The electrical energy value chain can be broken down into four main components: generation, trading, transmission and distribution, and retail. Given the high fixed costs needed to produce and transmit power, the electricity industry was a natural fit for a monopoly industry model. The United States recognized how a single firm could produce a desired level of output at a lower cost than two or more firms, and by the early twentieth century, 33 states had regulated the sale of electricity in this manner.
In the early twenty-first century, the industry has opened up somewhat, with deregulation in the U.S. occurring at both the wholesale and retail levels. In wholesale deregulation, electricity can be produced and sold independently from utilities, while at the retail level, customers may choose from several suppliers directly. Despite these changes, no state has an energy market that is completely deregulated, and even in deregulated markets, either an independent system operator (ISO) or regional transmission organization (RTO) is responsible for balancing electricity between generation and load. These institutions are more or less middlemen between generation and the consumer, and it is their job to ensure sufficient generation to meet demand and/or generation loss. Given the aggregation of demand in these large grids, the sector is dominated by massive centralized power plants that generate cheap power (fueled by carbon-emitting fossil fuels) sent long distances over transmission and distribution lines, aided by the entrenched history of regulation.
While rising consumer demand and federal tax credits have helped foster investment in renewable energy assets, renewable energy still only accounts for ten percent of all electricity generation in the U.S. Additionally, while renewable energy is flowing into the grid, due to the fungible nature of electricity as well as the many middlemen managing the flow, it is challenging to track renewable energy directly. Resources for tracking (e.g., renewable energy credits) have high transaction costs that often scare off stakeholders from further investment.
But what if you could eliminate the middlemen and high transaction costs to make money instantly off the generation of renewable energy? This is where blockchain technology comes in. Blockchain is a technology where a database of transactions is distributed among multiple computers. Transactions are documented automatically in a manner where they cannot later be altered, removed, or reversed—thereby eliminating the need for middlemen. With blockchain, the trading component of the energy value chain opens up completely. Stakeholders as small as an individual consumer can immediately track and sell the energy they generate to anyone participating in this blockchain technology, as long as a corresponding “microgrid” is created where participant energy assets are connected to each other. Currently, it takes an electricity producer an average of 60 to 80 days to get paid; however, with blockchain technology, payment can happen instantly, thus dramatically reducing the high fixed costs needed to produce. In this manner, for smaller stakeholders (particularly those with renewable energy assets) blockchain creates financial value where before there was little.
Blockchain technology, though, certainly comes with challenges. Massive centralized power plants currently have little incentive to invest in blockchain since they benefit from market dominance and high barriers to entry for any new competition. Furthermore, blockchain technology is still immature. In an industry that is critical to the safety and daily life of all Americans, mistakes can be dangerous and costly. That said, some major players are moving to adopt the technology. In Australia, the startup Power Ledger is conducting a 200-blockchain customer trial with power retailer Origin Energy. LO3 Energy in Brooklyn, New York, has set up a neighborhood trading system called the Brooklyn Microgrid. Blockchain trials from companies such as IBM, BP, and Shell are documented. Furthermore, if consumers can invest in renewable energy assets such as solar panels, they may be able to unplug from the current energy grid completely, instead generating their own power and selling it among other participants. At the very least, dominant energy companies might recognize the threat of consumers going “off the grid” and see how they can neutralize this threat, perhaps by adopting blockchain technology themselves.
Ultimately, if blockchain technology can be adopted, particularly by the companies that control centralized power plants, it offers an opportunity to upend the trading component of the energy value chain. Blockchain can allow renewable energy to compete on its appeal to consumers, which offers at minimum an interesting prospect and at best a true platform to become our dominant energy supply.
Naveed Ahmad is a second-year student in the Full-time MBA Program at the Scheller College of Business. He is serving as 2018-19 co-president of the Scheller College MBA Net Impact Chapter.