Earlier this year, LO3 Energy set up a peer-to-peer microgrid in Brooklyn, New York. The initiative enabled consumers to generate, store and sell solar energy within the community, instead of buying directly from the grid. How does it work? Blockchain. Smart contracts validate sales between members of the community, storing the transactions in the general ledger.
This traceable, simple method of confirming energy trade has not gone unnoticed by incumbent businesses “We’re looking at things that could disrupt ourselves. That’s the reason we got into blockchain,” says Julian Gray, Technology Director at BP’s Digital Innovation Organisation. “We saw a proof of concept (POC) being done by a startup and our first reaction was, that could disrupt us. . . so, we looked at it closely and realised that actually this is a massive opportunity.”
So, now that big companies and startups alike are actively pushing the application of blockchain in the energy sector, how will this impact the industry?
For the past 18 months, BP has been looking into blockchain solutions for industry. This has involved joining various consortia, but also developing their own internal technology. At the beginning of the month, it was revealed that the company had created a blockchain based platform for energy trading in partnership with Shell, trading houses Gunvor, Koch Supply & Trading, Mercuria, and banks ABN Amro, ING and Societe Generale.
The platform will be open to all market participants by the end of 2018, but what does it hope to achieve? “The blockchain platform that’s being created for the energy industry will probably use platforms from startups with uses across industry players, and try to create distributed solutions for end to end processes,” says Julian.
Blockchain platforms have already been used by retail banks to verify trade-finance deals, and logistics and transportation firms like Maersk to track cargo. BP’s newly announced consortium – as well as non-profits such as The Energy Web Foundation – want to apply this traceability to energy markets, simplifying and opening up supply chains.
So, should other big energy providers start to develop blockchain systems? Julian explains that it’s not a decision to take lightly. “One of the things we do first whenever we talk about blockchain is to look at whether we really need to use blockchain. There are other solutions,” he says. “I was in a conversation the other day with a BP business – they didn’t need blockchain, what they needed was RPA, or some form of intelligence and process reorganisation. So, the first thing you need to do is know exactly why you need blockchain.”
The blockades to blockchain
It goes without saying that the application of blockchain to any industry can be a difficult task. Not only is this down to negative attitudes, it’s also because of the limitations of the technology itself. According to Julian, companies have focused on creating POCs that they then don’t put into production. However, this is all about to change.
“With a lot of the people we talk to, you end up having to develop quite a lot around their product because there’s a long way to go,” says Julian. “Over the course of the next year we’ll see a lot more production of some of the POCs – certainly we will be putting things into production, and I hear from colleagues in the industry that others will be doing that as well.”
Another major setback surrounds a lack of education when it comes to blockchain technology. For example, blockchain is often viewed as synonymous with cryptocurrencies, which have attracted mixed attention. However, cryptocurrencies are not a prerequisite of blockchain, and value can be distributed in fiat currencies and traditional resources.
Instead, the value of blockchain in the energy sector appears to come from smart contracts which store, verify and carry out contractual rules using blockchain. The decentralised system allows all parties to access contracts without the involvement of a central, third party, which saves time, energy and money. Julian states that this lack of knowledge can be accompanied by a “fear of the unknown” which discourages adoption.
Businesses should consider overcoming this reluctance, but need to be certain that blockchain is a suitable solution. It’s all too easy to fall into the trap of adopting a technology that doesn’t actually serve a real purpose. BP and the rest of the consortium are currently in discussions with regulators, which can also provide a major sticking point.
How will blockchain disrupt the energy sector?
Blockchain’s application to the energy sector is not a new development, but it’s no longer confined to experimental startups. Peer to peer energy platforms developed by startups could pose a threat to incumbent energy companies. . . but not, it would seem, if they start doing the same thing. By supporting startups, big businesses are in a better position to evolve alongside the inevitable energy transition. While BP and Shell’s blockchain based platform might not be specifically suited to clean energy, blockchain could clearly be used to track renewables further down the line.
LO3 Energy, for instance, has already demonstrated this, and while Julian says that it’s early days, one of BP’s platforms will be used to track renewables. Blockchain could certainly cause a reorganisation of parts of the industry, and it’s up to existing businesses to work out how to respond to these changes.
In the immediate term, blockchain solutions developed by incumbent companies are geared towards confirming the ownership of non-renewable cargo and enhancing risk management. Blockchain has proven it can restore trust in trade, and applying this to the energy supply chain could have incredibly positive results.
There is a certain irony to the fact that the centralized energy market is using a technology that is decentralised by nature. Even so, it makes perfect sense. The incumbents that are investing in blockchain are disrupting themselves to remain relevant, and exercise a level of influence over changes that could affect them.
But by using emerging technology to support industry evolution, incumbents like BP and Shell aren’t just doing themselves a favour. The backing of major companies is key in encouraging the extensive legislative discussions that will allow the wider adoption of innovative tech and, as a result, a more efficient energy sector.
What other barriers could impact the adoption of blockchain in the energy sector? How can companies decide whether to develop or use blockchain technology? Could your business or industry benefit from smart contracts? Comment below with your thoughts and opinions.