A Blockchain-Based Energy Future?

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Addressing the long-term imperatives of the energy sector, including the difficult task of reconciling affordability, sustainability and security amid a changing climate and technological disruption, will involve more than the employment of old tropes (e.g., “energy independence”, “energy dominance”, or “sustainable energy”). It will also involve the utilization of new tools, some of which will not only aid energy and climate policy but which may even be poised to fundamentally change the way in which these are conceived and executed.

One such new tool, blockchain technology, has recently seen a proliferation of interest over its role in helping further one or more of these energy sector imperatives. Blockchain, a “distributed ledger technology”,”is known for its role as the secure, distributed accounting system behind so-called crypto-currencies such as Bitcoin or Ethereum. But blockchain may, if it fulfills its promise, also have a variety of important applications in energy.

Rather than having transactions between two parties mediated by a central clearing and record-keeping entity, such as a bank or land registry, blockchain-based systems allow for parties to transact directly and instantaneously among themselves, with transactions secured by a cryptographic verification process that then places the transaction on a “blockchain” ledger of which each participant in the system holds an identical, immutable copy.

The implications for energy are perhaps not readily apparent, although potentially quite far-reaching.

In terms of security, the importance of a secure, reliable energy infrastructure has reached a new level of prominence this summer against the backdrop of a new global ransomware attack that hit a number of critical systems. Entities targeted by the attack included Rosneft, Russia’s largest oil producer, the Chernobyl nuclear facility in Ukraine, and India’s largest container port, JNPT. Earlier examples abound, from the 2015 cyberattack on Ukraine’s grid that left more than 200,000 citizens without power, to the 2012 attack on Saudi Aramco’s computer systems that was at the time called the “biggest hack in history.”Where digital vulnerabilities are tied to critical physical assets, incredible levels of damage can be incurred suddenly and without warning.

These events, and the orders of magnitude in which greater risk exposure  still exists in centralized energy systems, furthers the case for more decentralized, tamper-proof, redundant energy data management systems. By allowing energy data to exist in thousands or millions of identical immutable blockchain ledgers distributed throughout systems across the world, the risk of having data illicitly revised or tampered with is exponentially reduced. Earlier data entries in the blockchain can only be amended through the use of addenda, not outright revisions. Moreover, blockchain’s use of public-private key pairs (also called public key cryptography) and rapid advances in digital “fingerprints” offers more security than the username and password pairs that dominate today’s data management systems. Finally, transactions occurring over a blockchain-based system can more effectively carve out and/or encrypt private identifying information from the transaction-clearing process than those transactions that are facilitated via a central authority such as a bank or utility.

While blockchain technology is likely to offer an improvement over the legacy systems it is meant to replace, it is intellectually dishonest to position it as without its own security risks and limitations. For one thing, one of the major imperatives for the adoption of a blockchain-based distributed energy system is the rapid proliferation of distributed energy resources (e.g. rooftop solar panels) and energy management devices (e.g. smart thermostats, smart meters, etc.). However, this physical “internet of things”  is the greatest source of new cyber-vulnerabilities in the energy sector. While blockchain can help to secure the data generated by such physical entities, the entities themselves often lack sophisticated security systems and can be compromised, such as their recruitment for distributed denial-of-service (DDoS) attacks. Moreover, as quantum computing technologies advanced, even the more advanced blockchain cryptography systems today may see new vulnerabilities emerge. This quantum vulnerability, however, is true of most cryptographic systems, not just blockchain, and would initially come at such a high cost that only the most sophisticated and resource-rich actors (e.g. states) would pose a threat.

Finally, the distributed, redundant web of data at the heart of any blockchain-based architecture requires re-thinking approaches to data governance. We, and governments, are accustomed to thinking about individuals’ data, along with things such as bank accounts and transactions, as having a physical location, at least insofar as it can be tracked to a specific server within the borders of a single country. A system in which data is stored and processed with the simultaneous use of thousands or millions of nodes around the world sets up a collision with old ways of thinking, and old regulatory approaches. In particular, so-called “data localization” requirements, which have become increasingly prominent points of disagreement in trade negotiations such as those for the Trans-Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (T-TIP), are seemingly irreconcilable with the effective implementation of blockchain-based systems. The EU and the US should recognize and proactively address this collision course.

