For blockchain applications, the most unpopular industry in the world should be the electricity market. Energy markets are attractive testing grounds for investors to bridge financing gaps, close deals and increase transparency.
In the power sector, processes such as electricity procurement, production and delivery present multiple opportunities to test blockchain technology. In advanced economies, small businesses using blockchain are building microgrids in densely populated areas like New York, developing energy trading platforms in Tokyo and Australia, and making supply chains more efficient around the world, with large companies from the U.K. to Illinois Utilities are also funding research and testing blockchain applications on their systems.
While Tokyo and New York City have extremely well-developed, capital-intensive transmission and distribution networks, and the utilities that serve these networks are large organizations with complex supply chains, where does blockchain fit in the puzzle of electrification in the developing world? ?
According to the data, two regions, sub-Saharan Africa and India, account for most of the global electrification deficit, accounting for 57% and 25% of the world's approximately 1.14 billion people without electricity, respectively, in stark contrast to Japan and the United States.
Can these areas lack the systems of some of the most basic physical power assets, such as power stations, substations, and transmission and distribution cables, to effectively utilize advanced technologies such as blockchain? Let's take a look with Maoqiu Technology.
Not only can energy markets deploy blockchain technology to achieve electrification goals, but they may actually be the best market to push the limits of blockchain’s capabilities in the power sector. There are potential risks to less traditional electrified roads, but there may also be benefits to working in an unbuilt environment: technological "white space".
For example, modifying policy and regulatory frameworks in developed markets may be too onerous to create attractive opportunities for blockchain solutions; moreover, many developed economies already have systems in place to ensure payment for services, while developing countries may lack the same Structure.
In the energy market, governments and businesses can leverage blockchain to potentially advance the future of their grid by unlocking three capabilities - a distributed, flexible, adaptive and transparent network:
Bridging the Funding Gap
Enabling Energy Trading
Unleash Radical Transparency
first level title
How can blockchain improve electricity supply?
Electrification is an expensive process, with physical and financial challenges such as the installation of power lines and costs associated with generation and transmission.
Investors need to get their money back; countries and generators that trade electricity need to trust they will get paid; and regulators need transparency to monitor transactions. Blockchain may offer a solution to these problems.
Bridging the Funding Gap
Despite advanced and innovative approaches by investors and financial institutions to finance power projects, funding for power generation assets in developing markets remains scarce. The main reason for this scarcity is that investors need to enter into long-term (15-20 year) power purchase agreements (PPAs) with reputable off-takers before they can secure financing.
In many developing countries, offtakers are state-owned public utilities, and unfortunately, capital markets often do not consider these offtakers to be sufficiently creditworthy for investors. Thus, development bank funding and donor guarantees support short-term development with the goal of improving the utility's creditworthiness over time.
For example, Lithuanian company WePower is using blockchain technology to sell future energy products from planned renewable energy production to raise funds. Investors market their future contracts through WePower's online trading platform and receive funds from investors in exchange for energy tokens, which can later be traded as agreed or receive electricity.
While the concept is similar to more traditional PPAs, WePower's approach includes two innovations. First, it “distributes” the PPA by tokenizing it, avoiding reliance on the utilities that financial markets have traditionally priced loans. Second, it liquidates the electricity market, allowing WePower token buyers to fund the project and then sell the right to consume electricity to end consumers or utilities/retailers.
There are real costs and risks for state-owned vertically integrated power system operators in developing countries. When investors seek capital, financiers typically charge a premium based on the risk profile of these system operators to secure the capital — a premium that can be prohibitively high but is the cost of doing business in certain markets.
For example, in April 2016, the Tanzania Electricity Supply Company owed $300 million to its suppliers. It’s an environment where it’s hard to get project funding: when investors aren’t getting paid, their investors aren’t getting paid, so investors often stop pumping money.
Can Power Sector Intermediaries as Institutional Offtakers and Capital Markets Be Decentralized? WePower is testing this idea. Its model in the context of a developing country would allow retail investors to fund projects by purchasing its tokens, and allow a distributed network of holders of those tokens to become direct taxpayers of the project, bypassing centralization market operators.
Enabling Energy Trading
Most energy markets require flexible grids of the kind that exist in more developed countries, for example, where areas of high energy production can be efficiently used to power less productive areas in real time.
