Just as blockchain technology has allowed for the tracking and authentication of Bitcoin and other cryptocurrency transactions, it could similarly mediate transactions in energy units.

Blockchain technology — once known only as the peer-to-peer distributed ledger technology underlying the cryptocurrency Bitcoin — is now making waves in many other industries. Banks and financial services companies have jumped onboard early by investigating how they can use blockchain technology to securely process currency transactions, and companies are now issuing shares on blockchain platforms, but the number of industries experimenting with this technology does not stop there. (For a background on blockchain technology, read our previous alert.) It does not require a large logical leap to recognize that a technology that processes currency-based transactions could be expanded into processing transactions in other things, in this case, electrons. So could blockchain technology be impactful in the future of the energy industry? We examine that possibility below.

The Problem

The energy industry has undergone massive changes over the last few decades. When the electrical grid was built, it was intended to support the traditional model of energy generation and consumption, where a central utility would generate power and then distribute to consumers.

Today, energy generation is becoming increasingly distributed because of the participation of a rising number of “prosumers,” those individuals and institutions that transmit energy back onto the grid. Consider, for example, that homeowners and commercial facilities equipped with solar panels are no longer just consuming energy supplied by a central utility — they are also generating their own power, resulting in more two-way traffic on the electrical grid. Many states currently permit this sale of excess electricity back to the utility through the process known as “net metering,” in which prosumers sell the excess electricity that they generate to the utility at retail rather than wholesale rates.

While net metering has caused dramatic growth in the solar industry, these developments are not without controversy. The decision by Nevada’s Public Utilities Commission to phase out incentives for homeowners who install rooftop solar panel demonstrates the countervailing sentiment that net metering is overburdening utilities with costs that they cannot recuperate from ratepayers. After all, utilities are responsible for maintaining the entire electrical grid, and every kilowatt-hour generated on a prosumer’s roof is one less the utility sells.

Simultaneously with the changes in generation, an increasing number of devices are being connected to the internet, enabling them to optimize energy consumption in new ways. The number of connected devices is expected to grow from billions to hundreds of billions, thereby increasing the need for efficient, scalable and secure means of processing all of the resultant transactions. To the extent that these connected devices are also interacting with the electrical grid, whether as energy producers, energy management software or other capacities, it seems likely that there could be continued friction between utilities and prosumers as the world moves toward a future where potentially billions of endpoints might be transacting with each other for energy and other resources.

So how do you create a system that can verify instantaneous, autonomous transactions across these nodes as market conditions change?

Blockchain as a Possible Solution

Blockchain may be one piece of the answer to the challenges being faced by the energy industry. At a fundamental level, a blockchain is a distributed database (aka digital ledger) of transactions stored and verified by all of the participants on a network, rather than by centralized databases each maintained by individual processors (or the so-called “middleman”). New blocks of information are only added to the ledger after being verified by the participants on the network and confirmed by consensus. The permanence of the ledger allows intangible, electronic assets to behave more like tangible, physical property, where ownership can be easily verified based on possession and traced back to the point of origination. Just as blockchain technology has allowed for the tracking and authentication of Bitcoin and other cryptocurrency transactions, it could similarly mediate transactions in energy units.

A blockchain-enabled smart meter, for instance, could provide prosumers with the ability to earn cryptocurrency-like credits by injecting energy into the grid, which could later be spent to purchase power from other prosumers when conditions become less favorable for generation. Or, a blockchain-enabled smart meter could be used identify the particular electrons that a prosumer has generated, thereby allowing for the possibility of transactions between consumers directly without the need for transmitting power back to the utility at all. By enabling prosumers to trade energy directly with one another, distributed generation could continue to operate in an environment where net metering is no longer permitted or economically advantageous.

The inherent transparency, permanence and decentralized nature of a blockchain-powered computing process may also address one of the biggest threats to the electric grid — cyberattacks. Due to the requirement for network consensus to change information on the ledger, properly implemented blockchain-based networks are arguably less vulnerable to spoofing attacks, where a malicious party impersonates another device to launch an attack to steal data.

Another benefit of blockchain is its application in smart contracts — namely, certain terms in traditional contracts written in software code, recorded on a blockchain and then self-executed and enforced based on preset rules in the smart contract. Smart contracts could be used in transactions between a consumer’s connected devices, allowing them to autonomously react to market signals to optimize power consumption — or perhaps even to function as independent automated entities, sharing electricity and other resources with other devices independent of input from the consumer.

Still, blockchain technology is not without weakness, which may impact its immediate widespread adoption in the energy industry. For example, processing speeds on blockchain-based systems currently lag behind the speeds necessary for processing the huge number of transactions occurring on the electrical grid. While this means that the full grid is unlikely to be supported by blockchain anytime soon, blockchain technology may be adopted in the energy industry on a smaller scale to start — perhaps first in smart meters, then in connected devices and then across microgrids.

Conclusion

Although blockchain is not an immediate end-all solution for the challenges faced by the modern energy industry at this time, utilities, energy tech companies and consumers alike should be excited by the possibilities of an electric grid that incorporates blockchain in some way.

Full adoption of the technology may still be many years away, but players in the energy industry should heed the example of financial services companies by investigating and planning for blockchain now to avoid missed opportunities in the future.