Updated: Jan 26
Current Concerns Regarding Blockchain’s Energy Consumption
One of the biggest criticisms of blockchain technology is that the process of mining and proof of work requires large amounts of computation power, which consumes enormous electricity. The University of Cambridge has developed a live Bitcoin network power, and according to its historical records, Bitcoin’s energy consumption rose from 4TWh annually at the end of 2015 to 90TWh per annually today ( at the end of 2020). Large investments are poured into building up mining pools in countries with low cost of electricity, mainly in China and India. Back in 2019, when the annual energy consumption of bitcoin was around 58TWh p.a, it was equal to the energy consumption of Switzerland. And now, as bitcoin exchanges are becoming more developed, we can see how this figure has nearly doubled. A study published on Natural Climate Change found that Bitcoin energy consumption converted to carbon emissions alone could push up global warming above 2°C. But does this imply that Blockchain technology imposes a significant challenge to controlling climate change and moving towards sustainability? Not necessarily.
In the following article we will mainly focus on the potential for blockchain to encourage peer-to-peer renewable energy trading and revolutionize the way we think about energy suppliers. We will also briefly discuss the application of Blockchain Technology in the energy industry from the aspect of transaction recording and verification of renewable energy certificates as solutions towards a more sustainable future.
1. Decentralized energy supply system and household participation
One of the most special opportunities that Blockchain brings to the energy sector is that it encourages the growth of electricity ‘prosumers’. The term refers to households that are able to generate electricity or become the supplier of electricity, for example, by having a solar panel installed in their buildings. By placing consumers at the heart of the system, both renewable energy consumption and production can be enhanced, creating a positive feedback loop that accelerates the transformation of society from non-renewable to renewable energy in a self-sustaining way. In order to bring such a system to reality, there needs to be an incentive mechanism. For instance, prosumers should expect to be rewarded with positive return from investing in installing a solar panel. However, in the current electricity supply system, the challenge is not only that there is a lack of trusted platforms to facilitate household electricity transactions, but also the fact that multiple intermediaries and complexity in regulatory compliance cuts the potential income for households from engaging in electricity trades.
Many governors and scholars in this field have recognized the need for change. In 2017, the European Union’s Clean Energy Package was implemented with a set of rules on household energy producing, storage and trading, and aimed to encourage consumers to actively participate in electricity trading. Academic literature has extensively focused on improving the market design by establishing local storage systems into national operations of power systems. Nevertheless, progress is slow and we have not seen significant changes in the past few years.
This is where a decentralized Blockchain system could come into play.
Firstly, and most importantly, Blockchain Technology could create a trustless network to encourage Peer to Peer (P2P) electricity transactions. In any P2P transaction, trust between parties are extremely important. If we think about how Uber and Airbnb have built up their P2P exchange system, parties involved in the transaction have trust in the paring and verification mechanisms of the platform, for example, the registration process to become a Uber driver. Blockchain technology provides an even stronger ‘trustless’ system, where you don’t have to trust the counter-party, but only the technology. By offering cryptographic ways of tracking transactions, the transparency in terms of transaction records and anonymity in terms of personal information is enhanced. Without centralized control, identical databases that record each and every transaction ( in an encrypted form) are stored in the device of every player involved, and in order for a transaction to be recorded, all parties need to reach a consensus and validate the transaction.
“Historically, although there are some exceptions, people tended not to share with strangers or those outside their social networks. Sharing was confined to trusted individuals such as family, friends and neighbours. Today’s sharing platforms facilitate sharing among people who do not know each other, and who lack friends or connections in common.” (Frenken and Schor, 2017).
Furthermore, through the use of a distributed ledger system, many intermediaries are removed from the transaction, a pure peer to peer transaction is possible to achieve. This reduces cost and time of transaction, increasing the “profit margin” and incentive for households to engage in energy trading activities.
We have already seen practical implementations in many countries around the globe, both startups and traditional large energy suppliers are actively pushing for such a revolution. For instance, in 2018, Centrica- the owner of British Gas worked with a American startup to initiate an energy sharing project for their Local Energy Market. The project aims to enable trading of energy between local businesses, consumers, the national grid and other participants in the UK.
