Blockchain – what is it and why should the energy sector care?

image1Having already taken the finance industry by storm, the Blockchain technology has started to attract a lot of interest from other sectors. While being on the panel for one of the debates at the excellent Blockchain Expo in London this January, I realised that more and more business executives want to join these discussions, and would benefit from a relatively non-tech introduction to it. So here are the basic concepts, with some the added thoughts on why it should be relevant to my current industry – the energy sector.

What on earth is a blockchain?

In a nutshell, a blockchain is a distributed database that facilitates secure online transactions.

The entries in this database (records, or more precisely, blocks) are designed to be secure. They have specific mechanisms through which they link to each other in a way that makes alteration of their data virtually impossible.

From this point of view, a blockchain can be considered a secure ledger that does not require a trusted administrator, and which is suitable to recording sensitive information and demonstrating chronology of ownership.

A blockchain can be also understood as largely an append-only ledger for recording the history of transactions. The ledger exists in multiple copies across the participants to that blockchain (which are synchronised all the time), and uses a system of decentralised consensus, whenever a change is required for the historical data stored in the ledger. This means that participants in the blockchain can record new transactions in the ledger, however if one needs to alter transactions that were recorded previously, this can be done only with the consensus of the other participants.

All information that is present on a blockchain, as well as the operations executed within the context of the blockchain, are called “on-chain” – everything else is off-chain. This has relevance when one tries to bridge the digital world (on-chain, secure) with reality (off-chain, insecure).

Evolution of the blockchain

The first generation of blockchain is considered the one supporting digital currencies, such as bitcoin.

As the security of the blockchain proved itself, additional features were added to this technology in a second generation, and this was done as the blockchain platforms diversified (e.g. Ethereum, Hyperledger, etc.).

The most important new feature was that of a smart contract. This is in effect a piece of computer code that runs on a blockchain. This code defines the rules and consequences in the same way that a traditional legal document would, stating the obligations, benefits and penalties which may be due to either party in different circumstances.

The purpose of a smart contract is to enable two anonymous parties to do business with each other, without the need of a middleman.

A smart contract can be automatically executed by a blockchain. Because the blockchain is a secure platform by design, it allows for the smart contract to be trusted by the blockchain participants.

The challenge comes from the interaction with the real world– for example the smart contract needs information such as price points in order to trigger its execution. Who can be trusted to inject this information into the blockchain?

The revolution: blockchain 3.0

Enter the “oracles”.

An oracle is an entity trusted by the blockchain and its participants, and which can securely present the blockchain with claims about the real world. These can be soft (e.g. an oracle that introduces official kwh prices into the blockchain) or hard (e.g. an energy meter that introduces energy consumption or production data into the blockchain). The keyword here is “trusted”, which would mean a cryptographically attestable and tamper-proof way of providing the real data, thus allowing for off-chain interaction.

The details behind blockchain 3.0 are still crystallising, and while they do so, industry touts this technology as the next revolution of the Internet. While blockchain 1.0 and 2.0 have been largely applied to the financial sector, blockchain 3.0 will have particular relevance to industries, government and education. It is worth noticing that the technology gradually becomes available more broadly, and one of the leading efforts in this regard comes from Microsoft, with its Bletchley initiative – Azure support for blockchain infrastructure “in the cloud”, since November 2016.

This sounds familiar…

How is this different from regular (complex) computing systems?

The key difference is that a blockchain is a distributed, secure-by-design platform with the capability to execute autonomous smart contracts which include financial operations, without the need for a trusted central authority.

Enough with the theory – how is this relevant to the Energy sector?

In April 2016 a first blockchain-managed energy trading transaction took place in New York. A small solar micro-grid venture enabled residents to sell each other solar energy, without the involvement of national utility companies. The historical transaction was made by the owner of a solar roof panel who sold a few kWh to a neighbour, using a smart contract on the Ethereum blockchain.

In November 2016, a mWh energy trade took place between two European energy companies (Yuso and Priogen Trading). This was done on a specific blockchain platform developed for the energy sector, Enerchain, and which showed the possibility of creating a peer-to-peer energy marketplace that does not require a centralised platform or authority.

Clearly, the above are proof of concept examples, however the industry develops quickly. Take the Bitcoin for example. At the end of 2008 it was presented as an idea. 8 years later it has about 16 million bitcoin in circulation. 1 btc is valued at over $1000 as of Jan 2017, and companies such as Ernst and Young, Microsoft, Dell, Expedia and PayPal are accepting it for payments.

While in its infancy, the technology has potential advantages to the energy sector. It could lower the barriers to entry for the energy marketplace. With its secure and distributed ledger it can offer a trusted and transparent way of recording transactions, both for the energy generation as well as for its consumption. Its trusted nature means that peer-to-peer transactions can be accomplished without intermediaries, and this could streamline the energy distribution.

The blockchain platform could ease the process of verification for green energy, and also allow for the direct trade of renewable obligation certificates.

Last and not least, blockchain 3.0 could open up new possibilities, when coupled with other developments in technology and in the energy sector. One could envisage the scenario of a “smart” house, where the smart meter is a participant in a blockchain 3.0 energy trading platform. The smart meter acts as an economically independent machine with its own digital wallet. Smart contracts that are associated with the meter will allow it to autonomously trade excess energy that is produced by the household (solar/biomass/etc), or purchase at the most advantageous rate based on the market offer – perhaps even securing a low rate for an extended period.

Conclusion

Considering the potential of the blockchain technologies, their application to various sectors (in addition to finance) should be closely followed, in order to understand what opportunities develop and how they could transform the market.

Some further info:

1st Blockchain:

The Bitcoin was the first application of blockchain technology. Bitcoin is a form of digital currency that was designed and implemented in 2008/2009 by an unidentified person that goes by the name Satoshi Nakamoto. The bitcoin blockchain is the public ledger of all transactions ever carried out with bitcoin and it has resolved the double spending problem which inherently affects digital cash. As of Jan 2017, there are more than 16M Bitcoin in circulation. Microsoft, Ernst and Young, Dell, Expedia and others accept bitcoin.

A note about encryption:

Blockchains use established security technologies such as public/private key encryption. This type of encryption uses 2 sets of characters called keys. One key can be used only for encryption and it can be safely made public by its owner, so that anyone can encrypt information addressed to the owner. The other key is only used for decryption, and the owner keeps it private. Public key encryption is considered secure as there is no need to exchange decryption keys. This encryption is also used for digital signatures.

Digital currencies that use encryption technologies are also called cryptocurrencies.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s