Overall electricity demand growth has remained limited to 1%, but it is very much expected that electricity rates will continue to rise due to increased investment demands in transmission infrastructure. This along with the latest innovation in smart metering devices, reduction in prices of renewable energy and storage systems are leading towards growth in a decentralized approach. In this model, traditional energy consumers become energy producers, selling excess energy back to the grid or other energy consumers within their vicinity, engaging in peer-to-peer sale/purchase agreements. Blockchain technologies can provide secure, reliable and faster way for communication between millions of such energy users. This will lead to a shift in the balance of investment towards more decentralized approach. Instead of only large utilities reaping profits from large energy plants, new entrants into energy marketplace will redistribute revenue streams.
Selling excess power back to grid through net metering
Energy producers which are not utility companies, mostly solar rooftop setups, sell excess energy back to the grid which is subjected to net metering. This mechanism credits power consumers for the amount of energy they deliver back to the grid. Mostly it helps in lowering electricity bills for the consumers instead of providing direct revenues. Rates provided are equal to retail electricity rates, but due to growing utility pressures for decreasing credit rates, there are chances of reduced benefits from the net metering mechanism.
Blockchain for decentralized energy marketplace
Due to predicted reduction in credits from excess energy, there will be an increasing number of instances where electricity will be produced and sold locally within a community. Blockchain, with its distributed ledger mechanism combined with modern communication technologies, can provide a highly decentralized energy marketplace. Though there will be many regulatory hurdles in this regard, but future years can see them fading or reducing, due to mass local benefits. TransActive Grid, a Brooklyn NY-based startup, has attempted at setting up such blockchain based energy network. Similarly, Grid Singularity is utilizing ‘pay-as-you-go’ mechanism in developing countries using blockchain. John Lilac from ConsenSys gives a quick explanation of how the smart grid system works in the video below.
Blockchain promoting decentralized grid architecture
The greatest incentive for decentralized grid topology will be the distributed transaction mechanism provided by blockchain. Localized energy market can only develop once consumers and vendors have a secure and reliable system of maintaining records of payments. Blockchain with its highly reliable and fraud-free system is best suited for the decentralized approach. This will lead to the increase in development of decentralized micro-grids and technologies enabling microgrids. Roof-top solar, storage equipment, smart metering devices, and even electric vehicles will be the greatest beneficiaries of blockchain implementation.
Policy impacts of Blockchain may render net metering redundant
Although net metering has led to enormous growth for solar roof-top setups as it provides good incentives when it comes to the debate between going solar vs not going solar. But in future, it is expected that utilities will offer much lower rates for the energy credits. With blockchain transactional scheme, small distributed producers will have an alternative to selling their excess power to consumers other than utilities. This will result in more adoption of efficient renewable technology leading to better policies for the general public benefit.
Blockchain and IoT (Internet of Things)
In a futuristic scenario, all electricity consumers and producers within a community will be connected in a mesh topology through wireless or wired networks. IoT-based sensors, placed at every node, will relay information regarding energy produced and consumed along the network. This will allow real-time visualization of energy demand/supply, allowing energy peers to coordinate and close energy purchase agreements. All happening according to their mutual price negotiations, through secure blockchain ledger. Such ‘smartgrids’ will offer the best situation for using public blockchain where end node users are completely unknown to each other.
Estimates of decentralized energy marketplace by the year 2030
According to a report by The Goldman Sachs, an estimated opportunity between $2.5 billion to $6.9 billion is available for blockchain industry in distributed energy sales. Solar rooftop penetration would rise from 1% to 5%. Average retail electricity price would rise from $0.10 to $0.14 per kWh. Distributed energy generators don’t require transmission lines investment, avoided cost in the case is equal to the cost of generation, which is estimated to be around one-third of the retail cost.
According to the report, if avoided cost of $0.05 is chosen by distributed generators to sell their excess electricity, there would be a $2.5 billion opportunity for the blockchain industry. This is worst case scenario, considered due to increase in pressure from utilities on decreasing net metering credit rates.
If distributed producers are compensated less by utilities, they may start consuming more power themselves or think of ways to sell it to other consumers. Assuming, if other consumers had an opportunity to buy electricity from distributed producers at $0.13, which is 10% discounted compared with the retail price, then there will be a big opportunity for distributed generation. Distributed producers would be compensated at much better rates and opportunity is quantified at $6.9 billion. If producers sell it at $0.10, a price in between avoided cost and a 10% discount to the grid price, then the opportunity available will be $5.1 billion.
Benefits of blockchain adoption for decentralized smart grids
Blockchain is the technology which can unleash the true potential of a decentralized model by providing secure, reliable, outage free and self-executing community management of energy networks. It will lead to lower lines losses, better load management, lesser outage hours and overall higher efficiency. Ability to conduct secure energy transactions in a peer-to-peer mode will increase the proportion of distributed generation within global energy mix. It will also provide great incentives for advancements in the field of renewable and Smart grid appliances. Overall, energy networks will become more robust with the inclusion of IoT and blockchain platforms, as every node and asset in the smart grid will be helping to keep the grid stable.
Schenider, J. (2016). BlockChain : Putting theory into Practice. Goldman Sachs.