Blockchain and the Energy sector – #1: Will microgrids transform the market?

Blockchain technology has received a lot of attention from subject matter experts and the mass media alike over the last 12 months. While initially focused on the Financial Services industry to a large extent, arguably attributable to the prominence of the Bitcoin cryptocurrency as its most prominent use case, attention and experimentation has meanwhile moved beyond FSI.

Change is already happening in the energy market and Deloitte Switzerland is now launching this series of perspectives in order to explain the underlying drivers and concepts. This initial piece focuses on the possible use of microgrids in the future, whereas future episodes will focus on smart storage and specifically opportunities in the Swiss energy market. We welcome any feedback and suggestions of additional topics to cover.

Decentralising energy supply: peer-to-peer virtual energy trading networks

The current ‘traditional’ method of electricity supply is built on a centralised system operated by major energy and utility companies. It consists of a main grid in which energy is produced at large power stations and distributed to consumers through a wide transmission network.

Challenging the traditional electrical supply model are microgrids. The “microgrid” term normally refers to a localised grid that can disconnect from the main grid and operate autonomously. It uses local sources of energy to serve local users, integrating the supply of energy from various producers, including local power generators and providers of renewable energy such as solar power. Consumers with their own energy production capabilities (wind turbines or solar energy systems) can sell their surplus energy production back to peers in the microgrid, on a pay-per-use basis (becoming 'prosumers').

While physical microgrids are still rare, we do observe the development of virtual microgrids using peer-to-peer energy trading. Blockchain is just one element in the transformation of electricity supply, providing Distributed Ledger Technology (DLT) to members of a peer-to-peer energy network, or microgrid. It offers [or ‘provides’] a reliable, lower-cost digital platform for making, validating, recording and settling energy transactions in real time across a localised and decentralised energy system.

With increasing demand for more flexible energy supplies we expect a continued increase in the number of virtual microgrids and a gradual movement towards true, physical microgrids along 4 stages depicted in the below table.

The first development stage is what is currently being deployed as part of the Brooklyn Microgrid, which does exhibit a few traits of a true microgrid in terms of locality, but is still fully connected to the power grid.

A second stage would start with the introduction of demand response, which means that participants can agree to have some of their appliances be turned on and off by the grid operator to allow for better balancing of demand and supply.
The fourth and final stage would involve the network being disconnected from the national power grid and having full (obligatory) demand response with an inbuilt pricing mechanism to determine with which priority appliances can be turned off. We also envisage some exceptions where prosumers pay an extra availability fee in order to override the demand response rules (i.e. make a short-term decision to keep an appliance turned on). Again, this availability fee can also be set using a pricing / clearing market with the fee being used to incentivise other participants to guarantee offsetting generation or demand reductions.

Smart contracts

Aside from the Internet of Things (IoT) and Machine to Machine (M2M) technology, a key factor enabling such a future (i.e. stage 4) state are ‘smart contracts’. These are tamper-proof contracts that are triggered automatically through real-time monitoring of transactions. When a set of pre-defined requirements are fulfilled, such as the balancing of energy in a peer-to-peer network, a contract is created and executed at an automatically determined price.

Smart contracts therefore ensure the working of pricing models and demand response / balancing services for the network.
Within the future target microgrid, accurate tracking of energy consumption and generation by prosumers is monitored by the IoT, executed by smart contracts and recorded on the Blockchain.

So what is the advantage?

For countries with an already high reliability of supply, we do not envisage that a move towards microgrids will further increase energy reliability. Instead we see the benefits in terms of lower energy cost as the future energy model we presented above offers two key opportunities:

• Elimination of distribution costs: Essentially, the current role of the electricity distributor would become redundant.
• Reduction of capacity costs: The ability of the stage 4 microgrid to rapidly respond to changes in supply through intensive demand response will reduce the amount and thus cost of back-up generation. The magnitude of this cost saving will grow as we move to a greater proportion of intermittent renewable production. 

These cost savings can be shared between the remaining energy market participants.

Not to be forgotten are the likely downsides of the stage 4 microgrid:

(i) the need for the consumer to become engaged in energy pricing and

(ii) the impact of demand response on daily life.

What will come next?

The combination of Blockchain with smart contracts is likely to change the energy sector as we know it today – adding ways to manage and route power within the larger energy ecosystem. It opens the market to new participants, thereby increasing competition and introducing peer-to-peer autonomy.