The energy industry needs blockchain to revolutionize its future – but not without some tweaks
Blockchain is the buzzword everybody wants, pretends and attempts to know. Often referred to as the ‘5th big thing in network technology’, it is already seen in the same saving-grace light as the revolutionary World Wide Web, with potential to follow a similar expansionist trajectory yet also, and crucially, shifting the internet paradigm from the transfer of information to transfer of ownership. Due to blockchain’s public immutability and ability to move the power of trust from gatekeepers to the public, pioneers have identified potential use cases spanning from security to trading to drugs.
Localized, prosumer-led use cases
The energy industry is no different: blockchain is now part of the future smart city blueprint, the cornerstone to a decentralized and distributed power system. Its ability to provide a timestamped, verifiable, single record of truth that is distributed among many devices in a network is paving the way to shared databases between parties that traditionally may not trust each other. Demand-side response measures, peer-to-peer trading, and microgrid initiatives are already using blockchain technology – albeit in localized scenarios – to remove the middle man and create a prosumer led, energy sharing business model.
Limitations to mass-market success
However, whilst the secure removal of an intermediary is the foundation of blockchain, there are three limitations to a truly successful blockchain revolution in the energy sector:
Speed of transaction throughput
With scale comes complication
The cornerstone of blockchain’s secure and immutable network is that every transaction must go through a complex validation process to enable supply chain security, traceability, and data interoperability. Whilst these are all critical components when trading commodities, it has limiting consequences on its ability to ensure scalability in transaction and approval time.
An increased number of users requires amplified mining complexity to confirm transactions, resulting in a higher demand for computational power and thus a negative knock-on effect on processing and validating response times. As a result, players pay higher transaction fees to guarantee faster mining (somewhat removing the democratic and egalitarian ideology of the technology). Even with a cutting-edge quantum computer and limitless funds to prioritize transactions, each block has a limit – miners can only add transactions that add up to less than or equal to the block value.
Speed is key
These factors have consequently limited the technology’s ability to handle large numbers of transactions using the centralized architecture: Bitcoin currently processes 4.6 transactions per second against Visa’s 1,700 transactions per second1. If the energy industry is to adopt blockchain technology to enable mass decentralized trading, it requires a high-performance legacy transaction processing system, minimum transfer delays, and low transaction fees to accommodate its network activity.
Understanding how the move from Proof of Work to Proof of Stake concept can improve the speed of transaction verification is the next step. Mass adoption of sharding, where transactions are broken down into smaller elements that can be spread across the network according to its required level of interaction, rather than every node downloading and saving the entire blockchain, is a possible solution that warrants exploration and ideally adoption.
Backing an algorithm, not an entity
It is no surprise that the legal and regulatory environment surrounding blockchain is still nascent and developing, given it takes ~30 years to get a core technology installed into the financial and regulatory community. Currently, governments do not support blockchain due to the ideological confusion of backing an algorithm and not an entity. If it is to securely replace conventional enterprise infrastructure, regulators and auditors first need to understand the technology if they are to challenge it, and ultimately guarantee it. Blockchain needs to be treated as an enabling technology that provides a foundation for solutions, rather than a product.
Enabler for idealism
If blockchain can assure scalability, capacity and transaction throughput whilst still assuring trust and accessibility, the future of energy can be transformational. Energy production/consumption, consumer identification and operational technology validation can be tracked and traced with precision, enabling efficient pricing mechanisms, cheaper settlements, and leaner network balancing. Blockchain is an enabler for society’s idealism to be more open – it just needs a few more tweaks.
Author: Meera Kotak, Energy & Utilities Strategy Consultant, Innogy Consulting (all views are the author’s own).