Will blockchain disrupt the traditional distribution network model?

8 October 2018 (Last Updated September 28th, 2018 11:55)

A new report published by Eurelectric highlights how blockchain could be adopted to better manage increasingly decentralised energy sources being introduced to the grid. The technology, experts says, could create a more streamlined and efficient system – but could it also create disruption for traditional network operators? 

Will blockchain disrupt the traditional distribution network model?
In an impact assessment, Eurelectric noted that the electricity sector is ‘perhaps more susceptible than others to the integration of blockchain technology’.

Blockchain technology can build in efficiency and inherent security for any process that requires data sharing and transactions to occur between a network of peers.

In simple terms, it does this by recording transactions on a distributed system of registers that are validated by the network and completely tamper proof.

As such, many experts believe the technology could be adopted by the grid to better integrate renewables and manage electricity flows across the network.

However, doing so, experts agree, could significantly impact the current role of distribution network operators.

Physical vs digital

In a blockchain impact assessment published by Eurelectric, the sector association that represents the common interests of the pan-European electricity industry, it notes that of the sectors with physical exchanges, the electricity sector is “perhaps more susceptible than others to the integration of blockchain technology.”

This is because “electricity markets are pooled… sales and purchases are cleared in aggregate on centralised trading platforms, similar to stock exchanges, and other financial market platforms,” the report says.

For distribution network operators (DNOs), this process has become considerably more complicated because electricity no longer comes from only big power stations, but from multidirectional flows, including small and large-scale renewable energy projects.

“Energy-related transactions and exchanges through blockchain are already being deployed for peer-to-peer energy trading.”

To manage this widening network, more capacity needs to be built into the grid and increased data sharing and trading of energy facilitated.

Traditionally, extra capacity would be created by reinforcing the grid with more physical infrastructure, such as cables and grey boxes.

However, the cost of doing this is high. For example, in Germany it is estimated that in the period to 2032, additional overall investment of between €23bn and €49bn will be required, depending on the scenario, to expand the grid to integrate renewable energy.

Instead, most agree, building in flexibility through demand-side response and other measures is a cheaper solution.

“The hope is that deferring or putting-off that energy use is more cost-effective than building more capacity,” says Jim Cardwell, head of policy development at Northern Grid.

This is where blockchain comes in.

“To procure flexibility by either paying a consumer to stop using energy or to sell some to the network requires operational dispatch,” say Cardwell. “This process needs visibility to control it and to commercially carrying out the transaction: that is where blockchain could play a part – for commercial contract and settlement.”

Blockchain could essentially be a platform where data sharing and transactions between the grid, power generators and consumers is conducted quickly, securely and efficiently.

Simplifying this process in a transparent way could reduce barriers to energy for the market, says Cardwell.

“Presently specialist knowledge is needed, but there are several different contracts which could be made into one,” says Cardwell. “Blockchain could strip out some of the cost and complexity, opening up the market to smaller players who could almost plug and play without using an intermediary.”

By intermediaries he is referring to demand-side response companies, such as Kiwi Power, which currently provide some flexibility to the grid by remotely managing the consumption of groups of consumers.

It could also be useful for reconciliation purposes. Currently, Germany pays around €1bn each year to correct the difference between market activities and the physical reality, according to Dr Marius Buchmann, senior energy economist at Jacobs University in Bremen, Germany.

Pilot projects

While adoption of the technology might seem a long way off, some significant projects are already underway.

On a smaller scale, energy-related transactions and exchanges through blockchain are already being deployed for peer-to-peer energy trading. In May, Australia-based Power Ledger announced it was ready move its platform beyond trials.

And although there are currently many technological and regulatory barriers to large-scale grid deployment, pilot projects are being funded.

Eurelectric, for example, highlights TenneT, a transmission system operator that has partnered with Vandebron, sonnen and IBM for blockchain-based projects to enhance flexibility services available to the operator. In a pilot project, the companies will work with electric vehicle (EV) owners to make EV battery capacity available to help TenneT balance the grid.