In terms of the transition to a modern, affordable and efficient energy system, blockchain is also a key enabling technology. Today’s electric grid is an invariably arcane and inefficient, albeit very valuable, piece of infrastructure. It was designed around a 20th century model, in which large coal, gas, and nuclear facilities generate significant volumes of power, and that power is then transported through a high-voltage transmission system, and then eventually transformed for delivery to consumers along a lower-voltage distribution system. Consumers are at the end of a cascading, uni-directional grid.

With the aforementioned growth of distributed renewable energy and smart energy management systems, this traditional model is being challenged. Electricity production is increasingly diverse in terms of size, location, greenhouse gas (GHG) intensity, generation profile throughout the day, and any other number of key attributes. Moreover, the increasing efficiency and affordability of rooftop solar systems has meant that more and more consumers are transforming into “pro-sumers”, selling energy to the grid when the sun is shining and drawing upon the grid when the sky goes dark. In many locations, the power sector looks more and more like a “web” of dynamic, variable, multi-directional nodes.

Blockchain presents an opportunity to minimize the costs and inefficiencies associated with conducting this orchestra of energy assets. The technology architecture can, for example, be used to enable household-to-household transactions that use and compensate a utility’s wires, but which do not involve the utility itself as the clearing agent. These transactions can be quite data-rich, and can involve “smart contracts” that automatically trigger certain clauses or actions depending on certain pre-established parameters.

In a pilot project in Brooklyn, a blockchain-enabled community micro-grid is allowing neighbors to sell and purchase locally-produced renewable energy among one another, and individual consumers can apply desired “screens” to their personal power supply (e.g. “only green power”, “only nuclear power”, “no coal”, etc.) with the use of smart contracts. While these applications may be more gimmicks than scaleable solutions for global problems, it should be noted that the benefits of this blockchain-based energy trading system are broader.

Beyond peer-to-peer energy transactions, blockchain can increase retail competition and consumer benefits by allowing more seamless and low-cost switching between power suppliers, and can allow specific energy production and energy efficiency activities (such as the curtailing of energy use during “peak demand” periods) to be more accurately compensated based upon their instantaneously-calculated value to the grid at the precise moment that they occur. In the event of a generation source or part of the grid failing, blockchain-based systems can more rapidly and seamlessly recruit compensating resources to make up for the loss. In other words, blockchain as a data management architecture can be a catalyst for a more transactional, intelligent, and resilient energy system.

Finally, blockchain can be a force multiplier for efforts to address the greatest imperative for the global energy system over this century: decarbonization. Regardless of the political winds in Washington, climate-related risks have continued their ascent as a key concern for the energy sector. Asset managers that together represent around half of all global assets under management have stated on the record that climate is a material, not theoretical, risk. Moreover, around half of all shareholders in fossil fuel and utility firms are now supporting resolutions related to additional disclosure of climate-related risk.

Europe is in many ways at the vanguard of this movement, with France’s Article 173 “Energy Transition Law”  last year becoming the first public statute of its kind to mandate that companies disclose GHG-related risks and strategies for addressing them. The Task Force on Climate-Related Financial Disclosures (TCFD), established by Michael Bloomberg and the governor of the Bank of England, Mark Carney, under the auspices of the Financial Stability Board, has spent the past year and a half scoping out more detailed guidance for companies and investors on what useful, usable metrics of carbon risk for the energy sector (among other sectors) might look like.

One of the major pushbacks against efforts to increase the energy sector’s transparency on GHG-emissions and climate-related risks has been the lack of clear metrics, along with methods for calculating and tracking such metrics throughout the energy value chain. How, for example, might an oil company know the full lifecycle emissions of one of its barrels of oil, from the crude oil’s initial extraction out of the ground to its final delivery to end users as a variety of different petroleum products? This may have been an exceedingly difficult (and costly) challenge in the past, but new tools, combined with new enabling technologies such as blockchain, are poised to begin changing this dynamic.

