Blockchain Revolution in the Power Sector (Part 2)
This is part two of a two part series — click here for part one. Acknowledgements: Thanks to Radhika Iyengar-Emens, my colleague at DoubleNova Group and StarChain Ventures, for her contributions.
The key blockchain use cases for the sector include:
- Peer to Peer Renewable Electricity Trading – See Part 1
- Renewable Energy Credits (RECs)
- Virtual Power Plants (VPPs)
- Decentralized Electric Vehicle (EV) Charging and Storage
Renewable Energy Credits (RECs)
Renewable Energy Credits or Certificates are tradable commodities that prove that a certain amount of electricity, usually 1 megawatt-hour (MWh), was generated by an approved renewable energy source and fed into the grid. Such a system is required because all electricity looks the same when it is on the grid, regardless of source. RECs incentivize renewable energy generation by enabling providers to collect two sources of income, one from selling the electricity and another from selling the RECs (i.e. environmental attributes).
For each REC issued a designated regional agency certifies the generation and distribution of renewable electricity and provides a unique number for the certificate. These agencies also track all REC transactions to ensure that they are valid, are retired when purchased, and are not double spent. The government recommends that REC purchasers buy only certified and verified RECs to ensure that buyers are not defrauded by fake or double-spent certificates.
There are two common methods for tracking US REC status and ownership, i.e. certificate-based tracking and contract-path tracking. The certificate method is run by 11 regional authorities across North America which store REC status and ownership information for wholesale transactions in centralized electronic databases. The contract-path tracking system is an older method that provides chain of custody information enabling verification and track and trace of all RECs in the system. This approach is verified by a third-party auditor which uses declarations, sworn statements, receipts, and other transaction information to verify all attestations. Audits are time-consuming, sometimes taking months, and fees are borne by intermediaries or end customers.
Clearly, REC certification, issuance, verification, and trading are typically complex, time-consuming and expensive processes. As a result, they are currently issued to and used mostly by large players in the market. Blockchain-based systems, by contrast, can provide a technology platform to streamline all of these processes leading to significant cost and time savings for all members of the ecosystem and opening it up to smaller players. Simply put, a decentralized and immutable ledger showing electricity generation and grid feed activity can eliminate the bureaucracy imposed by a centralized authority.
REC certification and issuance can be automated via smart contracts so that the process is easily accessible, fast and available 24/7. REC verification audits become unnecessary since the immutable ledger can be trusted and referenced directly by interested parties (primarily buyers and their agents) without fear of hacking or fraud. It also becomes possible to create a national or international database, with the existing regional agencies as nodes, rather than the current patchwork of regional and country-based databases. A national or international database can increase transparency, reduce friction, and improve REC discovery across regions.
Blockchain systems were initially built to facilitate secure, decentralized, peer-to-peer transactions. As a result, they can be a boon to REC trading. Current trading systems require intermediaries such as brokers to enable REC trades and auditors to certify the authenticity of certificates. Blockchain-based systems instead enable trustless peer-to-peer transactions, greatly reducing costs and improving settlement times. Audits and reconciliation in current systems delay settlement times by months leading to limited transparency across the market. Decentralized and automated blockchain systems make settlement times nearly instantaneous, greatly improving efficiency. Some key real-world cases prove out these benefits and are summarized below.
Singapore’s government owned utility SP Group, which through its subsidiaries supplies all power to the country, launched a new blockchain-based REC trading platform in October 2018. The prior trading system had low volumes due to high costs for verifying certificates and difficulties tracking RECs. The new blockchain platform has lower costs since no centralized authority is required to verify certificates and transactions. Transparency and tracking is improved since all RECs are visible across the ecosystem. The lower costs have led smaller players, such as those with rooftop solar, to get involved in the REC marketplace. SP believes the system will soon enable peer-to-peer cross-border transactions, greatly expanding the size of the ecosystem.
The US power sector looks to emulate the Singapore example above via a pilot (October 2018) by PJM Environmental Information Services, a subsidiary of PJM Interconnection, the regional transmission organization serving 65 million people from the Mid-Atlantic region to Chicago. The blockchain pilot is being run by Energy Web Foundation (EWF) with the goal of reducing the cost and bureaucracy around RECs to enable participation by a much broader group of players. PJM envisions a much more efficient ecosystem for RECs enabling the entry of thousands or tens of thousands of new, smaller participants, like rooftop solar owners.