Another well-known case is the Australian startup “Power Ledger”. It uses a blockchain-based network to establish a peer to peer energy trading platform. Some of its key benefits include real-time payment, automated low cost settlement, neighborhoods trading, transparent trading information and much more. One of the most interesting features of Power Ledger is that it comprises of both a permissioned and a permissionless blockchain infrastructure. The permissionless blockchain operates on a global scale to allow international market trading, whereas the permissioned blockchain operates among local trusted peers. The platform also uses two tokens as assets: one called “POWR” — which is used to access the global P2P trading market, while the other one — “Sparkz” usually functions in the local network as the trading currency, representing the electricity price and the local “real-world” currency. In combination, the system ensures value via “POWR” tokens and facilitates exchange through “Sparkz” .
Other P2P electricity trading startups and projects you could explore include:
Apart from solar panels, another active field is electric vehicle charging. Sales of electricity vehicles is increasing dramatically year on year. Overall sales of Tesla’s Electric vehicle is expected to surpass 10 million by 2025, and responding to such a trend, the demand for charging stations will scale up exponentially. This puts pressure on the national electricity grid as millions of drivers demand for energy flows to charge their cars at the same time. The idea of ‘distributed’ charging stations matches well with blockchain’s characteristics, it could play a key role in improving the coordination of a distributed charging network by allowing any owner of EV charger to be a supplier. The use of blockchain smart contract enables trusted payment and transaction to be made between individual EV owners and EV charger providers who are unknown to each other.
The Share & Charge project initiated by Slock.it is an example of P2P EV charging station project, allowing households owning charging stations to provide charging services to drivers. It could benefit the ‘suppliers’ by recouping the cost of their investment, while broadening the geographical coverage of EV charging stations to benefit the drivers. The app has been available since the 28th of April for charging stations located in Germany.
2. Efficient transaction records
In its essence, Blockchain is a distributed ledger, a decentralized database. The current energy supply chain involves multiple parties and intermediaries, from generator, to distributor, to trader, regulator, and finally reaches the end user. The complex process requires multiple billing and cash flow transactions, which opens up opportunities for Blockchain Technology to bring positive changes. With a distributed ledger system, multiple stakeholders involved in the transaction can all read and write on the ledger, updating information onto the commonly shared database in real-time. Data such as electricity consumption, heat use, smart metering, can all be stored on the blockchain database, increasing security while also improving the efficiency by reducing replication of recording.
3. documentation of ownership and verification of renewable energy
The use of Blockchain Technology in the energy sector can also be significant in terms of registering ownership and current state of electricity production assets. The immutability and transparency characteristics of Blockchain system ensures that the recording is tamper-proof, giving both the owner and regulatory authorities confidence and guarantees in their property rights. Furthermore, the documentation allows users to track back to the originality of electricity production and inspect the transaction between each stage of the energy value chain, from generator to distributor. The use of smart contracts for renewable energy certification (REC) transactions is also valuable. The renewable energy certification is a proof provided by states according to specific amount of (megawatt (MW)) renewable energy generated by an energy supplier. However, private entities frequently engage in ‘unbundling’ of such certificates to traded it among private parties, which raises massive concerns regarding fraud REC transactions such as double selling of credits. Using a blockchain, the double selling problem can be avoided following the same logic as how it eliminated the double spending problem in cryptocurrency transaction, and the originality of the REC can always be tracked back by both regulatory authority and the consumers. The chance of fraudulent REC and tricks to play around with regulatory loopholes can be reduced to its minimal.
Back to energy consumption problems… How can it be mitigated?
You might be asking, although blockchain technology could potentially promote the use of sustainable energy sources, it doesn’t change the fact that it consumes huge amount of energy. To address this problem, we need to realize that most business and real world applications of blockchain other than cryptocurrency are using permissioned blockchain. In contrast to a permissionless blockchain, a permissioned blockchain further enhance security by allowing only authorized participants to be in the network. This might seems like a contradiction to the notion of decentralization, but the requirement for all validators to verify a transaction in order for it to be recorded still holds, and database are stored in every device in the network. It does compromise some of the trustless features, if consensus is reached by all participants, a past record could potentially be mutated, however with some degree of inherent trust between participants, a permissioned blockchain to work well.
The energy consumption of a permissioned blockchain is much less than a permissionless blockchain. According to a study on the energy consumption of different type of database, approximate energy consumption per transaction on a permissioned blockchain is in orders of magnitude smaller. If you think about multiplying it by the number of transaction, the energy consumption used by permissioned blockchain is negligible comparing to a public blockchain with Proof of Work, and its difference comparing to a traditional centralized system is not very significant.
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