by Thomas Boersma
Blockchain’s shades of grey: resetting the expectations for energy applications
Virtually any presentation on a blockchain application is met by the same question: “But what is the actual added value of blockchain in this application?” Often, the person that asks this question radiates the impression that they came to the presentation with this question specifically in mind and, regardless of how clear the presentation or the answer would be, they would impatiently listen whilst simultaneously disapprovingly shaking their head. The optimists, on the other hand, often fail to cope with critique and seem to believe that anyone who doesn’t believe that blockchain will disrupt the complete energy sector, simply doesn’t understand it well enough.
Besides the regular reasons for resistance to change - such as doubts about the costs, performance and reliability, which have been refuted for blockchain in a multitude of blog posts and presentations - two other factors contribute, in my opinion, even more to the negative mindset surrounding blockchain. Those are (1) the link with Bitcoin and other cryptocurrencies and (2) the overall fear of disruption. The fact that, towards the end of 2017, cryptocurrencies seemed to make teenagers rich through a technology most of them did not really understand led to widespread skepticism. The market collapse in 2018 then led to a big communal “I told you so” and a sigh of relief among skeptics, confirming their negative assumptions regarding blockchain, personified as bitcoin, as a hyped promise that will never deliver. Therefore it remains important to clarify the actual relationship between blockchain and cryptocurrencies and stress their distinctive characteristics, qualities and pitfalls.
The market collapse in 2018 then led to a big communal 'I told you so' and a sigh of relief among skeptics, confirming their negative assumptions regarding blockchain as a hyped promise that will never deliver.
A brief history on blockchain always helps with kicking off such a clarification. In 2008 the banking crisis had led to a new low in public trust in conventional financial institutions. This encouraged Satoshi Nakamoto, a pseudonym for one or more bright minds, to write a paper on a new electronic cash system: Bitcoin. In this paper, he explained a system for a digital unit, based on a system that created a scarcity of these units, and thus value, and a decentral system of controlling, approving and recording the creation and transactions of such units. Intended to replace fiat currencies and side-line financial institutions, the focus of this paper was on the creation of value for this unit, the Bitcoin, and the advantages of using a decentralized accounting system over a centralized system.
When, about eight years later, the value of these Bitcoins and other cryptocurrencies started to rise, interest in these coins and their underlying technology started to rise as well. Where the media mostly reported on the skyrocketing value, the underlying accounting system was recognized as promising for applications beyond cryptocurrencies. This system of distributed ledger technology had been developed further over these eight years as well and grew out into a comprehensive accounting system that could seamlessly link terms in agreements to the execution of transactions through smart contracts and, equally important, allowed to immutably verify and execute transactions without the interference of a single intermediary. In supply chains with multiple stakeholders and high numbers of exchanges of value, this system holds the potential to increase transparency and save on transaction costs. The backbones of such systems, are what we call blockchains.
Even if you want to stay away, as far as possible, from the somewhat anarchic philosophy behind Bitcoin and do not believe in its model of value creation, it would still be perfectly acceptable and not incongruous to still believe in the underlying blockchain technology itself. Blockchain technology is something that started out as a byproduct of the cryptocurrency movement, spun off to undergo its own development, and now is nothing more and nothing less than a “simple” potential upgrade for accounting systems and back-ends, which could potentially lead to an economic system with fewer intermediaries.
The second source of resistance, one that could easily be overcome by introducing a bit more nuance in the conversation, is the overall fear of disruption. Shortly after the booming cryptomarket hype the media started to slowly pick up on the additional potential of blockchain applications in other industries. Top 10 overviews of industries to be disrupted by blockchain were all over the internet and every other day an expert would tell a talk show host how the world would never see intermediaries again. But even if the technology holds that potential, there are so many factors influencing such developments, that actual disruption on the short-term is highly unlikely, especially in a heavily regulated and incumbent-dominated industry like the energy industry.
It’s precisely because of this kind of media coverage that people now associate blockchain with a high, almost uncomfortable, level of disruption and often overlook the rest of its potential. The headline “Blockchain will allow your car to buy energy directly from your neighbors' solar panels” gets way more views than “Blockchain incrementally improves your charging poles backlog system”. But it’s not without reason that a report by the Council on Foreign Relations made the following statement on peer-to-peer energy trading, which currently makes up for more than one-third of the blockchain projects in the energy sector: “Even though this is the most popular application, we expect it to be among the least successful, because it seeks to upend centralized electric power systems rather than managing the complexity of these systems in new and valuable ways.”
This week a Dutch newspaper headlined “Blockchain fails to pass the test phase”. It ran that headline little more than a year and a half after it also published an article on how blockchain technology would surely rule out all intermediaries. In its latest verdict, the newspaper concludes that the technology struggles to live up to its promise and that less than 15% of all projects passes the proof-of-concept phase. However, if we zoom in on the applications in the energy sector, for example, it is no real surprise that the majority of the theoretical papers and proposals, many of which were aimed at disrupting an entire industry through an immature technology, did not make it.
The 15% that did make it past the theoretical phase weren’t the sexy projects that made headlines. These were the projects that took a close look at the industry’s true needs and came up with applications of blockchain specifically geared towards solving one real problem or incrementally improve a single process.
The 15% that did make it past the theoretical phase weren’t the sexy projects that made headlines. These were the projects that took a close look at the industry’s true needs and came up with applications of blockchain specifically geared towards solving one real problem or incrementally improve a single process. In the UK, for example, a blockchain-based platform for the trading of flexibility is steadily becoming a reality and here in the Netherlands DSOs are testing the first EV chargers that run their transactions on a blockchain. Even the first cross-border utility-scale energy trading blockchain-based platform is already in place.
Believing in blockchain in the energy sector does not - per definition - translate to believing in large-scale disruption and a high-speed revolution towards a peer-to-peer economy without utilities. In an industry that is slowly but steadily transitioning towards a decarbonized system and, by doing so, has to deal with a huge increase in decentral assets, blockchain-technology could be another digital tool that provides support in dealing with the complexity of this transition, making it as reliable and cost-efficient as possible. Together with artificial intelligence, machine learning, and various non-buzzword-technologies that get way less attention, blockchains could help to streamline flexibility markets, optimize energy management in local energy systems, lower the cost of charging your electric car or even improve the backlog system of your good old utility.
Let 2019 be the year of the grey opinion, in which we do not fear, nor fully expect to realize blockchain’s potential to disrupt the energy sector, and don’t judge it on its performance in doing so.
If 2017 was the year of the hype, in which everything seemed possible and innovative as long as you did it on a blockchain; and if 2018 was the year of the downfall, where the expectations of blockchain collapsed hand-in-hand with the cryptomarkets; then let 2019 be the year of the grey opinion, in which we do not fear, nor fully expect to realize blockchain’s potential to disrupt the energy sector, and don’t judge it on its performance in doing so. Instead, let us realistically look at blockchain applications on a case-by-case basis and judge it by its ability to add to the much needed innovation in the energy transition.