Blockchain promises great things for power and utility (P&U) companies. But with industry tipping points fast approaching, are players now bold enough to explore the possibility of the technology and manage the shift from physical to digital?
Answering this question starts with understanding the stakes. Consider this: Mrs. Brown sells her excess kilowatt hours of solar energy to Mr. Smith. He also tops up from Mr. Poole, who, the previous week, bought from Mrs. Brown. Multiply that scenario millions of times over and it all begins to look very complicated, especially when factories and businesses start selling their excess capacity to fellow consumers, too. The data that will fly around the ether is immense, as is the scope for fraud. Blockchain, some claim, can fix all that with open, transparent and timely exchange of energy for value, which will, in turn, restore trust between consumers and suppliers, increase competition and drive down transaction costs.
Easy. But where is the proof?
Blockchain has generated a lot of hype about what it can, can’t and might do. Our survey on the state of blockchain in the Power & Utilities sector helped us better understand how the industry is working with the new technology. We believe that the technology will be transformational and enduring, but we also recognize that it will be those utilities brave enough to collaborate, experiment and venture from potential to reality that will prove the concept and make blockchain mainstream.
EY Global P&U Innovation Leader
+32 2 749 1722
Blockchain’s arrival coincides with massive industry upheaval
To understand what role blockchain plays in our future, we have to look at the big picture. The P&U industry is hurtling toward three critical tipping points which will herald a new and very different era for energy:
- 1. Off-grid energy will reach cost and performance parity with grid-delivered energy — from 2021.
- 2. Electric vehicles will reach cost and performance parity with combustion engine vehicles — from 2025.
- 3. The cost of distributing energy will exceed the cost of generating and storing it locally — from 2039.
As these tipping points approach, challenges will increase and revenues will be stretched. Empowered prosumers will require flexible monitoring and control systems that are relevant to their individual levels of engagement. Transaction complexities and risks will rise as the number of participants in the distributed energy systems increases. Security of supply will depend, increasingly, on seamless interaction between central and distributed energy sources, necessitating open standards and interoperability between networks. The need to optimize cost efficiencies and maximize output will put pressure on balancing supply in real time.
These are all areas in which blockchain has the potential to deliver swift and secure digital solutions that support the transformation of the industry going forward. So what does that look that?
Where blockchain all began
Blockchain, in essence, is very simple. It began in the finance industry as a digital ledger of transactions, agreements, contracts, payments, etc. Rather than being stored in one place, the ledger is distributed across computers worldwide.
Every transaction becomes an encrypted block. Each is linked to the prior block, forming a time-sequenced chain that irrefutably documents exchanges of value. The ledger is instantly updated. Blockchains can be private, shared only with specific individuals, making them akin to corporate intranets. Or they can be public, giving a completely transparent view.
The inherent value in basic blockchain is its resistance to corruption, allowing parties not known to one another to transact in complete confidence. Transactions can be added to, but not altered. In fact, a fraudster attempting to tamper with the history contained within the blockchain would have to alter every preceding block to present a new version of “truth.” Blockchain also makes intervention from a third-party bank or central authority redundant and, in doing so, speeds up transactions and reduces manual processing and overall costs.
Building blocks in energy markets
Though it is still early days for blockchain, there is a growing realization that the underlying technology could be used in other transactional industries too, to transformative and disruptive effect. The power and utility industry is one of them. It is, essentially, an ecosystem of multiple parties, all transacting with one another.
Every interaction sets off multiple reactions, creating long chains of paper and mountains of data, as well as transparency, compliance and related issues. Blockchain technology could, potentially, solve all that, storing every interaction from one end of the process to the other as immutable blocks, connecting parties across the platform to distributed common ledgers that capture data about identities, contracts, pricing, transactions and payments. Forever.
The possibilities are numerous. Blockchain could deliver a payment mechanism for charging EV batteries; it could enable EVs and other devices to provide stored energy back to the grid to balance demand; or allow energy users to switch suppliers in real time to take advantage of fluctuating rates. On a network level, it could help to diagnose and remedy disruption in supply and, on a trading level, make energy commodity transactions unchallengeable and transparent.
Where will the benefits of blockchain really stand out?
A process or environment that involves some or all of the following criteria might be suitable for blockchain:
- Transaction — the greater the number of parties in the ecosystem and the higher the transaction volumes, the more secure blockchain can make it.
