14 May The Power Industry’s Killer App – Blockchain
Block chain could be a new killer app for the power utility sector. It will either kill the industry, or will be used by the industry to kill.
Why the Power Industry?
Recently I spent a couple of hours with a power utility on the potential impacts that block chain technology could have on the broader utility sector. I structured the meeting with an initial exploration of how blockchain technology actually works by playing a word game that approximates bitcoin mining. Once the concepts become clearer, I then turned to examples of block chain innovations in the power sector. We spent some time discussing other sectors of interest, like retailing and trading, and finally looked at the impacts of combining block chain with other digital technologies, such as artificial intelligence.
Blockchain technology is also called distributed ledger technology (or DLT), a really dull abbreviation. I’m a fan of the far more creative branding in crypto currencies – Ethereum for example, a name which reminds me of that fictitious mineral in the Avatar movie, Unobtainium. A lot of people are believers in DLT – venture capital to the tune of $1b or more now backs the more than 800 companies in the sector. Even the World Economic Forum is in on the hype, and projects that 10% of global GDP will be stored on DLT by 2025, or something north of $10T.
Normally, my articles dig into the impacts of digital directly on oil and gas, but in this case, the impacts are more indirect. Specifically, natural gas is used to generate power, and as gas replaces coal in power applications, digital innovations in power can impact the market for gas. Frankly, power utilities are at risk of getting absolutely hammered by changes coming at the sector, many of which are enabled by digital solutions such as block chain.
What kinds of changes?
The utility business model hasn’t changed much for over a hundred years. Since the time when Thomas Edison invented the integrated power utility, electrons have flowed in one direction, from the big central power generator, along big transmission lines, into the local distribution company and finally into the home or business to provide power for lights, appliances and machines. Monopolies prevailed.
The roles of the players in this industry (generator, transmitter, distributor, consumer) were largely fixed and stable. The things that consume power (lights, appliances), were pretty much fixed in place, and were manually switched on and off by people. Power generation itself is very efficient – large scale central plants and a hundred years of innovation has squeezed almost all the cost out of fossil fuels like coal. Byproducts like emissions and water usage have been free and borne by society.
Utilities are all optimized around these features with large centralized systems, command and control top down management structures, surveillance of the infrastructure using SCADA systems, an integrated supply chain optimized to extract maximum value, and a regulator who balances the conflicting interests in the system through tolls, rights of way, permits and restrictions.
One by one, these sector features are falling away.
First, the new power sources from wind and solar feature generation costs that ultimately fall to near zero, unlike fossil fuels that have a floor on their costs. Instead of being centralized in just one location, much future power generation will be highly distributed on roof tops and road surfaces. These future power generation assets may not be owned by the utility, eliminating monopolies and creating competition. The power they generate can be stored in small batteries, and can be instantly on (coal plants can’t really ever shut off, and gas plants need an hour’s notice). The things that consume power no longer need people to switch them on and off – they can self manage, in response to price signals for example, and very importantly, they move around. The power will flow in multiple directions as conditions warrant. Finally, the byproducts are becoming socially unacceptable, and are starting to carry specific costs like carbon taxes.
The roles of the players in the sector are therefore in flux. Consumers become producers. The one-way grid no longer works. Financing the grid as a shared asset with tolls on consumers fails if the consumer becomes self sufficient and doesn’t use the grid, or is part of a neighborhood of solar power producers and consumers who self manage.
The Killer App
There are early signs that block chain is both a killer app for utilities as well as its silent killer. Block chain researcher William Mougayar has coined the mnemonic ATOMIC to help surface where blockchain kills (that is, it disrupts the established order or business model).
- A – asset – physical (buildings, land), intellectual (music, movies, design), or ephemeral (electrons, sunshine, wind).
- T – trust – best fit is where there is a lack of trust between parties. Disputes are a good sign, but so is elaborate paper-based and computer systems for detailed record keeping
- O – ownership – when knowing who owns what asset is important
- M – money – a store of value, narrowly defined as currency, but could also be points granted (loyalty), shares and tokens
- I – identity – for persons and things, where individual identity is valuable
- C – contract – agreements between parties (people, organizations, things)
Power utilities are the perfect candidate for ATOMIC. Utilities are asset heavy businesses, with lots of assets and few people, and many of the power consuming assets have been dumb devices. Trust is enabled by elaborate and expensive computer systems like SAP to provide detailed records of consumption. Ownership of land (where power lines encroach) is important, as will be ownership of smart assets (like appliances, cars and buildings) that purchase power independently. Utilities generally rely on fiat currencies, but in a world where power purchasing fragments, creating loyalty may matter. The identity of all those smart assets will be critical to recording power consumption by asset. Finally, utilities have many thousands of contracts that govern their interactions with customers, land owners, suppliers, regulators, fuel sources, and soon thousands more to engage with smart devices.
How might utilities be killed by block chain? It’s already happening, of course, just not symmetrically across all utilities and locations.
- Cars get outfitted with block chain and purchase power not from grid suppliers but from new distributed suppliers (batteries in fuel stations), using block chain to capture the transfer of electrons (Porsche, MOBI). A major new revenue source flows to the automakers.
- Battery power sources (either centralized sites or distributed through cars) switch on instantly during power spikes to shave off power peaks, an important profit line for utilities (Tesla South Australia).
- Neighborhoods create district solar facilities (sunny homes with solar panels wheel excess power to shadier homes and batteries), using block chain to record generation and consumption data for monthly settlement (BMG)
- Industrial power generators wheel excess power to adjacent industrial assets, bypassing the grid.
- Smart appliances monitor power markets and prices, switch off to avoid times of high power prices, and purchase power from best available supplier in the moment, recorded on block chain for settlement. Utilities compete to supply the cheapest electron.
Utilities need to fight back, of course, and here’s where blockchain creates value in a utility:
- Better management of land contracts. Utilities both own land and administer rights of way to third party land, and block chain could be applied to administer those contracts, including payments, leases, royalties, title transfer, and settlement (NAL).
- Distributed power purchasing. Utilities are already very efficient at power purchasing, but the purchasing model (power purchase agreements for many megawatts over long periods) does not scale down to a future distributed solar. Block chain as a distributed database looks better suited than a large centralized database.
- Prosumer administration. The thousands of possible independent solar installations will need their own administration capabilities for buying and selling power. Utilities could stand up a blockchain based back office for the distributed world.
- Wholesale power trading. Power trading is not that different from other traded commodities – dual sets of ledgers could be replaced by a shared ledger.
- Smart metering. Block chain enabled metering could automatically sort out identity of meters, their owners and power flows, creating the ledger of transactions for fast settlement.
One of blockchain’s hidden capabilities is the ability to create entirely new value, such as loyalty, which is rather foreign to most utilities, whose customers often had no choice and were slow to change suppliers. Tomorrow’s energy customer will be a dispassionate machine that will behave entirely on the economics of power. Utilities either figure out how to exploit the robots or get crushed.
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