate switching, with lower costs. Blockchain can do all that because it can switch suppliers with meter points, so you don’t have all the reconciliation issues. And you can put in smart contracts, so you can start flagging things like if a person is on the priority register service.”

4. Restoring consumer trust

With energy suppliers in the dog house over price rises and overcharging, the transparent and automatic nature of blockchain could help restore consumer trust.

Speaking to Utility Week last month, Electron’s chief operating officer, Jo-Jo Hubbard said the concept could guarantee “certain simple processes such as correct billing and supplier switching”.

“Blockchain technology could remove billing discrepancies, improve the transparency and accountability of the system and provide consumers with a faster, cheaper, more accurate service,” she said.

Right now there are a multitude of companies, groups and academics developing their own blockchain platforms. The Energy Web Foundation, which launched in May, is a partnership between the American think-tank Rocky Mountain Institute and blockchain developer Grid Singularity

The foundation is looking to build an open source platform that will form the basis of an international energy blockchain system, which companies can use to test their own applications.

Managing director of the Rocky Mountain Institute Herve Touati told Utility Week that working together to develop the platform “is a logical first step for the industry to take”.

“Over time, we expect a healthy level of competition to develop among energy companies offering blockchain-based applications,” said Touati.

Senior architect Joseph Stanley, from Centrica, which is also involved with the Foundation, told Utility Week that it “makes sense for all the utilities join together” on the project. “This is like the Windows operating system or the iOS built by Apple,” said Stanley. “It’s quite difficult, but we need to get it right.”

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