- Trust — multiple points of verification in the blockchain heighten trust between participants.
- Traceable — blockchain records are permanent and cannot be edited or deleted.
- Tangible — blockchain logic prevents double-counting of assets, records ownership and transfers.
- Transparent — ownership or control of assets is public and transparent.
Despite all of blockchain’s apparent benefits, proceed with caution. Though blockchain is being cited as the secure and irrefutable technology that will enable a virtual marketplace in energy and secure microtransactions between participants, it is no panacea. While there is merit in the transparency of public blockchain, it comes with privacy issues. Thinking back to the example from the beginning: Do Mrs. Brown, Mr. Smith and Mr. Poole really want every transaction they make visible on a public platform?
In it together
Taking lessons from the finance industry, joint ventures, acquisitions or consortiums are a proven means for interested parties to get behind initiatives that enable the transition from experimentation to adoption.
Of course, one of the major advantages of blockchain is that it facilitates multiparty endeavors. It provides a secure, trustworthy and transparent environment that lends itself to collaboration between industry allies and competitors, where each party contributes value, including investment capital, intellectual capital and technology. Collaborating, co-creating and investing in blockchain solutions as a community, rather than as stand-alone players, will deliver proofs of concept more quickly, drive blockchain’s acceptance as a transformative technology and enable the industry to tackle and conquer the tipping points ahead.
Already, around the world, we’re seeing the P&U industry begin to engage in collaborative pilot programs. Among them is a blockchain initiative, driven by Swedish power company Vattenfall, which links 22 other European energy trading firms for peer-to-peer trading in the wholesale energy markets. Meanwhile, in Auckland, New Zealand, electricity and gas distribution company Vector is working with Power Ledger, an Australia-based startup, to sign up 500 solar households, schools and community groups to an energy trading platform.
Collaboration is also applauded by government bodies, including the European Commission, which are keen to see what blockchain can do. They are seeking support on strategy, infrastructure and development of workable use cases in a variety of transactional sectors.
Trial and endeavor on the path to commercial maturity
Some P&U industry pioneers have already built blockchain prototypes. Our own pilot programs are underway in the sector too, including a collaboration with a Dutch provider to use blockchain to provide immutable and transparent ledgers for the certification of green energy.
Outside the P&U sector, we have a proof-of-concept, blockchain-enabled platform for the marine insurance industry, ready for commercial use in 2018. It will connect multiple parties to distributed common ledgers, capture data on identities, risks and exposures and integrate the information into insurance contracts, reducing paper chains and duplication, while transparently linking assets, transactions and payments.
We have also launched Tesseract, a groundbreaking platform, underpinned by blockchain technology, for the “fractional ownership” of vehicles. It can be scaled up for other on-demand assets, such as batteries and charging infrastructure, too. Vehicles and trips are digitally logged on blockchain and transactions automatically settled between owners and operators via a usage-based payment system. Ultimately, Tesseract provides the framework that will support the autonomous vehicle fleets of the future.
To realize blockchain’s potential, win over skeptics and enter the P&U mainstream, one-off, proof-of-concepts and small-scale tactical innovations are not enough, though. Blockchain has to overcome competition from existing solutions and prove its attractiveness to users. Tangible monetary or time-efficiency savings will do the talking. Only then will blockchain convince enough participants to ditch legacy systems in favor of this new platform.
As the market matures, on the back of industry partnerships and positive stakeholder and consumer feedback, that optimal end-state will get closer. A future is possible where industry partners, utilities included, conduct secure business online and where blockchain enables them to:
- Use shared infrastructure, rather than participate in multiple separate private blockchains
- Engage in closed-loop business transactions, exchanging tokens that represent digital or physical assets and services for tokens that represent financial value, over the same blockchain
- Have confidence that transactions are synchronized across the network of partners, and within private business ecosystems, and protected from arbitrary hacking
So where does of all this leave Mrs. Brown, Mr. Smith and Mr. Poole? Right now, they believe in the benefits that a secure and transparent blockchain-enabled solution can bring to their neighbor-to-neighbor microtransactions of energy. It should not be too long before today’s pilot programs are scaled up to deliver big-value and secure blockchain-enabled transactions across industries and continents.
There are no clear industry winners yet, but those with the courage to participate, innovate and leverage the insights of endeavor, are in line.