Energy sector disruption – Taking a look at microgrids and blockchain

Updated: Aug 6, 2018

By William van der Byl

[TL;DR] Blockchain, the technology behind Bitcoin, has many use cases and the potential to disrupt many sectors. One particular use case is peer-to-peer (P2P) energy trading, thereby potentially helping the development and uptake of microgrids. This post explores how this can be achieved and identifies companies attempting to commercialise P2P energy trading using blockchain technology.

Disclaimer: This article was originally written for, and appeared on, and was edited for the purpose of this post.

Blockchain, the technology behind Bitcoin, is a buzzword at the moment and for good reason. The technology has the potential to disrupt a large number of sectors from the financial industry to government voting to healthcare. Another sector which could potentially be heavily influenced is the energy sector. In this post we’ll discuss how a particular use case of the technology, peer-to-peer (P2P) trading, could have a positive impact on microgrids.

Microgrids, as discussed previously in a Delta Energy & Environment blog post  and webinar, are fast becoming a key topic of commercial relevance in many global markets. This is due to an increasingly distributed energy system, rapidly falling energy storage costs, and a growing demand for flexibility and energy autonomy among other aspects.

The composition and nature of microgrids can vary greatly from one project to the next, but they all generally contain bi-directional flow of energy and the potential to have several independent prosumers. The bi-directional flow of energy amongst multiple prosumers increases the complexity of the tracking, recording and balancing of produced and consumed energy within the microgrid. This is where blockchain technology can come into play. The shared nature of energy resources within a microgrid, balancing of supply and demand and the difficulty of tracking large volumes of transactions (energy supply, demand and sales) are problems well suited to the attributes of blockchain technology.

A good way to think about a blockchain is that it is a distributed and chronological ledger which is updated and validated in a synchronised manner. This is performed by a network of independent nodes – a multitude of computers connected to the blockchain network. Consequently, transactions can be tracked and recorded in a transparent, distributed, accurate and incorruptible way. This is an automated process which allows the middleman to be removed, reducing transaction costs and lowering overheads. This means that energy supplied to and consumed from a microgrid can be tracked and recorded using blockchain enabled meters. This helps address the aforementioned microgrid problems in an efficient and low-cost manner. The idea of tracking and recording energy can be expanded to include the associated monetary value and, subsequently, the financial aspect of this process.

In a nutshell, blockchain, coupled with adapted electricity meters, enables the supply and consumption of energy and the associated financial transactions to be monitored and recorded in a cost-efficient, distributed and secure manner.

Smart contracts are another aspect of blockchain technology. These are automated contracts which self-execute when the pre-programmed criteria (which are coded into the blockchain) are met. This solves the problem of consensus authorisation associated with transactions. Smart contracts allow prosumers and consumers within a microgrid to enter directly into energy exchanges with each other, enabling P2P trading and creating a virtual energy marketplace. These energy exchanges are instant, automated and can facilitate balancing the supply and demand of the microgrid. Because these exchanges are performed in almost real time, it creates a cost reflective marketplace where energy is appropriately priced. This is best explained with a simple example:

If Emma is generating more energy than she needs, then she is able to export that surplus energy to the microgrid and set the transaction conditions (for example, she can set a minimum price on her exported energy). If Matt requires energy and has set his willingness to pay (via an app connected to his blockchain enabled meter) which is higher than the minimum price set by Emma, then Emma and Matt are automatically matched (via algorithms which enable dynamic trading) and the smart contract is executed as the desired criteria are met. The flow of energy and associated monetary transaction are automatically coded into the blockchain which makes the transaction indisputable and available for everyone to see. If Emma is generating surplus energy when the demand is high and supply is low, then she can alter her transaction conditions and increase her minimum price. It is important to note that the exact electrons supplied to the grid by Emma will almost definitely not be the same electrons consumed by Matt, however as long as electrons are supplied to and consumed from the grid at the same price and rate then this ‘virtual energy marketplace’ will act as an enabler for microgrids.

A possible residential microgrid. Source: Mengelkamp et al., 2017
“Imagine you’re growing a whole lot of tomatoes, but you can’t trade them over the fence with the neighbour for their zucchinis – you’ve got to go to the supermarket to sell to them and buy from them. That’s the situation in energy markets now – we want to change that.” – David Martin (Power Ledger)

P2P trading is perhaps the most well-known and commercially progressive application of blockchain use in the energy sector. Companies such as LO3, PowerLedger Open Utility and Grid Singularity are first movers in this field and have made some exciting progress such as LO3’s Brooklyn microgrid and Power Ledger raising more than $34 million AUD in a funding round. That being said, there is an incredible amount of hype surrounding blockchain at the moment (see Gartner’s chart) and it is important to be aware that the P2P trading using blockchain technology is extremely nascent and largely untested. There are several obstacles that need to be overcome such as government regulation and transaction speed – Bitcoin, the most well-known application of blockchain technology has a theoretical transaction speed of 7 transactions per second (tps), which is orders of magnitude lower than the likes of Paypal (450 tps) and Visa (56 000 tps). Regardless, P2P trading is an exciting prospect which could potentially have a positive transformation on microgrids in the future.

Hype cycle for emerging technologies. Source: Gartner, 201