In the March 2017 issue of New Power Report Janet Wood looked at how blockchains are becoming a reality in the electricity sector

Anyone attending power industry conferences and meetings in the past couple of years has heard that blockchains have the potential to transform the industry.

Companies are quick to express their enthusiasm and to say they have projects under way or in development. Yet energy utilities have been stung before in their relationships with IT. From shelling out to prepare for the Y2K bug to continuing failures as they update billing systems, they have found it hard to find a happy medium between jumping on a bandwagon too early and missing the boat.

That uncertainty does seem misplaced in the case of blockchains, perhaps because a blockchain is a platform, not a specific application, and it does not require companies to invest in huge dedicated systems of their own. Instead, they can use common platforms in the same way they are doing with cloud data storage.

And it has real-world applications already. Bitcoin, the most well-known blockchain application, has been around since 2010.

See section below for a full description of how a blockchain works. At its most basic, it is a way of managing a distributed ledger or database in a way that doesn’t require a central authority or processor, and it can give all users full visibility of all the processes. Parties that do not want or need to have full visibility can have a digital ‘wallet’ of currency and carry out transactions with the blockchain, paying transaction fees to parties the ‘miners’ hosting the blockchain.

There is no single blockchain platform. Groups can set up their own closed blockchains, but the alternative is to use an existing blockchain platform to run an application. 

Applications and uses

With a blockchain in operation, contracts can be written around it, enabling trading to take place automatically. That ‘machine-to-machine’ (M2M) interaction, as much as the distributed nature of the product, is what is driving companies to use it for new applications.

The energy industry is no different, and as many ambitious large-scale applications are being proposed as small niche offerings. Not all are from small specialist startups. Many are being funded or joined by the big six and other major energy suppliers.

With all the transactions taking place on the blockchain there is “complete transparency, which could have many regulatory advantages in the future”, And using an open system “instead of impenetrable service-oriented architectures” may make it easier to bring new partners on board.

In June last year, Vattenfall (with Nuon and Feenstra) launched Powerpeers in the Netherlands. Launching the product, Lars Falch, customers and solutions business development manager at Vattenfall, said: “Why shouldn’t we share the energy we generate from our own solar panels with others?

“Every kilowatt-hour traded is ‘labelled’. You can check online whether the energy that you have been supplied has been generated by your neighbour or by your ‘own’ turbine,” Falch said. “Any time ‘your’ turbine is at a standstill, the system will inform you that another generator you have selected has taken over. And if that generator is not able to supply electricity either, Powerpeers will automatically provide a green power backup – solar, wind or hydropower – from a source in the Netherlands.”

In April 2016, the world’s first blockchain-managed energy-trading transaction took place in Brooklyn, New York. The owner of a solar roof panel sold excess energy (a few kilowatt-hours) to a neighbour using a smart contract in the Ethereum blockchain. The project, called TransActive Grid, is a joint venture between Brooklyn Microgrid developer LO3 Energy and blockchain technology developer ConsenSys.

The first European megawatt-hour sold over a blockchain was executed by two traders – Belgium’s Yuso and the Dutch Priogen Trading – in November 2016. It was carried out on Enerchain, a blockchain managed by German software provider Ponton. Ponton says Enerchain allows users to send orders though a trading screen anonymously. Counterparties conclude the transaction and it is all done “peer-to-peer” without a marketplace operated by a third party. The tool supports a variety of energy products including day-ahead, monthly, quarterly and yearly baseload for power and gas.

Ponton has ambitious plans. It has joined the NEW 4.0 consortium, which aims to balance local production and consumption in two German regions – Schleswig-Holstein, which generally exports renewable energy and has had to shed capacity at times; and Hamburg, a huge consumer nearby. Ponton’s contribution to NEW 4.0 is the development of a smart market for flexibility. This marketplace is a logical venue that executes orders from the demand and supply side. Traded products are short-term regional consumption or generation, both provided at market prices.

Enerchain wants to use blockchain technology as a joint data layer to co-ordinate market activities such as submitting buy or sell orders and executing trades. The system users will be transmission and distribution system operators, industrial users and individual prosumers.

Still to be solved

As a new measure the blockchain is still rapidly developing and current versions have some drawbacks.

