Blockchain’s challenges in the energy sector
Blockchain technologies, use cases and projects have drawn considerable interest from investors, companies, start-ups, governments and consumers alike. The technology promises several solutions to problems that the energy sector is facing. However, to also be adopted in the mainstream, blockchain needs to overcome some challenges.
Blockchain in the energy sector
The German Energy Agency claims that blockchain technologies can improve the efficiency of current energy practices and processes. By accelerating IoT platforms and digital applications, innovation, especially in P2P energy trading and decentralised generation, can be achieved. Additionally, they claim that blockchain technologies can significantly improve energy enterprises and utility companies’ current practices by adopting internal processes and customer services. Consequently, costs will be reduced.
To date, there are a lot of notable use-cases including, but not limited to, the following categories: (i) wholesale energy trading and supply, (ii) imbalance settlement, (iii) digitalisation and IoT platforms, and (iv) P2P trading and decentralised energy.
Wholesale energy trading and supply
Current procedures are slow and time-consuming, as transactions need to be verified and reconciled multiple times from initialisation to final settlement. Consequently, the market has excluded small scale and distributed generators due to frictional costs experienced at the markets. Blockchain technology and smart contracts allow a generating unit to directly trade with a consumer or a retail energy supplier via autonomous trading agents, cutting out the middleman.
Numerous consultancy reports have concluded that distributed ledger technologies can even change the current energy market structure.
A blockchain application in the spotlight at the moment, especially in the UK, is the settlement of imbalances in power markets. By minimising time delays and reducing back-office processes to a minimum, blockchain can cut costs significantly.
Digitalisation and IoT platforms
Smart homes and smart cities are amongst the biggest profiteers of an increased level of digitalisation. Around 21 billion smart devices can be connected through the internet, serving as a basis for automation and big data analytics to transform the energy sector’s value chain.
P2P trading and decentralised energy
The keywords in this area are prosumers, microgrids, and peer-to-peer trading. Check out another one of our posts dedicated to this topic.
Challenges to overcome for Blockchain
Numerous blockchain projects, R&D efforts and initiatives demonstrate the significant potential that this distributed ledger technology incorporates. So too for the energy sector.
However, to also be adopted on a large scale and become the ‘new normal’, fundamental, long-term value has yet to be demonstrated. Amongst the most critical requirements that blockchain needs to fulfil are security, speed and scalability.
Most importantly, however, is that blockchain gains the trust of everyone involved. Every new invention is only ever adopted if people believe in it and are convinced that it works. This is even more important when talking about critical infrastructure. All of you who have read the book ‘BlackOut’ know best: There is no room for errors! So, for blockchain technology to reign the world of energy, trust, from all market players, is required. This is probably the most difficult challenge to overcome.
Another essential part is the consensus mechanism chosen. It needs to be fast, energy-efficient and scalable.
Even if the technology can overcome all of the mentioned challenges (and more), a clear, thought-through and favourable policy environment must accompany the ‘revolution’. Legal and regulatory challenges are some of the biggest for most disruptive technologies, so too for blockchain.
Finally, to unleash its full potential, blockchain technologies and use-cases need to achieve a higher degree of market penetration by conquering its competition.