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Lost into the ether(eum): could blockchain really spell the end of electricity retailing?

Advances in technology are creating opportunities for new services in electricity retailing. As a consequence, the number of parties participating in these markets is increasing - and so are the extent and complexity of the transactions. Could blockchain be the answer to simplifying these transactions?

by Fraser Clark

Associate, Wellington

14 December 2017

Advances in digitalisation, computing power, connectivity and consumer-scale energy technologies – and their interaction – is transforming the nature of our electricity supply. In particular, they are providing increased opportunities for consumers to have more control over how they source and use electricity.

At the same time, electricity markets are becoming more mature, and are also taking advantage of technology advances. These developments create opportunities for new services that support the existing supply chain. Examples include the expanding demand for ancillary services such as frequency support and reserves, the increasing range of risk management products, and the use of data analytics and battery technology to enable the more efficient use of distribution and transmission networks.

As a consequence, the number of parties participating in these markets is increasing - and so are the extent and complexity of the transactions.

Bye-bye electricity retailer?

The electricity sector is not immune to experiencing similar transformation and disruption that was created by the likes of Uber, Airbnb and Amazon in their respective industries. What they all have in common is that they have been disintermediating – removing the middle man (retailer) – to connect consumers to manufacturers and other consumers who have some spare resources at lower cost and higher efficiency.

These are the companies often referenced when a new peer-to-peer electricity trading platform is launched. Though, electricity is not quite the same as bedrooms or taxis:

  • Supply and demand must balance in real time – if they don’t then we end up with power system instabilities. In a worst case scenario this could result in a loss of supply for everyone. The market for temporary, discretionary accommodation operates well into the future, so an apparent undersupply at any given moment is somewhat less consequential.

  • Electricity operates as a ‘common pool’ – all of the electrons essentially go into one big ‘bucket’ so it is unlikely that your buyer will get ‘your’ electrons. This means everyone in the market relies on everyone else to accurately record what went in and what went out, make sure these balance, and also recognise the losses that occur as a result of physics. The Airbnb equivalent might be that you end up sleeping at a different house with one less bedroom than the one you booked.

  • We are all buying at the same quality – in terms of ‘quality’ I refer to voltage, frequency and power quality, as ‘availability’ might become a variable in the future as batteries become more prevalent. This is linked to the first point – all of the supply needs to meet the common standard to avoid performance issues. Compare this to bedrooms or taxis, where you can choose your quality level. The parties providing the services to ensure the required quality is achieved also need to be compensated by those that benefit from them.

  • You can’t by-pass some parts of the supply chain – I recognise you can completely by-pass the supply chain if you want to self-supply, but as soon as you want to get your electrons to someone else you need to use the transport networks. I’m not sure what the best Airbnb analogy is for this one – perhaps it is the levies that some cities are now applying to manage the impacts of the increasing proportion of temporary accommodation. Anyway, those parts of the supply chain that you do use will need to be compensated in some way.

  • Many-to-one, not one-to-one transactions – in all likelihood, a consumer using a peer-to-peer platform will be unable to source all of their supply from just one of their peers. It is unlikely that the surplus from the generator will match the demand from the consumer. The equivalent situation in Airbnb might see people moving between houses during a stay. Many-to-one transactions aren’t necessarily a problem, but you do need robust data to make the necessary transactions work.

In a more complex world, blockchain has its advantages

  • Multi-party relationships, at and behind the meter - blockchain can deal with the fact that multiple parties might be interested in the transactions occurring at a single consumer site and allocate data accordingly. These transactions can be either at the meter or behind the meter.

  • Utilises an existing, high-resolution data source – in order to make all of these transactions work, the blockchain needs access to a robust, high-quality data source (‘oracle’). This now possible through the widespread deployment of smart meters that are now installed in about 80% of New Zealand houses.

  • Crypto-currency and smart contracts increase efficiency - the use of crypto-currencies might simplify financial management by (potentially) removing some steps in the money-go-round. Smart contracts might also simplify the interfaces between the business systems used by the market and its participants.

  • Transparent ‘central’ record supports a range of services - the establishment of a data record that is accessible by all parties could support the delivery of a wide-range of data-related services, provided the right data and communications frameworks are in place and privacy concerns are appropriately managed.

