From the editor: Industries undergoing major reform tend to see aggressive implementation of new technologies and methods. This series looks at the electric utility/energy industry which, amid system reform, is producing numerous cases of blockchain applications and ICOs. Yasuhiko Ogushi, an expert in this field, will guide us through the topic. This first article gives a bird’s eye view of the changes occurring in the energy industry, while subsequent articles will go deeper into individual themes and case studies.
New models emerging amid
Around the world, blockchain application to the energy sector is increasing. There are over 80 organizations and consortiums leading development, and over 100 organizations implementing blockchain in the energy sector if companies participating as consortium members are included (writer’s own research; see writer’s blog covering the topic).
I believe this increase in application of blockchain to the energy sector is founded on changes over the past decades. In other words, if not for the changes in the electric utility industry in the last 20 years, experimental blockchain applications would not have penetrated the electric utility/energy industry to this extent.
What are these foundational changes? One is the liberalization of retail and generation as well as the unbundling of generation and transmission. Countries and regions have implemented this in different ways and at different times, but in Japan this is part of its Utility System Reform from 2015 to 2020. Traditionally, power companies have been vertically integrated, with generation, transmission, distribution, and retail carried out within the same organization. Japan was divided into ten regions, each having a vertically-integrated power company with a regional monopoly. However, after liberalization and unbundling, while transmission and distribution remained part of the regulated domain that provides and manages public infrastructure, generation and retail became competitive domains into which diverse businesses can enter. In addition to bilateral generation-retail transactions, transactions via the wholesale market are also increasing. Figure 1 illustrates this structural changes.
Liberalization/unbundling of generation and transmission has allowed diverse players to enter generation and retail, but that’s not the only impact. Generation is important in a vertically-integrated electricity system, and its advantages were displayed during Japan’s period of rapid growth (1950s to 1970s). Transitioning to a liberalized/unbundled model, however, shifts importance to operation and management of the electricity network. In other words, offering a choice of power source based on needs is shifting priority to skillfully using existing resources to fulfill demand and maintain a steady supply.
This should be reminiscent of Uber, the ride-sharing service, or Airbnb, the home-sharing service. Conventionally, when demand soars, it can be met by introducing more taxis or hotels. But if resources are introduced to meet peak demand, they will be under-used off the peak, hurting profitability. On the other hand, if new resources are not introduced, peak demand will not be met. Thus appeared the concept of using idle existing resources to fulfill demand, in the form of Uber and Airbnb. It goes without saying that they don’t own any resources themselves. They have grown their businesses by matching idle resources such as empty vehicle seats and rooms with demand for movement and accommodation.
Liberalized/unbundled electricity is the same. It has transitioned to the idea of using idle resources effectively, including those of customers, to operate a stable electricity system. Concepts often talked about in the energy industry such as “demand response” and “virtual power plant (VPP)” do not increase generation facilities but use demand-side facilities effectively to meet demand and operate the system in a stable manner. As I’ll explain further down, opportunities are emerging for diverse transactions utilizing idle resources, including those of customers.
Decentralization of energy
Another important change is decentralization of energy. Generation, traditionally the exclusive domain of power companies with large-scale plants, can now be done by installing solar PV cells on the roofs of buildings and even homes. Over two million Japanese households have done this. While not wholly self-sufficient, they can meet their needs on sunny days and even sell surplus electricity to power companies.
Electric vehicles (EVs) with large batteries are also gaining popularity. They are a means of transportation but, by plugging into an outlet and charging outside of peak demand times, they also contribute to stable electric supply. Furthermore, they enable other energy management applications such as vehicle-to-home (V2H), in which the electricity stored in the EV battery is used in the home, or V2X (a more general term) in which it is used for some other purposes.
Another growing technology is energy storage in plants or homes. Paired with solar PV, electricity generated during the day can be stored for use at night or regions where electricity is cheap at night can store it for use during the day. Naturally, these storage batteries also serve as backup power sources during an outage.
Called distributed energy resources (DERs), these solar PV cells, EVs, energy storage, and adjustable loads are spreading around the world.
Now think back to Uber and Airbnb. Rather than introduce new resources, they meet demand by using existing resources to the maximum. Instead of building generation facilities that will only operate for a small part of the year, it’s better to discharge the electricity in energy storage – or reduce customer demand. Thus, DERs can be used in electricity supply.
Solar PV and wind power are called variable renewable energies because their outputs are not fixed; rather, they fluctuate depending on the weather. In the past, when only electricity demand fluctuated, it was simply a matter of matching supply to the fluctuating demand. However, in electricity systems connected to a lot of variable renewable energy, both supply and demand fluctuate.
Normally, electricity cannot be stored, so operating an electricity system requires constantly balancing supply and demand. This adjustment is incidental to electricity measured in kilowatt-hours and is part of what are called ancillary services. Ancillary services are not new but until now have been handled in-house by vertically-integrated power companies. As variable renewable energy increases, so does the demand for ancillary services. These services went from internal to external with the liberalization/unbundling and can even use customer DERs, for example charging and discharging customer storage batteries and adjusting load.
Each DER alone is small, so the business of aggregators, which integrate DERs for the operation of electricity retailers and transmitters, is gaining prominence in the post-liberalization/unbundling world. New transactions between aggregators and customers and aggregators and power companies are emerging.
Adding that to the diagram above looks like this.
Transaction diversification and blockchain
As we have seen so far, because transactions that were internal to power companies before the liberalization/unbundling have now been externalized, diverse electricity transactions are emerging. The traditional structure in which power companies sell electricity (kWh) to customers is simple but now customer DERs will be able to participate in electricity system operation.
The decentralization of energy also brings with it new problems. There is a surplus of solar PV electricity. When solar PV was being introduced, its spread was helped by government support measures such as feed-in tariffs (FIT). However, sooner or later these support measures will come to an end. After that, the question will be how to use the surplus electricity effectively. It could continue to be sold to power companies, but without these measures, the pricing will not be attractive to solar PV owners. The logical next step is to share it with family, friends, or even the wider community. While electricity so far has flowed one-way from power companies to customers, this would add customer-to-customer, or peer-to-peer (P2P), flows. Of the companies currently engaged in applying blockchain to the energy sector, around half are developing energy trading platforms that enable P2P transactions (although most countries, including Japan, have yet to develop legal frameworks for P2P transactions).
The increase in electric vehicles is also diversifying transactions. This is because a transaction occurs when the vehicle charges at its destination, making EV charging another field for blockchain application.
In this way, while power companies have traditionally sold electricity to customers by the kilowatt-hour, in this post-liberalization/unbundling, DER world, the nature of electricity transactions and their players are diversifying. If blockchain is indeed a technology suitable for recording and transferring digitalized value, then the diversification of electricity transactions will expand the range of blockchain applications. This also explains why, around the world, more and more companies are beginning to apply blockchain to the energy sector.