Until recently, the energy industry was mostly associated with roughnecks, gushing greasy dirty oil, and centralized electricity distribution systems. But the digital revolution and technological advances have made even the notoriously slow-to-change energy sector start using smart rigs, data analytics and artificial intelligence.
Now the latest technology that is already changing the financial services sector is entering the energy industry: blockchain, the technology best known for cryptocurrencies such as Bitcoin.
Blockchain enables direct processing and recording of transactions between parties, without the need to have a third party as an intermediary, such as a power supplier, a bank, or a public authority. Each party in a blockchain has access to the complete history and database, and no single party controls the data. Blockchain tech is altering the way parties do transactions, shifting away from centralized and toward a decentralized system, PwC said in a June 2016 report.
This underlying ‘decentralization’ principle of blockchain technology has reached some maturity in the financial industry. It’s new to the energy sector, but it has already given rise to many start-ups and pilot and test projects initiated by utility and oil and gas giants.
Brooklyn Microgrid, for example, is a peer-to-peer marketplace for excess energy, where residents can harness excess energy and sell it to other tenants in the building or to neighbors across the street utilizing blockchain ledger technology developed by U.S. start-up LO3 and by Siemens.
In Germany, innogy Innovation Hub is testing a blockchain-based technology for EV-charging payments
In Australia, Perth-based start-up Power Ledger—a blockchain-based peer-to-peer energy trading platform—enables consumers and businesses to sell their surplus solar power to their neighbors without an intermediary.
“This is in response to a decentralization of energy trading—it’s becoming increasingly untenable to have a centralized system, which is incredibly expensive because of infrastructure,” environment scientist Paul Donovan, who is invested in Power Ledger, tells Australia’s ABC News. Power Ledger recently raised $26.7 million (34.15 million Australian dollars) in Australia’s first ever Initial Coin Offering (ICO)—a type of crowd funding in which a blockchain company sells part of its ledger to investors, which gives them access to the blockchain.
It’s not only start-ups developing blockchain-based transactions and P2P markets. Legacy energy companies are also testing to see what the hype is all about, probably rightly so, because if blockchain were to materially disrupt the supply and sale of energy, utilities would be the first to be affected.
Earlier this month, Germany’s E.ON and Italy’s Enel traded electricity for the first time via a new marketplace that uses blockchain technology. In May this year, the partners founded the ‘Enerchain’ initiative together with other European energy companies. So far, 33 companies have joined the initiative, aiming to develop a decentralized European marketplace for energy trading, E.ON says.
UK’s oil supermajor BP sees blockchain as an “opportunity to create disruptive business models in trading, supply chain management and retail. It might also be used to reduce operational risk and transactional costs, as well as to increase compliance.”
In June this year, BP, together with Eni Trading & Shipping and Austria’s Wien Energie, successfully completed a pilot for an energy trading confirmation solution on a blockchain platform developed by BTL. A 6-month go-to production phase follows, where BTL and participating companies are working to launch a live, commercial version of the energy trading solution.
“There are uses for blockchain that could give us a competitive advantage,” David Eyton, head of technology for BP, told the Financial Times earlier this month.
“Blockchain can be much more efficient in terms of speed and verification of transactions,” Eyton added.
According to experts, significant barriers still remain in blockchain adoption, not only in energy but in other industries as well. One is the lack of common industry standards. Another is that it is a largely unproven technology that has not yet reached maturity and is still under development.
If, however, it proves scalable and reliable, it could speed up the transition to a “distributed world” in the energy industry, James Basden and Michael Cottrell with Oliver Wyman’s Energy practice wrote in the Harvard Business Review in March this year.
“While there’s always room for startups to move in and disrupt this industry, established utilities are best placed to evaluate and make strategic bets on blockchain technology’s potential applications,” say Basden and Cottrell. “If they can seize the moment, centralized incumbents may turn out to be the true disruptors, ushering in a new era of decentralized power.”