Energy: You (Probably) Don't Need Blockchain for It, Part IV.
This is part four of a series of articles. While parts two onward deal with separate issues, it is recommended to read the first one in order to understand the context applied to the separate use-cases.
This chapter will be different to the other ones because I find a good use of not only cryptocurrencies but also blockchain for energy exchange and distribution. The usual caveats apply of course - it is of no use for a large legacy energy producer or distributor to experiment with private blockchains just to fill pockets of blockchain consultants. But cryptocurrencies running on open and permissionless blockchains could be the right solution for an underserved market of small communities comprised of net energy producers and consumers. While legacy large-scale energy producers and their customers in the urban areas of the developed world have pretty efficient distribution network and payment channels (I’m not an expert though, so I might be wrong on this), these smaller communities, especially in remote parts of the developing world, but perhaps also affluent villages of the West find it difficult to exchange their surpluses and demands.
Many households and small businesses in these areas are producers, as well as consumers of the energy (think solar panels). The challenge there is, how to build and grow the distribution network while incentivizing exchange. The solution could be to organize these end users to small grids, which would integrate with other grids and to facilitate exchange between them, so the net producers would release the energy to the grid and make it available for the net consumers. The producers, of course, need to be incentivized to do so, which is where cryptocurrencies come into play. Not only cryptocurrencies don’t have to rely on any centralized banking settlement, but they could be settled automatically on a blockchain using smart contracts with fully transparent and immutable rules, which would be subject to consensus of all the parties.
As with any other blockchain, its real benefit is subject to a permissionless distribution and to a network effect. It is of no use for a small grid to have a permissioned blockchain solution because that already assumes trust between the parties involved, mainly between consumers and producers of the energy and the grid’s node. The blockchain is a trustless solution for markets where the need for trust is not desirable.
Only when the blockchain where the rules of the energy trade reside (including an algorithm by which a cryptocurrency is exchanged) is properly distributed can all users trust the rules and their immutability instead of any particular party. It makes the rules transparent and it incentivizes others to join the network if those rules deliver benefits for those involved.
The design of the rules, including price mechanism, is subject to further research and incentive analysis, but the pricing model should be market- and incentive-based rather than algorithm-based. In its simplest terms, parties involved in the exchange could bid on buying and selling the units of energy production. In the beginning, legacy energy prices would probably serve as an anchor for those initiating the bidding process. Again a crypto-collateralized stablecoin comes to mind as an ideal medium of exchange since it would allow for simple accounting and asset allocation for companies and remove the volatility risk for households.
Since the blockchain and its cryptocurrency should be completely open and permissionless, it would allow other parties to get involved in the trade, creating a basis for a futures market. Speculators with the skin in the game would stabilize the price by buying when they would expect the demand to rise and selling if they felt the contracts are overvalued. The consumers would then be able to react to the price movements by adjusting their consumption, investing in or de-investing from their own production, or buying from the legacy grid where available.
While that might sound complicated, with an open and permissionless architecture there would quickly emerge tools and services, which would make the whole process for the end users seamless and simple, yet efficient and transparent. Third party apps would help users reference their prices to the legacy grid, setting price floors and ceilings, consumption alerts etc.
The local grids could also serve the purpose of blockchain’s nodes, storing the ledger and broadcasting the transactions. Anyone who doesn’t want to trust the grid’s node would be able to run their own and connect it to the network. The immutability of the ledger would be assured by permissionless mining, incentivized by fees awarded in the market’s cryptocurrency.
As I wrote above, there is no need for the legacy networks to engage in such solutions. Their economies of scale make the exchange efficient, reliable and convenient for the end users. However, the large producers could stay on top of this disruptive innovation by spinning off ventures outside of their existing value network and incorporating them back once the solutions mature, scale and reach usability for their core customer segment.
- Part V: Asset Management and Real Estate