This is the fifth and final in a series of posts that breaks down our article, “Smart After All: Blockchain, Smart Contracts, Parametric Insurance, and Smart Energy Grids,” recently published in the Georgetown Law Technology Review. We have discussed the enforceability of blockchain-based smart contracts under ESIGN and UETA and a few promising smart contract applications. We will now examine the use of blockchain-based smart contracts for microgrids. You can read the full article here.

Within the energy industry, blockchain-based smart contracts can accelerate the development of smart meters, as we discussed earlier. However, they can also help accelerate the development of microgrids. Blockchain-based smart contracts can provide the tool to give both utilities and customers the levels of efficiency and effectiveness that both strive for, while delivering both the consumer protections and individual choice that stakeholders often advocate.

In the United States, the majority of people receive their electricity from coal and natural gas facilities. These facilities generate power at a central location, which is then transmitted over power lines to the end user. Although this is the dominant model for delivering power in the United States, this model presents specific risks.

For example, centralized power production creates a risk that if a plant goes offline, customers will suffer substantial loss of service. Hurricane Sandy demonstrated this problem in dramatic fashion. The hurricane left 7.9 million people without power in the Mid-Atlantic and New England areas in the immediate wake of landfall. Even a month later, one percent of Jersey Central Power & Light customers remained without power. The crippling effects of the storm demonstrated that an electrical grid relying upon a few central power plants could collapse quickly and need a lengthy rebuild. The fact that multiple storms in the previous year had knocked power out to millions of people on the Eastern Seaboard further confirmed that the electrical grid was vulnerable. For these and other reasons, the centralized grid model has been criticized in recent reports as being outdated and in need of serious upgrade.

Microgrids are a potential supplement to centralized grid systems, but may eventually replace them altogether. Rather than rely exclusively upon a power plant that produces electricity for a region, a microgrid allows residents in the area to better manage local usage and even generate and sell power through solar panels or other alternative energy methods. The residents can use the microgrid to power their own homes or businesses, supplement their power needs from the larger grid—and if they generate extraneous power, residents can sell it either to their neighbors or back to the larger grid. Microgrids provide a backup system in case a storm or terror event disables the centralized grid. In fact, several microgrid participants cited access to a reliable backup as part of the reason that they joined the project. Microgrids may even extend power access to rural and tribal communities.

Blockchain technology is beginning to be deployed in the United States to facilitate microgrids. The most successful example so far is the Park Slope microgrid in Brooklyn, New York, with over 130 buildings participating. Although currently limited in scope, the ultimate goal is to use blockchain-based smart contracts to allow buildings that produce extra energy to sell that energy in an automated fashion to other residents on the microgrid. Blockchain-based smart contracts would be set up in such a way that when one user produces excess energy, it is automatically sold to another user in the neighborhood, which allows the neighborhood to lessen the amount of energy it draws from the central grid. Facilitating the sale of excess energy produced by one building to a building in need of energy helps reduce the overall strain on the grid, thereby preventing brownouts during times of high-energy consumption. The Park Slope microgrid has already led to reduced energy usage, as well as facilitating a better understanding amongst consumers regarding where the energy originates and how it is made. The emphasis on buying energy as needed forces customers to confront their energy usage and re-evaluate how much they are using.

Adopting blockchain technology in the energy industry poses its own challenges. Strict industry regulation and monopolies make it difficult to implement new technologies even with their likely benefits. For example, as a political subdivision of the state of Arizona, SRP is under different regulations from the Arizona Corporation Commission (“ACC”) than a standard utility company. This regulatory freedom allowed SRP to test and implement its pay-as-you-go smart meters. In this way, co-ops are also strong candidates to begin experimenting with and adopting blockchain-based smart contract technology, in a manner that can ultimately benefit the entire industry.

The energy industry is a promising application for blockchain-based smart contracts. They could increase the efficiency of payment systems and energy transfer while also improving security and resilience. Customers would also have more freedom and information on their energy usage and costs using blockchain-based smart contracts. Microgrids will increase resilience of the energy system, which may become more essential with severe weather patterns or potential terrorist attacks. Blockchain-based smart contracts will also allow people to easily sell or buy more energy depending on their usage at any given time. With fewer regulatory barriers, co-ops may be the best starting place for implementing these new applications within the energy sector, to the overall benefit of the energy industry as it can observe these experiments and take advantage of the technology as it matures.