India, for example, has ambitious renewable energy targets that will lead to substantial variable renewable generation, but adding to the grid could be problematic in areas where intermittent wind and solar resources may dominate.
Interregional energy trading could alleviate the intermittency problem by allowing one region with declining production to buy electricity from another to make up that deficit.
Blockchain can provide a smoother and more efficient environment for this type of transaction through the programmed logic of smart contracts – logic that can leverage consumption and production data on a shared ledger to trigger automated transactions.
Smart contracts also present the opportunity to automate the renewable energy certification process. The Energy Exchange of India opened the market for Renewable Energy Certificates (RECs) in 2015, but required state and central agencies to be involved in the certification, registration and issuance of RECs – a time-consuming but necessary process.
Smart contracts can not only automate this process, but also increase the speed of transactions while creating immutable records that support REC authenticity and auditing. In a blockchain ecosystem, states and central authorities will still manage and operate the system, but smart contracts will facilitate more seamless and transparent transactions. It is worth noting that to apply the above use cases, the grid infrastructure may need to meet minimum standards.
Countries such as India are installing large amounts of variable renewable generation onto their still maturing grids. These additions put added pressure on existing grid operations, as unexpected drops in wind or solar production often require last-minute dispatch of conventional sources.
Grids in energy markets are often very regionalized. Enabling point-to-point energy transfers between regions to balance the ebb and flow of renewable energy could mitigate the causes of pressure change. Smart contracts that leverage blockchain open ledgers to produce data offer a potential solution to help balance variability and drive overall grid stability.
Transaction automation and transparency can not only strengthen existing grids, but also reduce operating costs, especially for isolated small or rural microgrid solutions. Traditionally, microgrid investors have often struggled to find attractive returns while offering reasonable electricity prices. Innovative entrepreneurs active in emerging markets are driving scalable blockchain-based solutions.
Companies like LO3 are testing microgrid-scale peer-to-peer transactions in neighborhoods in New York City, and Power Ledger is working to deploy similar solutions in urban India. This peer-to-peer transaction deploys a blockchain-based smart contract that can automatically eliminate production and consumption across the microgrid.
This automatic settlement between peer consumers and peer producers of a microgrid reduces the operating costs of the microgrid; cost reductions are especially important in developing countries where profit margins are often low. Both LO3 and Power Ledger offer potentially promising new technology, but after a proof of concept they need to support regulatory reform, whether at a state or provincial level like New York, or nationally in countries like India Inside.
Another innovative approach is being explored in South Africa by Bankymoon, which is enabling prepaid meters for isolated solar home systems or rooftop power generation. Installing prepaid meters ensures that suppliers recoup their capital expenditures, as consumers pay up front for what they use.
In addition, Bankymoon enables its prepaid electricity meters to accept digital currency payments, which allows individual donors around the world to prepay Bankymoon to meter electricity usage for schools and other social institutions. In turn, these payments are automatically settled through blockchain-enabled smart contracts.
Extending electrification to the least served populations has been a long-standing problem in many developing countries. The utilization rates and affordability of smaller and less affluent populations often do not allow utility companies to recoup the capital-intensive costs of additional generation, transmission, and distribution capacity needed to expand the grid.
Microgrids and solar home systems are rapidly becoming cost-effective. Solutions such as peer-to-peer transactions can reduce operating costs through blockchain-enabled automated settlement; prepaid electricity meters can be built to accept cryptocurrencies, expanding the rate payment base.
Unleash Radical Transparency
In the electricity sector of energy markets, opaque rulemaking, poor compliance by utilities and other market participants, and insufficient regulatory oversight can deter investment. Where regulation is effective, the cost of compliance can be a difficulty for market participants.
Poor transparency creates opportunities for corruption, one of many hidden costs that can hurt the profitability of power generation projects. Even the best regulation in emerging markets can fall prey to a lack of standardized processes, lagging IT systems and concerns about undue influence by special interest groups. Uncertainty often leads project investors to demand high premiums for projects to move forward, so many don't move forward at all.
While there are currently no known use cases for blockchain-enabled regulatory reporting in the energy sector, financial services players in Europe recently implemented a proof-of-concept called RegChain.
RegChain captures transactions and manages reporting requirements through smart contracts, helping industry participants not only reduce administrative investment and costs associated with regulatory reporting, but also improve compliance and transparency among participants.
