Categories: Ethereum

Estonia may actually have a use for the blockchain: green energy

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If you're into buzzword bingo, blockchain will have been top of your list for a few years now. But has it got any real-world applications? There have been plenty of attempts to make it work in different industries, from mining to music. Now a green energy trading platform called WePower is trying to use blockchain technology to make energy markets more efficient – in Estonia.

The company began to use blockchain to link business buyers of energy – companies that buy electricity – directly with the producer, after striking a deal with Elering, one of Estonia‘s independent electricity and gas system operators. The idea was to use energy ‘tokenisation’ – by linking energy consumption and production data to the blockchain, in an attempt to digitise the country’s energy sector. Now the pilot project is yielding its first results.

Over the past few months, WePower uploaded 26,000 hours and 24 TWh of energy consumption data to the blockchain. It connected its blockchain-based energy trading platform and Elering's data exchange system that gives central access to the country’s smart meter data. In the process, WePower created 39 billion smart energy tokens.

But what problem do Elering and WePower actually hope to solve in Estonia by using tokenisation?

The bulk of energy in the Baltic country is produced by fossil fuels – only 18 per cent come from renewables. The main aim is to test the limits of what’s possible with blockchain technology, says WePower’s CEO Nick Martyniuk. At the same time it is trying to increase the percentage of eletricity generated from renewables. “Even though the cost of renewables has dropped significantly, small to medium size companies don't have a good way to start buying green energy.”

So WePower decided to make energy data available – and even to enable people to share their energy meter data with service providers. “Estonia is a good piloting country, with 100 per cent smart meter coverage,” says Georg Rute, Elering's digitalisation development manager.

The sensitive nature of energy data has been a roadblock for innovators, developers and engineers interested in building new solutions. “Blockchain provides the necessary trust for data sharing and creates liquidity as well as accountability between energy buyers and producers,” says Martyniuk. In other words, blockchain makes it easier for people to trade on the renewable energy trading platform that connects energy buyers directly with energy producers, giving people and companies a possibility to decide what green energy project to buy from, “hour by hour - token by token,” says Martyniuk.

Although blockchain could in principle be used for any type of energy – or other transactions – WePower is focusing on renewables, allowing its platform to connect the grid, local energy exchange markets and the end users of energy. “The cryptocurrency and tokenisation approach is offered as an alternative to a more traditional renewable energy power purchase agreement,” says Stephen Woodhouse, chief digital officer at Pöyry, an international consulting company that focuses on energy, industry and infrastructure. The trial itself is an attempt to understand the limits of this approach. If it is successful and lots of energy is traded using the platform, then the blockchain project might be scaled up, potentially to create an energy exchange or to facilitate peer-to-peer trading.

It's not clear, though, that scaling up will actually work, as it would mean using blockchain technology for data that is flowing at high speed and in huge volume. One concern is transaction capacity: WePower mainly uses the public ethereum blockchain that applies the so-called proof-of-work (PoW) approach that requires a lot of energy and computing power that only professional ethereum miners can provide (although ethereum may at some point switch to the environmentally-friendlier and easier “proof-of-stake” approach). So PoW means the transaction capacity might be limited, says Fei Wang, senior research analyst at Wood Mackenzie, energy research and consultancy firm. “This may not be an issue during the pilot phase, but this would be a hurdle if the project were to expand to a full commercial deployment.”

There is an incentive to increase the number of energy applications using blockchain: it helps to decentralise the grid for more and more distributed energy resources, which are largely renewables. “Blockchain as a technology can provide an alternative way to manage the increasingly more decentralised system,” says Wang. In other words, companies can select the clean energy projects – say, wind or solar – they want to buy energy from, and build their own renewable energy portfolio without facing huge legal and financial structuring costs or a long and resource-intensive process.

However, while the decentralisation of power is at the heart of blockchain technology, the energy sector is heavily regulated. So designing a governance framework would be critical when it comes to ensuring security, says Wang. Also, public blockchain is known to be very inefficient for micro-transactions, as the ledgers recording each transaction are replicated many times over. “It will have real value if there is a lack of trust in the central institutions, or where there is a need to have access to the data without communications to the central data repository,” says Woodhouse, “perhaps as a part of resilience planning against cyberattack.”

The other concern is that the regulatory landscape in energy changes fast, he adds, making it difficult for public blockchain to get adapted “because there is no effective governance system. Private blockchain solves some of these issues but ultimately falls back to a system where you have to trust the central authorities, not the blockchain itself.” Blockchain, it seems, is still a technology in search for a real-world application.

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