Blockchain in Energy – Where Do We Stand? Where Do We Go From Here?
For all the publicity generated by the recent increase in value of Bitcoin, as well as the generally increasing awareness of the existence of blockchain technology, Greentech Media's recent Blockchain in Energy Forum 2018 held in New York City demonstrated that the technology is incredibly young and all stakeholders—utilities, regulators, entrepreneurs, consumers and investors—are still struggling with the ultimate impact of distributed ledger systems. The promise of blockchain as a decentralized, verifiable and immutable database with the scalability to displace existing record-keeping systems is as of yet unfulfilled, but not for lack of effort. The wide variety of issues covered in the day’s panels demonstrate the fundamental debates stockholder are still having. The touchstone questions to which panelists came again and again were “What problem is this solution supposed to solve?” and “Why does blockchain solve it better than any other solution?” Definitive answers to both questions remain elusive.
Most expect blockchain technology to be the foundation of the future transactive energy grid in which power generated by distributed energy resources on a scale ranging residential rooftop solar to traditional generating stations is bought and sold in a marketplace, matching production with demand efficiently in real-time. Our traditional hub-and-spoke model of electrical generation and transmission is evolving to one of widely distributed generation. This new marketplace will require the settlement of an incredible number of transactions every second. Some estimates have pegged the minimum rate of transactions to be settled for a country such as Germany at 260,000 per second in this future grid. As a means of comparison, the blockchain behind the cryptocurrency Bitcoin can only process 5 transactions per second – that of Ethereum, another well-known cryptocurrency, can handle approximately 15 transactions per second. For the transactive grid to come to fruition, much progress remains to be made.
Efforts are underway. The Energy Web Foundation, an off-shoot of The Rocky Mountain Institute, the nonprofit energy research and consulting group, has begun developing its own blockchain engineered specifically for use within the energy space named the Energy Web Platform. Presently even this best attempt at an energy-specific blockchain can handle only 750 transactions per second. Further technical issues abound. Governance and best practices concerning the protocols pursuant to which major changes to the structure of the blockchain are implemented remain a topic of hot debate, as do the measures of verifying transactions on the blockchain. With basic issues such as these still in flux, it is not surprising that a real world manifestation of a fully-functioning blockchain application has remained elusive in the energy industry.
Utilities and regulators are not blind to the promise of blockchain though it seems as if they are just coming to the party. Both are extremely aware of their responsibilities to their constituents. Tasked with making sure that the power demands of their ratepayers are always met, utilities are particularly reluctant to embrace a transformative technology wholesale without total assurance that service to every customer will be uninterrupted. For all the promise of blockchain, utilities have the largest incentive to express skepticism. From their perspective, blockchain too often seems to be a solution in search of a problem.
That being said, opportunities do exist for utilities to apply blockchain-based services to their operations to increase efficiency, decrease cost and deliver value. NRG Energy, Inc. is developing an internal blockchain to manage its Renewable Energy Credit (REC) portfolio from generation to retail and retirement. RECs are widely seen as the most likely use case to first achieve viability as an independent product. A decentralized distributed ledger network perfectly encapsulates the multiple records that REC portfolio managers must reconcile to ensure that the managers have what they think they have. Yet, even with a seemingly square peg fitting into the square hole, utility representatives present still pondered aloud whether blockchain was the best and sole solution its promoters believed it to be.
That tension was evident in the advice of Dr. Paul Breslow, head of EDF’s Innovation lab. Dr. Breslow cautioned on one panel that entrepreneurs seeking investment or buy-in who make their pitches geared toward the future transactive grid are not helping the present-day discussion. Better, he said, to come into the room having identified a quantifiable problem and proposing a solution that works today. Utilities are among the most heavily regulated industries and are thus acutely aware of the incremental steps they must take from the traditional model of energy production and distribution to that of the future in order to continue to satisfy the concerns of their regulators.
Regulators are generally seen to be the last to embrace the promise of blockchain because of their explicit mandate to ensure the health of the grid. In this sense, the United States lags behind Europe. European regulators are regarded to work more closely in conjunction with major industry players to change the regulation to accommodate blockchain technology compared to their American counterparts. As increasingly beneficial economics drive the penetration in the U.S. of distributed energy resources like community solar, the resultant necessary changes to the energy regulatory framework will likely include a provision for blockchain-based technologies.*
It is clear that blockchain energy entrepreneurs view this growing shift as their opportunity to enter the market. As the physical grid decentralizes, the efficiency offered by distributed ledgers over central recordkeeping becomes apparent. Propitiously, a distributed ledger system is also seen to increase overall grid resiliency by localizing the effect of adverse events on grid infrastructure – no single hit can take out the central ledger for the entire system. To these forward-looking souls, the day of blockchain in the energy industry has arrived and they are there to seize it.
Seizing the day requires financing and blockchain presents a tricky problem to traditional sources of funds because within blockchain lies its own mechanism of financing. Tokens are produced as miners verify individual blocks of transactions. Large amounts of tokens can be created by the blockchain progenitor and sold to third parties to raise funds for their projects. Of the estimated $324 million invested in organizations seeking to utilize blockchain in the energy industry, 75% has come from these initial coin offerings, a staggering amount. Increased SEC regulation have depressed ICO numbers in the United States in the last six months but this fundraising mechanism continues to be popular abroad.
Initially, traditional venture capitalists found the competition from ICO fundraising disconcerting. Having independent access to capital, founders were more willing to eschew a VC-financed path of growth for their organizations. As SEC regulation has increased, however, founders have resorted to private placements of tokens to comply with U.S. securities laws. This shift has brought venture capitalists back into play to fund blockchain energy startups. Their emergence into the market is still new enough that the panel of investors discussing investment in blockchain energy products could not cite any benchmark returns on investment they expected nor any exit strategies beyond strategic acquisitions.
The excitement surrounding blockchain tends to mask the birthing problems of the transformative technology. Both the excitement and the problems were on full display at the Blockchain in Energy Forum. Mintz Levin is here to harness that excitement and help you address those birthing problems. We encourage you to reach out if you are a stakeholder in the energy space exploring the application of blockchain technologies. As our energy grid transforms, Mintz Levin will be helping you lead the way.
*This attitude markedly contrasts with non-U.S. jurisdictions. Several panels referenced their desire for a “regulatory sandbox” to experiment with blockchain implementation without unduly intrusive oversight. Interestingly enough, the lack of “regulatory sandboxes” in the United States can be explained by our regulatory framework. All energy providers, regardless of size, tend to be regulated equally in U.S. jurisdictions. Alternative systems of regulation allow, for instance, that an energy resource is not fully regulated until it produces more than 1 kW, allowing for more smaller-stake experimentation.