I will start this article with a short recap on blockchain: what is it, how it works and what are its main applications in business.
As the name suggests, blockchain is a chain of blocks that contain information. It was discovered in 1991 by a group of researchers and was initially intended to timestamp documents so they can’t be changed. It went unused until it was adopted by Satoshi Nakamoto to create the digital crypto-currency, Bitcoin.
A blockchain is a distributed ledger, open to anyone. Once data has been stored in a block, it is very difficult to change it. In case you’re wondering what exactly a distributed ledger is, Investopedia clarifies:
A distributed ledger is a database that is consensually shared and synchronised across network spread across multiple sites, institutions or geographies. It allows transactions to have public "witnesses," thereby making cyberattacks more difficult.
Each block has three characteristics: data, hash (a function that converts input of letters and numbers into the encrypted output of a fixed length), and the hash of the previous block. The hash is like a fingerprint. Once the block is created, its hash is being calculated. The hash of the previous block is what creates a chain of blocks. It is this technique that creates the chain of blocks secure.
The proof of work is a mechanism that slows down the creation of new blocks. It takes 10 minutes to calculate the proof of work and add the block to the chain. Blockchains secure themselves by using hashing and the proof of work mechanisms, as well as by being distributed. Blockchains don’t use intermediary institutions; but a peer-to-peer network, where everyone is allowed to join. When someone creates a new block, that block is sent to everyone in the network. Each node verifies if the block is ok and that it hasn’t been tampered with. If everything is ok, each node adds the block to their own blockchain. Blocks that are tampered with will be rejected by other blocks in the network.
Blockchains work on consensus. They are secure and trustworthy because it is impossible to tamper with the blockchain. That would involve to tamper with all the blocks on the chain, redo the proof of work for each block and take control of more than 50% of the peer network, which is almost impossible to do.
So far, blockchain has been used in the creation of digital notary, tax collection and medical records storage. Experts say that is ripe to enter the energy ecosystem.
In the energy industry, blockchain plans to revolutionise everything, from reduced transaction costs, better grid management, to new financing models and productivity costs.
According to a GE report, renewable energy is pushing the sector to ever-greater decentralisation. Blockchain can help to produce and record generation forecasts for different power producers, which then need to be shared within the grid to minimise fluctuations. This can include data flows from virtual power plants (VPPs), where power generation from decentralised energy sources is pooled together as one.
The study “Blockchain in Energy 2018”, reports that 59% of blockchain energy projects are dedicated to building peer-to-peer grid networks that will facilitate the trade and buying of energy without intermediaries. As the trend of renewable energy becomes more mainstream, people will produce their energy at home and will have the possibility to trade it.
Companies like PB or Royal Dutch Shell are developing blockchain platforms for energy commodities trading. As reported by Reuters, the consortium declared that the main benefit of using blockchain, in this case, is to reduce administrative operational risk and improve the reliability and efficiency of the back-end traded operations.
The new disruptors in the energy industry like digitisation, decarbonization, decentralisation, and electronification are opportunities for blockchain to become the backbone technology that will apply its principles of security and integrity, removing the need of an intermediary.
In the energy sector, blockchain enables efficiency and productivity gains by eliminating intermediaries, as well as by facilitating transactions in a more effective and economically viable way. Whether used to tackle renewable energy sources or reducing cost and waste of the more established industries, blockchain has the potential to transform the energy system.