Using RegChain, industry members can automate compliance procedures, and regulators can audit processes and procedures. Automated reporting to regulators could have wide-ranging implications, but one of the most powerful could be the ability to transform the power sector in developing countries into a data-rich rather than data-poor environment.
Strengthening regulation, while better addressing electricity sector challenges in real time, can benefit energy market citizens, electricity market participants, and investors.
Perceptions of corruption, haphazard rule-making and the corresponding market and black market compliance costs appear to be some of the most commonly cited reasons for underinvestment in energy sector capital in energy markets.
first level title
Assessing the potential of blockchain in the energy market
While blockchain appears to have great potential for electricity markets in developing countries, it is not necessarily suitable for all uses. Stakeholders should keep the following factors in mind when considering blockchain applications in developing countries:
build an alliance
In energy markets, investors, utilities, operators, regulators and customers often operate in an opaque system. Most participants are unaware of the activities of others, and energy sector transaction reports are, at best, submitted quarterly, or even annually.
Much of blockchain's value lies in the technology's ability to provide transparency while keeping transactions secure -- neither of which are currently available in many developing markets. While transparency and security represent long-term net benefits for all participants, such benefits may require substantial short-term investments to establish the level of cooperation necessary to build a blockchain-powered system.
Establishing these systems or alliances requires stakeholders in the entire value chain to understand the positions of stakeholders in the local market, as well as local policies and rules.
Designed with scale in mind
While blockchain solutions are likely to provide value at every level of the electricity industry — from microgrids to regional cross-border trade — broader blockchain applications are likely to have the greatest impact on existing systems.
Blockchain adopters will need to decide whether to develop lower-cost local or national systems that will need to be integrated into larger regional frameworks in the future, or undertake the substantial up-front costs associated with developing comprehensive systems that can immediately span national borders and regions cost.
The historical spread of network innovations suggests that local and national systems may evolve before cross-border regional solutions emerge. Some markets will recognize the enormous value of blockchain solutions early; others will lag. Eventually both may be integrated into the regional system.
Ongoing need for centralized utilities
Most countries envision a more flexible and distributed grid, but the reality is that centralized utilities will likely continue to meet most electricity needs. Centralized utilities should explore how blockchain solutions can benefit them before agreeing to modernize IT, train staff, and invest in the IoT technologies required to implement blockchain.
Centralized utilities are increasingly vulnerable to catastrophic cyberattacks; the December 2015 hack of the Ukrainian power grid provides a sobering example.
Designing systems with blockchain in mind can help mitigate security vulnerabilities and help provide consumer data privacy. Successful blockchain solutions can incentivize the participation of utilities—as well as the participation of other market stakeholders—and demonstrate the potential for utilities to streamline operations and reduce costs.
attract capital
Potential investors may be skeptical of applying an emerging technology such as blockchain in the context of the emerging market electricity sector, as it has not yet found broad applicability in more complex electricity markets.
However, this skepticism likely stems from the traditional concept of an optimal electricity market—featured by centralized administrators and clearinghouses, dispatching power from baseload assets requiring 30-year fixed investments.
next
next
Despite these challenges, blockchain seems likely to help overcome obstacles that keep millions of people around the world in the dark. Hairball Technology believes that development practitioners can develop implementation roadmaps to help solutions grow in scope, scale, and complexity.
Use Cases: As discussed in this article, blockchain power sector applications appear to be nascent across all markets, including emerging ones, and further opportunities may emerge. Developers should work broadly with investors, utilities, operators, regulators, and customers to help understand where blockchain solutions can disrupt business challenges and build a The costs have a greater impact on the entrepreneurial environment.
Piloted Proof of Concept: As the first solutions hit the market, the role of international development agencies may shift from building local capacity and understanding to building a sustainable enabling environment while advancing solutions aligned with development goals. Support through pilot tracking, benchmark collaboration, and retrospective analysis provides early-stage entrepreneurs with access to the data and training necessary to make informed decisions and understand the non-technical components needed to successfully deploy blockchain applications.
Scale: Given the penetration of international development agencies in the emerging market power sector, in this regard, international development agencies are well placed to provide value in building a consortium with strong membership, leadership, funding and governance in the power sector.
Development partners may play different roles at each stage of the roadmap, as defined by the alliance operating model. With their intervention, blockchain has the potential to have a huge impact on bridging the financing gap, enabling energy transactions and unleashing radical transparency in the electricity sector.
