Invasion of the Codes

Invasion of the Codes

BLOCKCHAIN
Invasion of the codes

Invasion of the codes

A revolution from cyberspace: Using blockchain technology, business transactions can be processed without a broker. Is the digital ledger capable of changing the way our energy systems work?

Text: Ralph Diermann

Seiteninhalt

When two parties wish to do business with each other, there has to be trust between them. The buyer has to trust that the seller will deliver the goods as agreed, and the seller has to trust that the buyer will pay for the goods as agreed. To make sure that this happens, most business transactions are handled by intermediaries such as dealers or exchanges. They bring buyers and sellers together. But they perform another function that is just as important: they validate the transaction – thus establishing the necessary trust between the business partners.

And yet this service has its price. If it were possible to manage without brokers, the trading process would be more efficient and would cost less. That’s why many experts are placing hope in a technology which for a long time was considered a nerd’s playground: blockchain. Blockchain was originally developed as the technical basis for the digital currency bitcoin, and it created a framework for secure transactions between two parties (“peer-to-peer”). 

Since the transaction data are recorded in a decentralized manner, there is no need for a central authority to declare the transaction valid. Hence, experts also describe it as a web-based, decentralized public accounts system. It certainly saves costs. But most importantly, blockchain enables the emergence of new business models – and calls established ones into question. Who needs a bank to transfer money? How will the role of energy suppliers change if consumers are able to buy electricity directly from producers using blockchain? While the financial sector has been examining the possibilities of blockchain intensively for some years, the energy sector has just begun considering what blockchain could mean for it.

“There is enormous potential in blockchain, even if we don’t yet know which applications will bring the breakthrough,” says Professor Jens Strüker, director of the Energy Industry Institute (INEWI) at the Fresenius University of Applied Sciences in Idstein near Frankfurt am Main. But he is monitoring test runs for the creation of green electricity certificates, individual benchmarks for generation and consumption, asset evaluation and direct electricity trading models, but also accelerating the settlement of balancing energy accounts.

SALES OVER THE GARDEN FENCE
With the German energy system being restructured to cater to the increase in renewable energies, the technology is arriving at just the right time. “The energy market of the future will be very fragmented and dominated by decentral generation facilities that are weathersensitive, and which feed highly fluctuating volumes of energy into the grid, such as photovoltaic plants or natural gas-powered cogeneration plants,” explains Tobias Federico, managing director of Energy Brainpool, a german consultancy. “With its low transaction costs, blockchain is a perfect match for the system because it makes it possible to trade very small amounts of energy.”

To test exactly how it might work, an Australian start-up called Power Ledger is currently running a pilot project near Perth. The company has created a blockchain platform on which the inhabitants of a new housing estate can sell solar power they generate themselves to their neighbors. Smart metering systems record how much energy the individuals have generated and consumed and enter the data into a blockchain, so that the transactions are recorded and can be billed. “Residents are now able to trade the electricity from their roofs among each other without the involvement of a supplier,” says Power Ledger chairperson Jemma Green.

As attractive as such direct trading might be for neighbors, there is one serious disadvantage: it brings a little anarchy to the energy sector. That is problematic for supply security, says Axel von Perfall, expert in the digitalization of the energy sector at management consultancy PwC. “How are suppliers and network operators supposed to keep electricity supply and demand in balance when energy is being widely traded below their radar? So the sale of electricity over the garden fence is not really possible from the practical perspective. At least not at the moment – the existing regulatory framework does not allow it,” von Perfall explains.

SUPPLIERS FROM THE COMMUNITY
But there is more to blockchain technology than peer-to-peer business between producers and consumers. New business models, faster and more simple processes, more efficient transactions – according to a survey of 70 managers in the energy sector carried out by the German Energy Agency (dena) and the European School of Management & Technology (ESMT) in Berlin, there are many fields of application for blockchain. Half of those who took part said they were already carrying out or planning test runs with blockchain.

One of the pioneers in this development is electricity supplier StromDAO, which was founded by German blockchain experts. Initially the company wants to use the technology for calculating the billing for electricity delivered to end consumers in order to make it more efficient. “We asked ourselves where can we use blockchain in the existing regulatory framework? These processes are perfectly suited to this,” says Kirsten Hasberg, one of the co-founders. But Hasberg is already thinking even further ahead. “Blockchain makes it possible to bring totally new products, tariffs and services onto the market,” she says. Households, for example, could take a financial stake in a solar plant and use part of the electricity it generates themselves. The blockchain would document how much energy is generated and consumed. With this model, households that don’t have their own solar panels on the roof would have the opportunity to supply themselves with self-produced solar power.

What ever shape such models take in the future, the blockchain system will not manage entirely without a third party, because consumers need an authority that takes responsibility for supply security. This body must ensure that customer demand for electricity is met at all times, and must also take care of regulatory obligations such as balancing group management. This has traditionally been the task of energy suppliers, and it allowed them to save at least some of their sales business with these customers.

Before blockchain can be used beyond the pilot-project level, it may take some time. “In my opinion it will take another four to six years before a regulatory framework has been created that allows the broad-scale use of blockchain,” says Energy-Brainpool-Chef Tobias Frederico. Enough time, then, for the industry to develop the right strategies and business models for the new technology, too.

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