London-based Electron is also using blockchain technology for flexibility trading, incorporating market design and technical support from National Grid and Siemens.
The company has also founded a consortium with partners including Baringa, EDF Energy, Flexitricity, Kiwi Power, Northern Powergrid, Open Energi, Shell, Statkraft and UK Power Networks.

What about the DSO?

So, what impact could blockchain have on the DSO?

Buchmann says if blockchain is adopted as an efficiency tool to reduce costs and streamline processes, like in the banking sector, there will be no huge disruption.

However, he adds, moving from a pure physical electrical system towards a cyber physical system could present challenges for incumbent DNOs unaccustomed to the technology.

If DNOs are unable to manage the transition to operators of cyber-physical systems it could, in an extreme scenario, result in a separation of ownership of the physical infrastructure and the operation.

“I don’t think blockchain itself will disrupt the core business of DNOs, but if the technology enters the energy market through peer-to-peer trading, and network operators cannot cope with this development and make use of the technology, it could be one of a combination of reasons why the government takes measures to separate asset ownership and network operation,” explains Buchmann.

“Many distributed energy networks [will be] connected to a digital platform that will need to be steered and controlled.”

However, this would be difficult to do due to existing laws and economic advantages of an integrated solution.

Partner at EY Global Innovation Lead Power & Utilities, Thierry Morier, says in the future there will be many distributed energy networks connected to a digital platform that will need to be steered and controlled. But the question concerning DNOs is: by whom?

“Now, I think there will be a big battle over who will own this platform – the grid companies and power utilities are interested, obviously, but there are also tech players, such as Google and Microsoft who provide IoT solutions,” he says.

“Grid companies I would say are not yet ready or equipped to step into that platform through the use of emerging technologies – blockchain is only one – and if they don’t step up there is a big risk that other players will become the platform owners who control all the customer relations and the access, which would mean grid companies are reduced to owning these cables and, at the best, maintaining them.”

Cardwell recognises these points and assures that Northern Powergrid, at least, is “not seeking to hold on to the old way of doing things”.

“We are keen to embrace technology and see it as an opportunity – we are keen to understand how blockchain can be used for our use case,” he says.

But Cardwell adds that what DNOs do is more than just distribution, but includes manual operation, dispatch and working through system abnormalities.

“So, I think we are quite away from viewing the operation of the distribution grid as something that can be done from a simple control room largely by a computer – that would be misrepresenting what distribution network operations look like today,” he adds.

Current limitations

Despite its potential, there are limitations to blockchain technology that Eurelectric highlights in its report.

“The technology class is currently burdened by high costs, slow transaction speeds, and other limitations.”

It states that the technology class is currently burdened by high costs, slow transaction speeds, and other limitations and risks. For example, there are a limited number of transitions that can currently be processed per second. However, research to improve transaction throughput is underway.

Furthermore, the European energy network is complicated and heavily regulated, which will create a barrier to adoption.

For it to have any success in the network, Buchmann says governance of the technology needs to be regulation-friendly. And it will also be important to have accountability built in, so knowing who the validators on the blockchain are is crucial, he says.

In terms of security, Morier says no one has ever hacked a blockchain, but there could be security concerns about who has access to the chain.

Future gazing

Cardwell sees blockchain in the future as having the potential to make operations much more “straightforward where individuals can participate without having to be experts.”

He adds: “We think there should be a series of distribution operators that fit in and interconnect and interact with the national system operator and blockchain could be a way to support that vision.”

At present, it is uncertain how – or even if – blockchain will be utilised in the energy distribution networks, but it’s clear key players are paying attention, and so should DNOs. So, what should they be doing?

“DNOs should at least start experimenting with these platforms – time is moving fast,” says Morier. “We recommend utilities to step up and look at joint ventures and partnerships and to set out a road map of adoption to make it a reality.”