The new EWF blockchain system will enable tracking of RECs at the kilowatt-hour level, rather than 1 MWh, which will also encourage smaller players to take part. PJM will reduce costs on its GATS (Generation Attribute Tracking System) energy trading system by using smart contracts to automate many REC processes including physical asset registration, asset authentication through digital signatures, secure data logging, REC creation and validation, REC ownership registration, and REC retirement.
Virtual Power Plants
As we noted in the previous section, renewable distributed energy resources (DERs) can serve many useful purposes on the grid and within communities. However, many have voiced a key concern that it is difficult to optimize the management of thousands of distributed systems into a coherent and reliable grid. One solution that is gaining market traction is to employ management software to coordinate multiple independent DERs, like solar powered microgrids, energy storage facilities, wind farms, etc., in the configuration of a virtual power plant (VPP).
As managing power plants is well understood, creating VPPs from DERs can provide a more optimized and scalable model. VPPs face the same concerns that we discussed for DERs: providing transparency to generation and consumption across the grid, building trust in the data, and enabling low-cost energy trading. As noted above, blockchain systems in combination with IoT sensors, AI, and smart contracts can ensure accurate data, rapid response, and low transaction costs.
Since VPPs are a management mechanism, they also need to incorporate additional considerations for transactive energy. Transactive energy refers to techniques for managing the generation, consumption or flow of electricity via various economic and market-based policies while accounting for grid reliability constraints. These approaches help to make the grid smarter and more resilient by sharing information with stakeholders and incentivizing behavior to protect the grid.
Key policies such as demand-response (DR) and fast frequency response (FFR) are being incorporated into VPP solutions to ensure the reliability and resilience of renewables-powered grids. Demand response (DR) is a policy that incentivizes customers to decrease consumption during peak load times to reduce stress on the grid. Fast frequency response (FFR) is a policy that can be introduced to maintain a nearly constant system frequency within the grid. Overly high loads and frequency mismatches can lead to grid collapse and blackouts.
Blockchain in combination with IoT and AI can enable a decentralized ecosystem to intelligently manage both DR and FFR. Smart IoT sensors can write data immutably to the blockchain regarding environmental conditions and the state of devices. AI can then recommend appropriate policies or options, such as specific DR and/or FFR responses, and smart contracts with the appropriate policies can be enacted. The results can then be recorded on the blockchain for billing and audit purposes. In this way no centralized authority is required, and all transaction data within the network is easily accessible to all players. While a fully decentralized large-scale grid has not yet been realized, we are beginning to see deployments for smaller scale projects.
An exciting VPP project was kicked off in December 2018 by the city of Busan, South Korea, the 2nd most populous city in the country. The city is spending $3.5 million to build a VPP to improve efficiency, increase use of renewables, and modernize its power distribution. The VPP is aggregating various DERs including energy storage systems, solar power plants, and wind farms. It also provides easy access to data for energy traders and significantly improves forecasting and trading of renewable energy.
The Busan VPP plans to use blockchain technologies and IoT to improve the monitoring and distribution of power as well as boost operational efficiency. It will also use transactive energy policies to decrease its dependence on conventional fuel sources and redistribute power from renewable energy resources more efficiently. The initiative will be carried out in partnership with key industry players including Busan City Gas, the Korean Industrial Complex Corporation, Nuri Telecom, Pusan National University, and major factories.
A major pilot of blockchain technology in the power sector, which includes the evaluation of blockchain for VPP applications, was started in October 2018 by Deutsche Energie-Agentur (dena) of Germany. Large industry players taking part in the study include GE Power Digital (US), Siemens (Germany), Verbund (Austria), BKW (Switzerland), and EnBW (Germany). The pilot is investigating key aspects critical to the operations of VPPs including asset management, data management, market communication, energy trading, financing, and tokenization. The results of the pilot are planned for release in Spring 2019.
Decentralized Electric Vehicle (EV) Charging and Storage
Solar and wind-based power generation can be highly variable since it is based on weather patterns which can change over short time frames. As a result, energy storage is a necessary requirement to improve grid reliability in a grid with a high percentage of DERs. Energy storage also makes renewables dispatchable (instantly available) improving grid responsiveness and resilience. In the US the approval of Federal Energy Regulatory Committee (FERC) Rule 841 in February 2018 directed grid operators to create market mechanisms that better accommodate integration of energy storage systems.
