A growing number of companies want blockchain technology to become a core feature of Europe’s electricity market. An interconnected electrical energy system of the future must have democratic, decentralized, and resilient electricity trading.
With blockchain technology, traders can do business with no centralized intermediary such as an exchange.
What is blockchain?
Blockchain is a list of records that is forever growing. Each record is a block. Special codes, i.e., cryptography, link and secure the blocks.
Each block has a hash pointer. The hash pointer links the block to the one that came before it. Each hash pointer has a timestamp and also transaction data.
Imagine a block as a ledger page while the blockchain is the whole ledger book.
Blockchain technology emerged as the backbone of cryptocurrency. Cryptocurrency creators used blockchain technology to bypass banks. Cryptocurrencies differ from traditional currencies in that there is no central bank.
However, blockchain technology is also attractive for decentralized energy systems. Especially energy systems with a high proportion of renewable energy.
Blockchain technology – Europe’s future electricity market
In other words, the technology is attractive for the European electricity market of the future.
The future market would be based on consumers who produce electricity with their own generators. We call those producers prosumers.
Key trends in Europe’s electricity market
According to experts, there are several key trends in the European electricity market that make blockchain an ideal choice.
Shift from a futures market
Firstly, in the European electricity market, there is a shift from a futures market. In a futures market, consumers purchase electricity for future use, in an attempt to mitigate the risk of price rises.
The shift is towards a spot market. In a spot market, purchasers buy electricity for next day delivery at the latest.
The shift occurs as a reaction to declining electricity prices, which low-cost renewable energy has triggered. End users no longer fear price increases. Therefore, they want to benefit from electricity prices, which are getting cheaper and cheaper.
Blockchain processes transactions almost in real time. Therefore, it could become a blueprint for spot electricity trading in the European electricity market.
Transaction volumes in the electricity market
Secondly, in the European electricity market, transaction volumes are declining. 15-minute contracts may contain just 0.1 MW of electricity. These tiny contracts are for delivery during specific fifteen-minute windows on the same day or the next. 15-minute contracts are representing a growing proportion of total transactions in the electricity market.
Tiny contracts are ideal for the intermittent power generation from wind or solar energy, i.e., renewables. Blockchains perform better in these conditions compared to traditional energy exchanges.
Blockchain means cheaper transactions
With blockchain, transaction costs are cheaper because you don’t have to pay traders and several service providers.
Integrating European countries’ energy systems means a new approach to electricity trading. Specifically, one that enables transactional commerce at cheaper cost with no local intermediaries.
The cryptocurrency market has shown us that blockchain can create global trading networks with no intermediaries.
Youris.com, which designs communication strategies for EU-funded projects and research organizations, wrote:
“Another important tendency is the development of residential renewable generation with small installed capacity, which is a challenge to integrate into the traditional wholesale electricity market.”
“The latter was created to operate with a finite number of bulk power producers, whereas blockchain can handle a vast number of participants.”
Regarding Europe’s electricity market and trends in energy transformation, Christoph Burger said:
“The major trends in energy transformation are decentralization and digitalization. And blockchain is an ambassador of both.”
Burger is a senior lecturer at ESMT Berlin, an international business school. He specializes in the energy sector, blockchain, innovation, decision-making, and negotiation.
Smart contracts
In this context, blockchain’s latest achievements enable smart contracts that can one day become a basis of tomorrow’s automated energy trading. These are programs that are executed automatically under specific conditions.
This means that it is possible to program a smart meter to purchase energy when it costs X euros. The generator of renewable energy can subsequently be set to sell electricity for Y euros on the grid.
The smart contract occurs when X=Y, at which point the consumer buys the generator’s renewable electricity.
Regarding blockchain and smart contracts, Dr. Ole Langniß said:
“Smart contracts are certainly a major feature of the modern blockchain. They have the potential to facilitate trading in the future, be it wholesale trade or retail markets and peer-to-peer transactions.”
Dr. Langniß is CEO of blockchain startup OLI Systems GmbH.
Pilot tests
So far, there have been pilot tests for electricity trading with blockchain on micro-grids. OLI Systems and other partners have launched a major blockchain pilot project in Europe.
OLI and partners aim to test the blockchain technology, including smart contracts. They hope this will lead to the creation of a self-sufficient community in the electricity market. That is, a community of energy producers and consumers.
Dr. Thomas Brenner, chief technology officer of OLI Systems, said:
“Currently we have the first residential customers connected, and industrial customers are expected to follow soon. Generally, they’re either ‘first movers’ or employees of the participating utility.”
“I think their main motivation is to be involved in a cutting-edge project, to try out now what can boost renewable energy use in the future.”
Electricity market interested in blockchain technology
Multinational utility companies including Enel and E.ON have expressed interest in blockchain technology. Vattenfall has also expressed interest.
Regarding large utilities companies’ interest in blockchain applications, Brenner said:
“Large utilities can be very interested in using blockchain applications. Not in a disruptive sense, but rather as a software tool that either makes existing processes in their business easier and cheaper (for example, smart contracts can automatically disconnect debtors) or lets them offer new products and services (i.e., shared use of storage batteries).”
Challenges ahead
We are still facing some major challenges that we need to overcome, experts say. Burger says “scalability of the transactions is a key challenge.”
Blockchain can only process so many transactions per second. These numbers are significantly below the capabilities we would need in an interconnected smart energy system.
To address this challenge, energy blockchains are trying out alternative approaches to validate new blocks.
We also need to overcome data access and protection issues. To operate fully and autonomously, it is necessary for the system to gather and share grid data via connected devices. For this, we need robust data protection. There must also be compliance with the new General Data Protection Regulation (GDPR).
Youris.com adds:
“Many regulatory obstacles are to be overcome. Currently, blockchain is not reflected in European energy laws, and the new technology must meet the existing regulatory requirements. At the same time, market players are seeing their roles change significantly with blockchain.”
“Electricity suppliers who buy energy from producers to sell it to final consumers are getting pushed to the side as producers and consumers start trading directly. And the role of grid operators is also changing to accommodate the new market landscape.”
Blockchain is still a nascent technology. There are many possible future scenarios. It could become the key to a sustainable European energy market. On the other hand, it may languish as the technology of a niche of peer-to-peer transactions in microgrids.