Blockchain may play a key role in the next 10 years of electricity
“With the broadcast system, you have one person in one station deciding what gets put out over the airwaves. When you have a distributed network, like the internet, everybody can be a server. There’s no distinction between the broadcaster and the receiver: every computer does both. You can take your home laptop and run a server off of it in the same way that the biggest computers at Google can. There’s no fundamental difference between the computers they have in their server rooms and what you have on your desk.” — Aaron Swartz, cofounder of Reddit
Decentralization eventually comes to every industry.
Phones used to be regulated by the federal and state government, but with the Telecommunications Act of 1996, the industry was decentralized, and anyone was allowed to create a communications business. Next, even after commercial decentralization, there was still centralization in services — each phone provider still fully specified the hardware and software on their network. But by 2007, even these services had decentralized — cellphones began to allow 3rd party software into their hardware environments. And even more recently, even the data from these software services became decentralized — companies aren’t storing data in their own dedicated servers anymore, they’re storing them in data centers managed by third parties.
Similar things have happened in broadcasting, airlines, natural gas, etc. The story of human innovation is the story of decentralization and competitive markets. It’s only a matter of time until electricity is decentralized — until all the regulators and regional monopolies disappear. (note: this is not to be confused with electricity deregulation, which I discussed in an earlier piece.)
Decentralization is already happening, actually — the US has been on a path to decentralization for about a decade now. Decentralization began with the boom of smart meters (thanks to the Obama administration, which accelerated smart meter deployment with $3.4B in grants). These smart meters made possible the growth of microgrids (the microgrid industry is further projected to grow 115% by 2020). And these microgrids will culminate in complete electricity decentralization when transaction-based services are standardized for energy services.
With little hyperbole, it is very likely that the 21st century will be known to future generations as the age of energy democratization.
From crisis to opportunity: The rise of the microgrid
Microgrids are networks of energy assets that are able to disconnect and continue to operate, even when the grid itself is down. Microgrids gained in popularity after Hurricane Sandy, which knocked out power for 8.5M people in 21 states. Since then, microgrid capacity has grown 10~18% annually.
But in the scheme of things, microgrids are still a tiny fraction of US electricity — in 2016, installed microgrid capacity only accounted for 1.6GW out of a total capacity of 1,066GW (and largely limited to C&I customers). The reason that microgrids are still insignificant in our electricity infrastructure is that technological constraints necessitate that microgrids are built huge(the irony isn’t lost on me either). Power generators “trip” 2~10% of the time, so for every 100MW of plants on a system, operators need to keep about 20MW of spare capacity, just in case. But because this spare capacity can only be built so small, microgrids need to at least be a certain size.
But what if we could couple generators with a device that used real-time information to better predict when generators would need to be repaired? What if we could utilize data to remotely balance all systems that do happen to fail? What if we had the knowledge of energy supply and demand moment by moment, so that we could know which corners of the grid would become congested months in advance, so that we could create an optimal network of generators for the least cost?
We’d be able to utilize our existing assets to their fullest extent (asset utilization is only about ~80% on today’s grid), and we wouldn’t need 20MW of spare capacity for every 100MW of plants on a system. In doing so, we’d lower cost, and increase reliability. It would allow for us to create the smallest microgrids we’ve ever seen.
These advanced power electronics already exist to some degree. The most essential of this advanced metering infrastructure is called the smart meter.
Where are all the smart meters?
In the end of 2016, 47% of all US electricity customers had a smart meter. If smart meters are so great, why isn’t it 100%?
The underlying problem is that there aren’t many financial incentives for customers to buy smart meters (most customers who do havesmart meters were required by their state, or were heavily subsidized, to install them). At present, smart meters don’t matter for most customers because they don’t make a difference to cost. Most customers are still billed under legacy electricity prices from when we only had “dumb” meters that could only measure cumulative kWh used, and are charged a fixed $/kWh at the end of a month. (Such pricing is nonsensical — it’s the equivalent to paying for groceries by measuring their weight at the register.) Electricity is more valuable on certain areas of the grid and during certain times of the day, and so prices should fluctuate minute by minute, depending on system loads, geopolitics (for example, instability in Iran forced oil prices to a 3 year high this January), location (some customers may be in congested corners of the grid where electricity is more valuable), scheduled maintenance, etc. But they aren’t, and it keeps people from caring about their electricity use.
We know people should, in theory, care about energy , because Americans are very price sensitive when it comes to gasoline prices. The problem with the electricity sector is that prices don’t change, so there’s very little to care about(according to Opower, the average person thinks about energy use for only 9 minutes a year). At present,only around 8 million Americans are able to participate in a “smart pricing” program that lets them save money by reducing their energy usage at certain peak times, according to the Edison Foundation. People need dynamic electricity rates so that they have an incentive to install smart meters and save money — in a 2016 study, Commonwealth Edison, the largest utility in Illinois, found that customers (with no change in behavior) could save 13% on their bill just by billing them hourly based on wholesale market prices. We know systemwide dynamic pricing is logistically possible too, because this pricing structure has long been applied to large commercial customers.
Despite this slow progress in dynamic electricity pricing, it’s an inevitable trend of the next decade. In New York, we’re already seeing this with the VDER policy (part of their Renewable Energy Vision program), which is already valuing some new installations at the value that they provide to the grid — whether it’s with the marginal value of electricity, system congestion, or the environmental value from the resource. And part of this policy requires that everyone get a smart meter. These policies have far-reaching implications — formerly passive consumers of electricity can finally become active members of the energy community, consuming and contributing energy.