In the power industry there are two separate realms, the centralized front-of-meter market and the distributed behind-the-meter market. Battery storage in the centralized world, often called utility-scale, is large, complex, and can be an expensive undertaking due to the high costs of large batteries. The pricing for battery storage in the distributed world is decreasing rapidly and an alternate, and potentially faster deployment model, is based on EVs. This concept is often called vehicle-to-grid, or V2G storage and charging, and is projected to increase sharply as EVs grow from a few million vehicles today to hundreds of millions of vehicles by 2030.
Electric Vehicle (EV) Charging Infrastructure
This is the driving force behind the Transportation Electrification Accord (TEA), which was developed by Advanced Energy Economy, Energy Foundation, Illinois Citizen Utility Board, Natural Resources Defense Council, Plug-in America and Sierra Club. These players worked in collaboration with major automobile manufacturers, power infrastructure providers, and major utilities. Specifically, the Accord calls on industry players to develop, implement, and adopt standards for interoperability that will make possible the use of EVs for energy storage and demand response. The Accord was released in June 2018 by a coalition of 50 ‘founders’ and acquired over 100 signatories by early 2019.
The key physical technology for enabling V2G charging and discharging is a bi-directional charger. With this hardware and the addition of blockchain, AI, and IoT technologies, the electricity flow and operation of the grid can be optimized. IoT plus blockchain ensures accurate data capture and immutable data storage. Smart contracts plus AI automate energy trading, the use of transactive energy, and provide relatively fast settlement times. Decentralized marketplaces and DEXs combined with decentralized apps (DApps) can lower costs and complexity enabling consumers and small businesses to enter the market.
V2G is a fast maturing market and multiple pilots have been rolled out over the last 2 years. The key initiatives are reviewed below.
Share & Charge is a major V2G initiative started by Innogy SE, a major renewables utility in Germany, and powered by a startup named MotionWerk. As a first step MotionWerk has developed an app and decentralized blockchain protocol based on Ethereum that powers a decentralized marketplace enabling EV owners to find private EV charging stations and pay securely. Owners of EV charging stations can set the terms such as pricing and charging duration independently. Payment is carried out with smart contracts, removing any intermediaries and reducing costs. Initial peer-to-peer tests were carried out successfully in Germany and then in the US (with eMotorWerks) in 2017.
The Share & Charge technology was tested successfully across Europe in the Oslo2Rome pilot initiative in late 2017 with clean energy utility and charging partners Fortum (Finland), Enexis (Netherlands), Elaad (Netherlands), Sodetrel (France), Vkw (Austria), Innogy (Germany) and enviaM (Germany). The technology platform has expanded to other countries such as the UK, and has been adopted by the Oxygen Initiative, an EV charging infrastructure in the US supported by German utility RWE. The Oxygen Initiative has partnered with PG&E, a large California utility, to help power its EV charging network. Share & Charge functionality will go live in full deployment across Europe during 2019.
Another pilot involves TenneT, a leading European Transmission System Operator (TSO) that has launched a blockchain-based EV energy storage project in the Netherlands. The pilot project is being carried out in partnership with Vandebron, a marketplace for renewable energy, and IBM Blockchain, which is supplying the Hyperledger Fabric permissioned blockchain network. Under this pilot TenneT will balance grid supply and demand by utilizing energy stored in Tesla EV batteries, supplied by Vandebron. The plan is to discharge and recharge the batteries as needed without compromising the availability of the Tesla EVs.
The renewables energy revolution has led to large increases in wind and solar power over the last 20 years. That being said, power from rooftop solar still makes up less than 1 percent of electricity generation globally and all renewables excluding hydro-power make up less than 10 percent. The combination of wind and solar power with batteries, has the potential to generate more than enough power for the entire planet many times over, so much more is possible.
Adoption has been hampered in part by trust issues, high costs, and complexity. Blockchain technology can democratize access to DERs by providing trust and greatly reducing costs and complexity. As a result, greater adoption of blockchain technology can accelerate the adoption of renewable energy and turbo-charge the decentralized power ecosystem globally. With the right incentives, a much larger group of entrepreneurs and communities can develop businesses based on DERs and create a new renewables-based decentralized power grid with multi-trillion dollar potential.
To maintain a responsive and resilient grid infrastructure, this decentralized ecosystem should operate with a management layer based on blockchain technology. To optimize resilience and reliability the blockchain infrastructure will need to incorporate AI/ML algorithms and IoT smart sensors to create a smart blockchain network, a true smart grid.
Blockchain provides the missing elements to move to a 100% renewables-based electricity grid. The real revolution has only just begun.
This is part two of a two part series — click here for part one.
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