Blockchain and the energy sector: A new way of thinking

With many clients in the Cleantech sector, we spend a lot of time looking at what is on the horizon in the energy market. We pride ourselves in helping out clients communicate often complex value propositions. Today, we thought we’d put our money where our mouth is and have a look at blockchain.

Eyes start to glaze over when you mention blockchain. That’s partly because it’s difficult to explain, and partly because people don’t understand how the technology will transpose to their particular vertical. In this article, we will try to address both issues by explaining what it is and what it could mean for those in the energy sector.

Where it all began

In 2008, the world was in the midst of the worst financial crisis since the Great Depression. Excessive risk taking led to the collapse of several global financial institutions and society’s confidence in the centralised banking system was shaken to its core.

Just two months after the collapse of Lehman Brothers, a whitepaper was published online. The author’s name was Satoshi Nakamoto and the title of the paper was: “Bitcoin: A Peer-to-Peer Electronic Cash System”.

The paper outlined a vision, that would allow online payments to be sent directly from one party to another without going through a financial institution.

To this day, nobody knows who Satoshi Nakamoto is. His (or her) identity remains a complete mystery. All we know is that this person gave birth to perhaps the most disruptive technology since the Internet itself.

What is blockchain anyway, and why is it such a big deal?

After Nakamoto released the whitepaper, it quickly became evident that the real genius was not in the concept of a p2p digital currency, but the technology that powered it, known today as blockchain.

Let’s start with a bit of history lesson, a few rhetorical questions and some abstract examples for good measure.

If I email you a picture of my dogs dressed up in their Easter bunny outfits, I am sending you a copy of the picture – not the original. It’s nothing more than data. So if digital transactions are nothing more than the transfer of data, what is to stop me from buying two widescreen televisions when I only have enough money for one? 

In a traditional environment, trusted third parties act as intermediaries for transactions. It might be a bank, it might be PayPal… whatever. The intermediary checks that I have the funds in place for a television and guarantees a safe transaction, taking their cut along the way, of course. So how do you remove the trusted intermediary without everything going to pot?

Blockchain technology answers this conundrum through a process of distributed trust.

Blockchains are essentially nothing more than files – or ‘distributed ledgers’ to use the correct terminology. They contain a list of transactions, and this list is replicated across all of the computers (nodes) using the blockchain.

Analogy time

Google Docs and Office 365 both now offer document collaboration – allowing multiple users to work on the same document in real time. Blockchain could be thought of as spreadsheet that is replicated across thousands of computers. Because there is no ‘centralised’ copy of the spreadsheet, it makes it much more difficult to tamper with.

When a digital transaction is executed, it is grouped together with all the other transactions that have occurred in the last 10 minutes and is sent out to every other node (computer) on the network. Each group of these transactions is referred to as a block.

Every block carries a timestamp, a mathematical puzzle (more on that in a sec) and a reference to the previous block. The previous block is linked to the block before that, which is linked to the block before that, creating a chain (hence the name). The chain of blocks show every transaction made in the history of that blockchain. This chain of blocks is synchronised across the entire network, and all cryptographically secured.

Now this is where the brilliance really kicks in. Before blocks can be can be added to the ledger, they must first be verified. We need to know that nobody has messed with the block! This verification process is carried out by ‘miners’.

Miners take the information in the block, and convert it into a seemingly random sequence of letters and numbers known as a hash. Each hash is unique so if a malicious party makes any changes to the block, its hash will change too. Each hash is also linked to the block before it, so tampering with one block would affect the hash in every other block in the chain. Pretty clever, right?

To incentivise miners to keep mining so that everything runs smoothly, they are rewarded for their efforts (this might be with cryptocurrency, but it doesn’t need to be). The problem is that hashes are easy to create – all you need is a laptop. This is where the mathematical puzzle comes into play.

Miners compete to solve the puzzle, which requires a great deal of computing power, and they only get rewarded if they are the first to do so. ‘But what about dodgy miners?’ I hear you ask. Well, before officially being declared the winner, a consensus must be reached across the network that the puzzle has indeed been solved and so the miner shares proof of their calculations. This is called ‘proof of work’. While it is incredibly difficult to calculate the ‘answer’, it is easy for others to verify and this is what keeps the blockchain ‘honest’.

This notion is at the heart of blockchain. In traditional security models, you’d want to keep out the greedy people. Blockchain, on the other hand, relies on people acting in their own self-interest in order secure the network. And you probably won’t be surprised to hear that it works!

Will this technology really affect the energy market?

Blockchain is a highly disruptive technology that promises to change our understanding of transactions. The global economy is based on a centralised model of transactions. Remove that centralised model, and everything changes.

From finance to government, removing the need for an intermediary could have a profound impact on almost every sector. Nowhere is this more true than the energy sector.

Imagine a fully decentralised energy system in which supply contracts are made directly between energy producers and energy consumers. You might be surprised to hear that blockchain technology is already being piloted to achieve this.

In New York last year, decentrally renewable energy was sold between neighbours via a blockchain system for the first time.

As PwC global power & utilities stated in a recent whitepaper, the potential for blockchain extends far beyond energy distribution:

Blockchain technology shows a lot of promise. Other than being used to execute energy supply transactions, it could also provide the basis for metering, billing and clearing processes.

Other possible areas of application are in the documentation of ownership, the state of assets (asset management), guarantees of origin, emission allowances and renewable energy certificates.

Incentivising green

SolarCoin is a cryptocurrency similar to BitCoin – but with one big difference – it’s aim is to incentivise solar power production.

Anyone can mine SolarCoins, whether it’s an individual with a solar panel on their roof or a full blown solar farm. For every 1 MWh of electricity generated, you get one SolarCoin (which can be exchanged for good ol’ fashion sterling).

SolarCoin does not care what you do with the energy generated; the sole aim is to incentive the world to produce clean energy. SolarCoin says that it aims to drive the generation of 97,500 terawatt hours of power over a 40-year period.

Just the start

Blockchain is still in its infancy and the ramifications of this technology are not fully understood. Decentralising our very way of life raises a host of questions, from governance and regulation to cost and efficiency.

One thing is for certain – blockchain technology should be on your radar now, because it is going to change how you do business tomorrow.

If you’re working with, or considering cutting edge technologies like blockchain, you may find that communicating your value proposition to your customers is a challenge. We’ve helped many clients create content with clear messages, and would be happy to help you too.