Some are around the parties involved. In practice, miners tend to join in syndicates that share the rewards when they solve a block, so their revenue stream is more predictable. That clearly reduces how far the users are distributed and it can mean mining becomes concentrated in a small group.

Even if there are many nodes working in the system, problems at one can affect the users, especially if they are not nodes but only hold a wallet of blockchain tokens and communicate through an exchange. Mt Gox, a bitcoin exchange with more than 20,000 users, went bankrupt in 2014 when a large trove of bitcoins went missing from it.

A blockchain is a relatively slow process. Solving the blocks and normalising them on a regular basis may take seconds or even less, but that is still slower than will be required by the Internet of Things and is far behind trading systems that shave microseconds from their transactions.

But other options are coming into play. One, highlighted by Matthew Ward of the Reply consultancy, is Iota, which takes the ‘block’ out of the chain. Instead, it uses a continuous ‘tangle‘ of transactions. Iota is in beta testing.

The distributed nature of a blockchain can also make governance slower.

Although it cuts costs, a blockchain is still expensive for some applications, because transaction fees leak value away. Although the transactions are cheaper than those of traditional centralised systems, the fees look much larger as the trend towards ‘micropayments’ gathers pace. Payments for using apps have shrunk in some cases to a few pence in traditional currencies, so huge volumes are required to ensure a significant payback. Payments for transactions carried out on blockchain could be far smaller to allow local trading, and to make that possible, transaction fees have to be much lower.

Finally, in its current form, with parallel ‘proof of work’ being carried out across lots of computers, a blockchain is a large energy user. New Power was told that bitcoin in its current form requires around 600MW for its processing and that will grow: it is said that by 2020 it could be using somewhere around the capacity of Denmark (12GW). That is clearly unsustainable for large applications. It also results in an interesting dynamic among bitcoin miners. The availability of cheap power is one reason many mining groups in bitcoin are in China.

However, new approaches to blockchain processing will be much less energy intensive. Replacing ‘proof of work’ with a new system called ‘proof of stake’ will cut energy use by several orders of magnitude.

What is a blockchain and how does it work?

A blockchain has something in common with a database, but one where changes in the data are checked and signed off by all the database users at the same time. It has also been compared to maintaining many records of transactions across a set of electronic ledgers simultaneously.

The most important point about the blockchain is that there is no central record or authority. Instead of a central manager, the blockchain has authority because there is ‘consensus’ across the ledgers. Each user (‘node’) has data about every transaction that has taken place within the blockchain at every point, each of which has a unique identifier, and none can be changed without it being obvious across the entire system, which would reject the change. With transactions recorded across large numbers of ‘ledgers’, opportunities to alter the transaction record is vanishingly small, and becomes near-impossible as new transactions follow on and are embedded in the record.

Bitcoin, perhaps the most famous blockchain application, primarily uses the transactions as a currency, but a blockchain can record any set of transactions.

How does it work? Members of a blockchain community share the software that manages the blockchain. Information about any transaction is provided across the network, and at regular intervals (every ten minutes for Bitcoin) computers on the network take the most recent ‘block’ of transactions and verify each one by adding a random number to the block and then generating a series of codes (known as hashes). Then they combine the individual hashes until there is one single hash for the block. It is not only based on the transactions in that block, but also mathematically tied to the previous block. That means the blocks are chained together and attempting the slightest change in a past transaction will change the ‘hash’ of the current block – obvious to all participants.

All network nodes perform this ‘proof of work’, which involves a huge amount of trial and error, and they compete to be the first to produce the correct hash (‘solve’ the block) in a way that is then verified by the other members. The winner is rewarded with credit in the system. In bitcoin this is a fraction of a bitcoin, and the winner is said to have ‘mined’ it, although in some blockchains this is referred to as ‘minting’. From time to time the process pauses to check in on the process of producing hashes, make sure it falls within certain parameters (time taken to solve the block, for example) and adjust.

Taking part in the proof of work currently requires extensive computing power and it may not be something that all members of a network want to do. In that case they can join as a participant, sending messages but not adding to the mining power of the chain.

A blockchain is not vulnerable to individual transactions being falsified or altered, providing there are enough miners working on the blocks. It does, of course, rely on the algorithms that underpin it to perform as the blockchain’s designers expect.