Could a blockchain-based electricity network change the energy market?

The blockchain. It is the much-hyped, virtually foolproof digital ledger that allows cryptocurrencies such as bitcoin to flourish without the need for banks and governments, and promises to enable everything from the creation of ethical supply chains, to the ensuring of instantaneous payment on delivery of goods and services agreed to in immutable smart contracts.

The techno-utopian predictions for this system ignore one crucial detail, however. The intense data processing required by blockchain pulls in an extraordinary amount of electricity, and widespread use of it would drag global energy markets into the abyss – and bring the world’s carbon emissions budget down with it.

As an example, just a single bitcoin transaction has been calculated to devour as much energy as what powers 1.57 US households for a day – roughly 5,000 times more energy-hungry than a typical credit card payment. Would you prefer to pay by cash, credit or planet-wide blackout?

The electricity sector will need to dramatically increase capacity and lower emissions to pave the way for the era of smart contracts – and interestingly enough, a number of industry players think blockchain itself could provide the answers.

They range from the big, such as the 10 major utility companies joining the Energy Web Foundation’s efforts to identify and roll out blockchain energy solutions, to the small, such as US startup LO3 Energy’s launch of a blockchain-enabled green energy microgrid in Brooklyn later this year.

Similar to LO3 Energy’s offering is that of Australian company Power Ledger, which has developed a peer-to-peer energy trading model that works around utilities companies using blockchain in much the same way that bitcoin traders dance past the banks.

Power Ledger’s managing director, David Martin, explains that households that generate excess rooftop solar have to sell it to the grid operator at a greatly reduced price.

“Imagine you’re growing a whole lot of tomatoes, but you can’t trade them over the fence with the neighbour for their zucchinis – you’ve got to go to the supermarket to sell to them and buy from them,” he says. “That’s the situation in energy markets now – we want to change that.”

What his company is trialling is a system that will enable people to hawk off their rooftop solar energy directly to other households at a higher price than they would get by selling to a utility company.

By making rooftop solar even more economical and maximising use of the power it generates, Martin hopes blockchain-enabled peer-to-peer energy trading will help lower carbon emissions while raising energy capacity.

His company completed a virtual trial in Western Australia in January, and has taken the lessons learned from that and applied them to a real-world trial in Auckland, New Zealand. That began in December and will gradually ramp up to a network of 500 customers live-trading green energy.

But isn’t the blockchain process that underpins the whole system gobbling up most the power?

Not so, says Martin. He claims the energy-consumption issue has been averted by adopting a vastly more efficient form of blockchain than that which is used by bitcoin.

Whereas most blockchain relies on proof-of-work processes, Power Ledger employs something called proof-of-stake. The former consumes vast amounts of energy as it involves solving ever-more complicated mathematical equations, but proof-of-stake blockchains are based on pseudo-random chance.

“It uses the fraction of energy of conventional blockchain. Proof-of-stake is ideally suited for energy,” Martin says.

One of the leading critics of blockchain’s energy-consumption backs the approach. Michel Berne, the director of economics studies at Telecom management school in Paris, has been highly critical of the carbon footprint of blockchain, but he thinks, for energy markets at least, proof-of-stake could be a solution.

“Yes, I believe that proof-of-stake blockchain applications can validly compete with other non-blockchain based solutions in energy trading,” he says.

“Peer-to-peer energy trading is nascent, notoriously difficult to manage and blockchain solutions might be useful.”

He questions whether proof-of-stake could completely phase out proof-of-work blockchain in other sectors however, as he is unconvinced it offers the same level of security that is the point of blockchain in the first place.

Energy-efficiency isn’t the only obstacle in the path of a blockchain-based electricity network.

Dutch peer-to-peer energy trading network PowerPeers runs its system using already-available infrastructure and smart meter data.

Co-founder Michiel Ooms says the company is looking for ways to integrate blockchain, but has encountered several roadblocks.

“The biggest challenge we see so far is the handling of privacy-sensitive data,” he says.

“Using the blockchain brings more transparency, including on data exchanged. And although our whole vision is about making the energy market more transparent, sharing privacy-sensitive data (such as consumptions, locations, financial transactions) probably would not comply with the GDPR regulations that come into effect in the EU in 2018. Legislators therefore also have quite a bit of work to do if they want to enable everyone to participate in the future energy landscape.”

In Australia, Power Ledger also predicts legislative changes will be needed to pave the way for blockchain, or any kind of peer-to-peer energy trading for that matter.

“The system was designed at a time when regulators didn’t contemplate distribution and storage, let alone customers trading among themselves – everything is set up for a system of generating power a long way away from a centralised source,” Martin says.

“Reform is needed to the requirement that consumers who have excess PV being required to sell to a retailer – we need to change the market so it understands consumers aren’t just consumers anymore – they are generators too.”