Today, there are a number of efforts, both inside of large incumbent fossil fuel firms and among small, innovative start-ups, to use blockchain technologies for tracking the environmental attributes of energy commodities as they are transformed, transported and transacted along the value chain. One firm, for example, is using extant meters on natural gas wells to track a variety of environmental credentials, from methane leakage  and local air pollution, to water recovery and beyond, that are then “assigned” to the associated unit of energy that is produced. These credentials then travel with the gas all the way to the final buyer, so that firms which seek - or which are required - to purchase more environmentally-friendly energy commodities can do so.

A similar approach could be used for oil, where the Carnegie Oil Climate Index (OCI) has already created a robust modelling infrastructure and base of knowledge around lifecycle oil emissions. New streams of data would need only to feed into the digital ledger on the blockchain, and this digital ledger to in turn utilize the OCI, in order to create an extensive new library of continually-updated data on the relative carbon-efficiency of different crude oil-to-product streams that could be used by companies, governments, investors and civil society. Big data has already changed the way in which countless other sectors are conceived, including electricity in the energy sector. Fossil fuels, and in particular oil and gas, represent a final frontier whose transformation is not far off.

Already, energy trading and finance firms ranging from ING and Société Générale to Mercuria and Trafigura are experimenting with the use of blockchain for settling LNG and oil transactions. These actors are motivated simply by the speed and cost benefits of blockchain, including the fact that it eliminates the need for burdensome paperwork, bills of lading, and capital reserves that have thus far been a mainstay of commodities trading. As blockchain becomes more and more prevalent in the energy sector, however, it will evolve from an efficiency strategy to an enabler for a more intelligent and sophisticated approach to differentiating between different energy commodities that were once crudely thought to be all the same.

If it is true that “peak demand” for oil is imminent, a prospect with which a number of oil majors are now beginning to grapple, then the entire paradigm of fossil fuel resources may be turned on its head. Prices will continue to track with the balance of oil supply and demand, but the very nature of demand is also likely to evolve, from one which treats all oil as equal, to one which differentiates on the basis of previously-unconsidered attributes, including environmental ones such as lifecycle GHG emissions. It is in the interest of any oil company, or oil rich country, including the United States, to begin preparing for such an eventuality by increasing the carbon efficiency of its assets and processes. Norway has long been pursuing such a strategy with an upstream carbon tax for the oil and gas sector that has been in place since 1991, as well as aggressive measures to eliminate unnecessary flaring and venting of methane. There is much the world could learn from Norway as the oil sector considers the prospect of a carbon-constrained, blockchain-enabled future.

Of course, there are plenty challenges here as well that call for a sober and measured set of expectations. The digital ledger is only useful if critical details from the empirical world are correctly translated into digital identities. In other words, if an old meter or error-prone human being incorrectly record the methane leakage from an oil and gas well, even the most elegant accounting architecture will now be working with immutable inaccuracies. Systems that rely heavily on human input reduce the value proposition of blockchain in the energy sector. A more autonomous, systematized system based on the "internet of things" is preferable, though this too will take further time, thought and cost to put in place if the entire system is to be reliable, secure and relevant.

This points to a second crucial issue - the need for governance. Blockchain technology is still in its infancy, and the circle of stakeholders who understand it is still far too small. Standards for the use of blockchain technology, where they do exist, are often weak, ambiguous, or splintered. It will take time and active coordination between public and private stakeholders to create critical mass around different standards that correspond to various different applications of blockchain in the energy sector. While some believe that the blockchain future is one that can circumvent governments entirely, this is wholly unrealistic. Control of energy has always been central to the role and interests of sovereigns throughout history, and many of the benefits that blockchain is poised to deliver will not be possible without a role for governments in overseeing citizen/consumer protections and establishing clarity in legal “grey areas”, from liabilities emanating from “bad algorithms” to the regulation of currency-like commodity transactions.

Blockchain is not a miracle technology, nor a silver bullet for any single challenge facing the energy sector, let alone the full landscape of them. It is, however, a fundamentally different architecture for organizing and sharing data - and the commodities underlying that data - with a broad horizon of transformative applications. Very little attention has been given in the public sphere to the blockchain applications being devised in corporate labs, universities and pilot projects around the world, and this deficit of discussion is particularly stark when set against the scale of opportunities - and possible unintended consequences - that could accompany the move to a future blockchain-based energy system. The time is right to begin envisioning such a future, and to begin discussing at a very granular level the key challenges and considerations for this panoply of potential applications.