The Promise of Blockchain to Change the Utility and Oil & Gas Industries
The energy industry has found a new favorite topic with the blockchain. On the one hand, it fears the disruptive potential of this technology in the case of direct energy tradings between producers and consumers, as the energy broker becomes obsolete. On the other hand, there is a broad fascination regarding the economic potential of blockchain-based solutions. A wide number of cooperations have launched between established market actors and aspiring blockchain start-ups.
The task of a blockchain is to store transactions of any kind, thereby doing something simple, yet in a very complicated way: Transactions are combined in one block, authenticated by a decentralized consensus mechanism and queued into the distributed ledger, referred to as the chain. The complete transaction history thereby synchronizes among all participants. The expectations towards the blockchain are cost reductions, an increased technical security of information and new business models. However, where does the conception come from that the blockchain technology has the potential to revolutionize the energy sector and to contribute to an emerging real-time energy system? Starting point is the enormous complexity that is created when millions of controllable devices, e.g. small-scale cogeneration units, batteries, photovoltaic panels, and all kinds of load devices, participate in the energy system. This is where the blockchain technology promises to bring a new level of economic benefits.
Blockchains are a radically alternative design to existing system architectures, as transactions are result of a consensus mechanism and immutable, due to the cryptographic algorithm in use. In combination with the decentralized provision of the transaction history, it is possible to have a holistic view on the network, which eases communication between devices considerably. In this way, it allows for a flexible participation of an arbitrary number of devices at different energy markets. Furthermore, processes can be designed fundamentally different and a whole set of new applications can emerge. Prototypical approaches in the oil and gas industry may include streamlining processes in the supply chain, proofs of origin, or asset managing and benchmarking for the thousands of small-scale cogeneration units that are being installed every year.
The central questions is whether the blockchain technology already has the technical maturity for a wide-scale adoption of these applications. Bitcoin has proven that transactions can be executed between strangers fully automated without an intermediary. With the addition of smart contracts, Ethereum has impressively shown that even complex business processes can be integrated into the Blockchain without the need for a central agency. The sobering reality, however, is that less than 20 transactions per second are possible for both Bitcoin and Ethereum and that the validation of a transaction takes several minutes. This is by a factor of hundred still far-off the speed of today’s payment systems of credit card providers. In addition, the high costs for mining, the validation of a transaction, hinder the high-frequency communication needed for a real-time energy system. For instance, the standard fee for a Bitcoin transaction is currently 0.0001 Bitcoin or around eight cents. The frequent trading of smallest amounts of energy is therefore highly unattractive.
Other barriers for a wide-scale adoption of the blockchain technology in the energy sector are the free accessibility and anonymity of participants in public blockchains. As electricity, oil and gas supply are critical infrastructures, participants need to be known in the balancing group. The energy sector would be well advised to establish common rules and standards for Blockchain-based applications and for the interaction of public and private blockchains.
Currently, tremendous effort goes into the further development of the blockchain technology. There are already available alternatives to the Proof-of-Work, the computing power as central element for the validation process. Ethereum has announced to switch to the so-called Proof-of-Stake mechanism, in which not the computing power, but the equity ratio of the currency is the relevant parameter in the validation process. Another alternative constitute so-called Permissioned Ledgers for business environments. These centrally operated Blockchains connect registered devices in order to reduce validation costs and process time. The blockchain technology offers interesting design options for the emerging real-time energy environment. Utilities generally have all prospects to test specific applications and to find out whether blockchains can be the foundation for profitable business models. However, potential applications should be thoroughly scrutinized for suitability: Not every problem in the energy sector is a nail, for which the hammer blockchain can be used. The excessive present expectations leave no doubt that blockchain is also a hype. However, the decisive question is whether the maturity level of the technology is already high enough to test and develop new business models. There are strong signs that this is the case. The energy industry has currently the choice to wait or actively engage in the development of standards and the regulatory framework. Institutions like the Energy Web Foundation can help key stakeholder groups – electricity regulators, ratepayer advocate groups, and the public – better understand the benefits of blockchain technology and ease the technology’s path to market.
I will be speaking about this topic in my keynote “The Promise of Blockchain to Change the Utility and Oil and Gas Industries” at the International SAP Conference for Utilities in Lisbon on March 30th, 2017.
[This contribution is based on an article published in German: http://veranstaltungen.handelsblatt.com/digitalisierung-energie/blockchain-in-der-energiewirtschaft/?code=&pieceid=]