The Energy Blockchain – Believe The Hype, Just Don’t Forget The Physics

February 22, 2017

The analogy of blockchain to jazz was made more than once at Event Horizon, the first major conference on blockchain technology in the energy industry held last week in Vienna. Decentralized, free-form, and without a conductor, blockchains have the potential to transform incumbent centralized power structures. While this may be true for purely digital systems such as currency, data, and even identity, when blockchain meets the physical world — and power systems in particular — it seems as if a bandleader may be required after all.

So what is a blockchain? Other than the current peak of the hype cycle, technically a blockchain is a ‘Byzantine-Fault-Tolerant decentralized singleton fixed-function state-transition system’ (hmm). In simple terms, it is a type of virtual computer system shared by a network of users, which is slow, expensive to use, and not always immediately decisive. So far, so bad; however, blockchain has several exciting and useful properties. Trust, or the lack thereof, sits at the heart of the blockchain value proposition.

Transactions, contracts, records, and laws, typically mediated by trusted third parties such as banks and the courts, are encoded in logic and math on the blockchain, and enforced by the collective power of the network. This enables two parties who have never met to exchange goods and services, with zero counterparty risk and near-zero transaction fees, beyond the reach of international borders and laws. In addition, these exchanges have an inherently high level of cyber-security thanks to some clever cryptography. With no concentration of power and no single point of failure, blockchain may well be the technology that underpins a new interconnected and democratic future.

The ideals of blockchain seem to align perfectly with an energy system undergoing three major transformative Ds: Decarbonization, Decentralization, and Deregulation. The advent of widespread renewable and distributed generation is already causing headaches for grid operators and utilities around the world, and new markets to support remedial technologies such as energy storage and demand side response have been slow to materialise.

As to where blockchain can help, a recent survey of energy industry executives by the German Energy Agency (DENA) found 107 use cases for blockchain in energy. These use cases can broadly be split into two categories: processes and platforms. ‘Processes’ involve using blockchain to improve the way the industry does business today, including billing, auditing, automation, security and grid management. ‘Platforms’ involve using blockchain to design the way the industry will do business in the future, with examples including peer-to-peer trading, distributed aggregation, and wholesale trading platforms. Other applications are centered around the developing world, such as creating new ways to allow unbanked and off-grid citizens the opportunity to purchase and use electricity.

There is much to be optimistic about, however these categorizations belie an important reality when considering the interaction of the cyber and physical worlds. While blockchain is an excellent fit for ‘economic’ applications such as Bitcoin, where the only thing being exchanged is currency or information, the value is less clear when the exchanges relate to real world interactions. When using blockchain for peer-to-peer energy trading or grid management, the fly in the ointment may well be physics.

Selling electrons to your neighbour down the street is not the same as sending them a package. While the flow of UPS vans can be chosen and directed on the road network, electrons must flow through the power grid. Pesky physics means that it is not actually possible to work out where the electrons you sent end up, creating a provenance issue. You can imagine the power grid as a large water reservoir, where some parties are pouring water in and others are withdrawing it from a shared pool. This in itself is not a problem, but it requires that how much you put in or take out of the shared pool is recorded or metered. If you want to sell power to your neighbour, how can you trust that the data coming from their smart meter is accurate? Today, this issue of trust is handled by electric utilities such as PG&E who verify and audit that you actually consumed what you said you did, however it is less obvious how to resolve this in a decentralized paradigm such as blockchain.

Moreover, unlike a water reservoir, a power grid is not a passive system, and requires close management over very short time scales to avoid faults and blackouts. Operating a power grid is a messy business, requiring situational awareness, advance planning, and oftentimes a healthy dose of human operator judgement. Handing over the system operator functions to a decentralized piece of code seems for now to be quite a stretch.

The power grid represents an inherent centralization for the energy industry, requiring a degree of trust, infrastructure, and institutions, which seems to be at odds with the blockchain model. A solution to mitigate these issues could be the possibility of ‘private blockchains’ where entry is permissioned, and devices and smart meters are whitelisted by an independent trusted third party. One such effort is the newly created Energy Web Foundation, an initiative of RMI and Grid Singularity, which hopes to act as the provider and guarantor of decentralized, open-source energy software. 

Blockchain technology represents an exciting opportunity to transform and improve the way we manage our energy systems. However, any decentralized energy solution must not forget the interaction between ‘physical’ system operation and ‘economic’ trading. In short, don’t forget the physics.