Blockchain application to the energy market: distribution and transparency.

The energy market.

The energy market has been in a transition period towards renewable energy for years, which has led to various types of energy markets such as solar energy, wind energy and now a focus on hydrogen. This transition has been central to the recovery plans of EU countries.

In this context, companies like the Italian group ENEL, if it aspires to be a significant player in the European Green Deal and the green and ecological transition of society and the economy, still have to make an additional effort. According to the Reuters news agency, they emphasize that at the current rate, the largest Italian utility company still has 100 years to reach the solar energy targets set for 2030.

All these challenges raise the need for a transition to a new energy ecosystem that ensures access to energy, resilience and efficiency. At the same time, it is necessary to bring more security, decarbonization and democratization of the network at the lowest possible cost. In this new scenario, “transactional energy” emerges as a path towards cleaner and smarter services.

Today, network design hinders decarbonization. Even for providers, adding new renewable generation is not that easy. Incentives for distributed supply of renewable energy are not clear. Consumers cannot assert their values through energy consumption choices on the network. A reliable source of energy production and a reliable market are also necessary.

Blockchain application.

In this process, technologies such as blockchain, or distributed ledger, can play an important role. This technology has been attracting a lot of interest among energy utilities for a couple of years now. Many companies and industry operators believe that blockchain has the potential to bring significant benefits and innovations. Blockchains promise transparent, tamper-proof, and secure systems that can enable new business solutions, especially when combined with smart contracts. Allowing not only greater efficiency in the processes and origin of the energy produced, but also distributed models of consumption and production that provide greater resilience to the network.

Blockchain technology emerges as an answer to disrupt the existing energy hierarchy and self-organize at the edges of the network, something that is impossible with normal databases, offering new possibilities. Blockchain allows trusting the origin of energy production and tracking transactions. All in a much more secure way and with higher data privacy standards. On the other hand, the distributed nature of blockchain means that no central entity serves as a custodian of mass information.

One of the central elements of European recovery plans and the US strategy is the switch to clean energy. It is true, however, that this type of energy source can be produced by electrolysis using renewable sources such as solar or wind energy. But it is also true that about 95% of the hydrogen available on the market was produced using the methane steam reforming method, so hydrogen production still polluted the environment with CO2. There are energy companies that point out that doing it with renewable energy is very expensive and would require six times less to be feasible. However, tax incentives for clean energy and sanctions for the use of fossil fuels are helping to reduce the relative costs of hydrogen fuel, while the actual production cost is also decreasing. In this regard, the administration of US President Joe Biden recently announced the “Hydrogen Shot” program, which aims to reduce the cost of green hydrogen by about 80% from current $5/kg to $1/kg by 2030.

But as long as the cost of green hydrogen produced by clean energy is high, there will continue to be incentives to produce green hydrogen from fossil fuels and eventually lead to greenwashing rather than a truly green economy.

To truly determine if hydrogen is green, Blockchain is emerging as a technology that can ensure the clean origin of hydrogen. In this regard, some jurisdictions are trying to establish certifications with varying degrees of success. This is the case in Australia, where the Energy Council has created the Zero Carbon certification scheme for hydrogen, ammonia, and steel, which is already attracting collaboration from the United States and Europe.

The private sector: how it is moving.

The private sector is also moving in this direction, through technology Blockchain-based platforms that ensure the origin of renewable energies, including those coming from green hydrogen. In addition, this type of tool allows for transparent verification of the production, transportation, and delivery of this clean energy. This type of digital platform allows for real-time verification and visualization of the entire value chain of green hydrogen from anywhere in the world.

Its value is not only monitoring, but also that renewable hydrogen consumers or other energy sources can quantify, record, and monitor the decarbonization of their energy consumption. In other words, it provides all the corresponding information for the energy consumed and all the necessary data to quantify the carbon dioxide (CO2) emissions avoided in the atmosphere by using this type of clean energy.

This has implications for energy efficiency as a result of changing consumption patterns. Companies such as the Spanish ACCIONA have already indicated that they will use this type of platform in all future renewable hydrogen generation projects, including Power to Green Hydrogen, designed to create a green hydrogen ecosystem on the island of Mallorca (Spain).

The certification of hydrogen will undoubtedly not only provide transparency but also reveal preferences for different energy sources and the willingness to pay for clean energy sources.

In the future, it is expected that platforms like this will complement the official certification schemes for renewable hydrogen origin guarantees established in Europe and in every country, providing their differential values. This requires interested actors to be part of this process and become verification nodes.

A look into the future.

There are two additional areas in which Italy, through blockchain technology, can advance to position itself as a leader in the green transition with a view to the future: the emerging peer-to-peer (P2P) energy trading, which in the future could also have implications and move towards decentralized energy markets, and electric vehicle charging.

Centralized energy production models are becoming obsolete. This system worked when demand was limited and predictable, but today, in light of the high energy demand that will be generated by the adoption of IoT, among others, there is a high implication that is driving the vision that economist Jeremy Rifkin has supported for many years. A distributed energy network system, more resilient and towards zero marginal cost of production. Where not only companies become producers and consumers of energy, but also households.

According to this model, energy prosumers, i.e. households and institutions that produce and trade excess electricity, will spread. Using blockchain, the immutability and transparency of energy transactions are guaranteed, generates tokens based on smart contracts, and transactions are automatically executed without the intervention of third parties and can be extended to various transaction conditions. In the transaction, energy is transferred using the energy storage system to which the seller and buyer belong, and payment is made by transferring the token through a transaction.

Based on blockchain, peer-to-peer (P2P) systems are enabled that can freely exchange produced energy, at a real-time price based on supply and demand. These models have already been tested in microgrids in several countries around the world, by companies like LO3Energy in Brooklyn, a district of New York. Or through software companies like PowerLedger, which in Europe, the United States, and India are making progress in helping to create these renewable energy commodity markets, as regulations are updated to allow things to move forward smoothly and scale up to utility level.

In these models, the physical units of energy in kWh are exploited by multiple sources, such as smart meters, sensor readings, and green button data. This measurable output is tokenized on the blockchain to create renewable energy tokens whose name depends on the software used.

Australia is one of the countries at the forefront of creating decentralized energy markets, an example is a pilot project in the state of Victoria where $28 million will be spent over three years to create a bidirectional energy system where residents and businesses can buy and sell locally produced electricity in real-time. The initiative encourages people in their homes and businesses to install solar systems on the roof and smart energy devices with the goal of generating a network that ensures a resilient electricity supply and network.

Step by step, blockchain is changing the energy market and moving it towards a distributed and real-time system that provides resilience to the energy supply network, as well as transparency on the origin of energy and the power of consumers to choose.