Energy Business and Blockchain #3 Setting off the second wave of energy trading platform
In my previous article, I presented the trend of democratization of energy infrastructure investment that used be largely led by nations and corporations with large capitals, and the trend of proliferating infrastructure funds and financing that uses cryptocurrencies. I also reviewed benefit of applying characteristics of blockchain technology to energy infrastructure investment. In this article, I will discuss penetration of energy trading platform, the most popular application of blockchain technology in the energy sector.
The first wave that started in 2016
2016 was the year when blockchain technology was first brought to the energy industry and exciting pilot projects that envisages future of energy industry started in different parts of the world. First, in April 2016, LO3 Energy, a startup company in the U.S.A. started operation of Brooklyn Microgrid in a corner of of Brooklyn, New York. It allows local residents to trade attributes of clean electricity generated by rooftop solar PVs of the local community in a peer-to-peer (P2P) fashion using blockchain technology. A novel concept of sharing energy among neighbours in the era of abundant distributed energy resources such as solar PVs drew attention.
In May, in the headquarter of Nasdaq in New York, a demonstration was conducted that converted electricity generated by solar PV in the Western U.S.A into certificates tradable on Nasdaq Linq, a blockchain-based market, using IoT technology developed by a Nevada-based startup, Filament. This demonstration presented that electricity can be easily traded using blockchain technology after being converted to a digital asset.
Subsequently in August, Power Ledger, an Australian startup company commenced a pilot of a P2P energy trading in National Lifestyle Village in Western Australia. Further, the company also started another pilot in Auckland, New Zealand, partnering with Vector Ltd., a New Zealand distribution utility. Like LO3 Energy, those are the beginning of new trading method of energy in the world of plentiful distributed energy resources.
Although those companies have different methods of realizing P2P energy trading, it is common to those trials to digitize energy information, record the information on blockchain, and trade. After those pilots, companies that develop blockchain-based energy trading platform has spread to Europe, U.S.A., Oceania, Asia, and South America, and the number of such companies is now approximately 60 (listed on Author’s article). I would say the first wave of energy trading platform is from 2016 until now, with central activities being demonstration of proof-of-concept.
The world is testing ways that work
Then where are companies that develop energy trading platform toward commercial operation? Figure 1 shows the research outcome of status of those companies based on publicized information. Over 40% of the companies started, or are at least planning, pilot projects. On the other hand, only 10% of the companies have open network (deemed commercial) or commercial projects, which indicates that majority of the companies are yet to reach commercial operation.
How can we understand this? First of all, the most popular use case of energy trading platform is P2P energy trading among consumers; but a consumer cannot sell electricity to other consumers without a retailer license. I would assume this applies to most countries in the world, and change of current rules is needed to legally enable P2P energy trading.
In addition, many companies think P2P energy trading that utilizes existing transmission and distribution network. Existing transmission and distribution networks are managed by network operators and retailers (vary depending on countries and regions), but rules around P2P energy trading is yet to be developed. It would be challenging to start a business without coordinating with those electricity business entities and regulators. Furthermore, integration of energy information with existing system is required in order to distinguish existing billing and P2P billing. There are a lot of challenges.
One way of realizing energy trading is taking advantage of microgrid (*1) or private wire network (aka embedded network) (*2), thereby getting away with the regulation and requirement of existing network operation explained above. However, those microgrids and private wire networks are limited and not easy to find for application; and it would take time to build one from scratch.
*1 Microgrid: a network with distributed generation, energy storage, and electrical loads; it can be operated independent from a grid, or connected with a grid.
*2 Private network (embedded network): a network built dedicatedly for, and by a company or community
The need of coordination and harmonization with regulation and existing business operators may be blocking companies that develop energy trading platform from going commercial. Besides, different companies are trying different methods of realizing energy trading on different types of energy networks. Needless to say, how business is operated is not just one, but many. Can’t we say that companies all overt the world are in the stage of finding out ways that work through experimenting?
Furthermore, energy system, regulation, people’s needs and behaviour vary from country to country and region to region. Business based on energy trading platform is likely to vary depending on countries and regions. Currently there are limited number of commercial (including self-claimed) projects, but those cannot necessarily be deployed in other countries and regions, even if those projects are successful. I would say finding out conditions that enable energy trading platform business is part of experiment underway.
The key to setting off the second wave is creating regulatory framework
In August 2018, blockchain technology was reported to have passed Peak of Inflated Expectations and entered Trough of Disillusionment of Gartner’s Hype Cycle. It is the time when advancement of the technology and deployment of businesses that applied the technology do not meet expectations that have been inflated in the past few years, resulting in people’s interest fading away. Will energy trading platform, an application of blockchain technology, follow the same trend? In 2019, it has been three years since “the first wave” of energy trading platform started off, but there is no visible hint of breakout as of the beginning of 2019.
Nevertheless, you might well think some companies move on commercial phase once passing pilot phase among ones that are now in the pilot phase. Companies that cannot figure out ways of reaching commercial phase will repeat pilots or die out. This process is likely to be relatively slow, and may take a few years until a round of pilot projects end.
It is hard to say that companies that have open network or commercial projects in Figure 1 have established a solid business model. “Commercial projects” at this stage still constitute a continuation of trail and error. However, it would not be surprising if companies with an innovative and sophisticated business model emerge when increasing number of companies move on commercial phase.
An initial pilot project tends to be conducted in a lab environment or with a small number of customers. If demonstration of proof of concept is successful, it is logical to try out the idea with a scale of commercial business. At this stage, regulations that weren’t an issue at small-scale pilot may restrict larger-scale operations. Without regulatory restrictions, deployment of advanced technology would be faster.
It is clear that a new regulatory framework has to be developed for blockchain-based energy trading platform to become common. A possible scenario is that a country does this first, and the regulatory framework spreads to the other parts of the world. The next big wave, the second wave of energy trading platform, may come when regulatory frameworks that suit abundant distributed energy resources and digital technology is developed.
- #1 – Utility System Reform and Uber/Airbnb
- #2 – Financing in the era of infrastructure democratization
- #3 – Setting off the second wave of energy trading platform
- #4 – The latest trends in energy ICO
- #5 (final) – Notable areas in the future based on analysis of areas of applicaiton
Previously an employee of engineering company and electric utility company, he now does business development in the area of blockchain application to the energy sector for a US firm.