  • Harmonisation of systems and processes - a single blockchain that captures a wide-range of parameters associated with each consumer site could also enable other market systems or processes to be simplified or replaced. For example, the blockchain is essentially a pre-pay process so would impact on the market’s prudential security requirements. Money does not need to be put aside as a guarantee against expected future use. Other processes that are currently delivered through a mish-mash of systems, such as outage notifications or service requests, could also be rationalised.

… and also its challenges

I admit, I am no blockchain expert and the challenges outlined below are not necessarily unsolvable or significant. Though, some food for thought:

  • We have multiple ledgers, an ever-increasing number of transactions and parties, and an increasing use of smart contracts. Presumably the horsepower and time needed for calculation increases as the system expands. This is perhaps only a problem the closer you move towards wanting real-time calculation and settlement. Some blockchain-based models appear to be suggesting that they could act as a dispatch tool that decides which generators will operate, and techniques are emerging that ‘batch up’ ledger updates.

  • The crypto-currencies that typically underpin blockchains need to be ‘mined’ or resolved from processing complex algorithms. This mining process comes at a cost, including the energy used by the computers.

  • How do you settle on a standard and platform, especially an underlying currency, when currently this is highly unstable?

  • How would the blockchain system fit within financial market legislation, and how do you ensure private data is protected and intrusions are prevented (especially around the periphery with accounts, wallets and settlement)?

  • With the system effectively shared by all of the participants, processes will need to be put in place to provide confidence (including to the regulator) that the outcomes are as intended.

  • A key benefit of the blockchain is that it is immutable – once a record is placed in the ledger it can’t be replaced. Unfortunately, New Zealand’s experience with its existing reconciliation process tells us that we don’t always use the right data and information. Issues with switching, meter readings and meter data can cause problems (especially for the remaining analogue meters), and our existing system provides a 14 month wash-up process to enable these errors to be corrected.

There will also be practical considerations. The best approach would probably be to apply blockchain across the full market and replace existing systems.

But how do you manage the transition? Is it really any better than our existing systems that already provide many of the benefits of blockchain?

Also, the sun hasn’t set on ‘conventional’ technology either. The continued evolution of today’s approach, perhaps with added horsepower from the cloud and advanced data analytics, might be best.

How do you manage the transition? Is it really any better than our existing systems that already provide many of the benefits of blockchain?

Do consumers want more than transactions?

In New Zealand, it is our electricity retailers that help us when our power has gone out or if there’s a problem with our billing. They also manage all the commercial arrangements, including credit management, and are required to comply with consumer protection regulations, including those for medically dependent or vulnerable consumers. It is easy to get hung up on the idea of frictionless transactions and self-determination, though if it is not the retailer managing these services, then who? You are probably not going to get them from your peers.

That is not to say the retailers are the only ones that can provide them, but a change would probably have a material impact on other industry participants, especially network companies. The network companies would likely find themselves dealing with a much broader range of contractual parties, on a broader range of issues. Perhaps the blockchain, extended beyond retail transactions and linked to other data sources and tools, could also support and simplify these services?

Now is a good time to be having this conversation

The complexity of our market transactions will continue to increase and be compounded by the physics of electricity supply and the physical infrastructure that makes it happen. Consumers will expect and demand to play a greater role, either directly or through agents acting in their interest.

Blockchain has plenty of merits, but we need to be clear on the problem we are trying to solve before we anoint it as the chosen way. That decision will probably need to be made at a collective level, as this seems unlikely to be a decision made by market forces alone.

It can’t do everything for consumers. There are a range of other services that they need, often on an ad hoc basis. Today many of these are provided by retailers, and the challenge will be to demonstrate that this remains the best approach into the future.

Ultimately I think this is going to end up being resolved through the regulatory framework – there is too much at stake for consumers for it to be done any other way.

Topics

Fraser Clark

Associate

Fraser has more than 15 years’ experience in the energy sector, encompassing the entire energy supply chain from electricity generation to energy management, and in the regulation and operation of energy markets. Fraser has held senior roles with New Zealand’s electricity regulator and market operator, in the renewable energy sector, with an electricity and gas retailer and generator, and in the design and supply of process heating and drying plant for the manufacturing sector.

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