The rise of the “prosumer”
There’s one more reason why the next few years is a unique time in history. More people than ever are installing solar and buying batteries, and our grid is becoming an interconnected web of energy consumers and producers. Coupled with smart meters, each of these assets on the grid is becoming its own node on a network, with the ability to generate electricity and communicate with each of the other nodes.
As policies progress in the manner described above, consumers will be incentivized to install their own assets in order to gain control of their climate impact and energy prices. Currently, when assets generate electricity, the electricity must be sold back to the grid first, where it’s recorded and sent to an intermediary who manages the buying and selling of that electricity. This adds large transaction costs (utilities often add a ~100% markup in delivering electricity to you, from the distribution fees for maintaining the grid, property taxes, sales taxes, taxes for financing state energy programs, financial returns for shareholders, etc.). It’s obvious that customers will begin to install their own energy sources if they can save money in doing so.
The traditional function of the utility is to integrate assets, balance the grid, and pay asset holders — but these are increasingly becoming functions that can be done autonomously. Utilities aren’t even that good at it — in Australia, it can take months (on average 60 to 80 days) for the electricity producer to be paid. When we have smart software that can integrate all of the variables of electricity and balance our grid with no additional user input, electricity consumers won’t need to rely on the current electrical system anymore. It’ll also get rid of the premiums that we have to pay on electricity. This transition will make a large portion of our electrical system obsolete — in fact, utilities will essentially just become a wire company.
The biggest challenge for energy democratization is the next, and final, step. As the electrical system is increasingly made up of independent endpoints interacting with each other, we need to make sure that generators are still being paid. Additionally, electricity is highly sensitive information (giving insight into when people wake up, when residents come home, etc.), and we must secure this transaction. Until recently, it’s been difficult to imagine a world with completely decentralized electricity because it seemed that we would always need an independent clearinghouse. Until recently.
Frictionless transition from traditional utility services
There’s been a lot of attention given to blockchain technologies recently, so no deep dive will be given here, but here’s what’s important— blockchains hold a record of transactions, can either be on public or private ledgers, and have no single points of failure.
Blockchains make the transition of the electricity sector from centralization to decentralization frictionless (because the standardization of smart contracts ensures scalability). Blockchains can be used for localized trading of electricity that will make this complex marketplace work efficiency, securely, and without significant overhead costs. It also makes it easier to keep track of what energy came from where.
The transition to a decentralized electricity system will also aid in project development. The problem with centralized systems is that everything is dependent on a central authority. The electricity sector, for example, has had a bad history of policies changing suddenly with a change in government leadership. Decentralization thus stabilizes investment opportunities. A decentralized system allows 3rd parties to build for that system without fear of the rules of the game changing (investors are understandably reluctant to fund big infrastructure projects because of the length of time to earn a return, and the assortment of policy changes that could happen in the meantime). If there are ever any changes, it would have to happen via consensus of the community. A system undisturbed by politics will develop much faster.
The leaders of decentralization: what next?
So once our utilities “disappear,” what will the electricity sector look like?
There are a few scenarios:
- Individual consumers may own their own assets, and the utility may become something similar to the National Highways Association (responsible for maintaining transmission lines, etc.). Utilities will own the local lines and respond to local blackouts and operate repairs, but won’t ever be involved in owning or selling power.
- Assets may be owned by communities, and local public power may sell energy as a service to the community. This public power will come in the form of power companies like SolarCity or GE, or capital rich businesses that can afford to buy projects locally and operate them on behalf of customers, in exchange for service payments. (The Carlyle Group, a private equity behemoth, is already working with Dynamic Energy Networks to create a microgrid and sell energy in an “energy-as-a-service” long-term contract.)
- Or, it may be a company from left field — companies like Google that have the ability to take advantage of the massive amounts of data from smart grids. The amount of data will increase tenfold from 100 terabytes today to 1 petabyte when the smart grid is fully operational, and it will require a large existing infrastructure to utilize that data. Google is already discussing with state regulators for utilities to make energy information available to third parties like them.
- Or, it may be a startup.
The significance of this transition
There are very exciting implications of this inevitable energy transition, but there’s also a moral reason why this transition is necessary. We’re at a point in our planet’s environmental history where we need a faster rate of clean energy adoption, and this acceleration is enabled by decentralization — centralized systems can only grow at a rate at which the center of the node chooses. But decentralized systems can grow exponentially, as each node grows independently.
There are also still 1.2 billion people in the world without access to any electricity (and many more without access to reliable energy). Of these people, 85% live far from power grids, and it will never be economic for a utility to build out infrastructure to connect them. In the status quo of electrical infrastructure development, these people won’t have electricity for a very long time. But we’ve seen heartening lessons in the past — for example, the rural poor in India and China got cellphones long before they got land lines. If progress in electrical infrastructure innovation were to be wrested away from utilities, we could develop microgrids to be modular enough to build them in these areas. If we want control over our electricity future, we will need to start by taking back our future from utilities. That’s why the deployment of smart meters, the growth of microgrids, and the transition away from the traditional clearinghouse model is so important. That’s why energy democratization is so important.
Today, we’re only at the first stages of this transformation. But it’s obvious that this future is necessary, and, honestly, inevitable.