Home / Blockchain / Is Blockchain Solving An Elusive Or Non-Existent Problem In Electricity Markets?

Is Blockchain Solving An Elusive Or Non-Existent Problem In Electricity Markets?

Long curved row of terraced houses, all with an identical array of solar panels on their tiled roofsGetty

There’s a famous piece of dialogue attributed to the Prime Minister of Britain William Gladstone and Michael Faraday. Faraday had just invented the electric generator and was showing Gladstone what it could do.

Gladstone remarks, “Yes but what the devil use is it?” To which Faraday says “I’ve no idea, but I warrant one day you’ll tax it.”

Such an exchange, whether true or apocryphal shows the huge mystery and incomprehension new technology often brings to any society.

And it’s true that distributed electricity paired with blockchain and crypto based technology is baffling to many, even highly tech savvy commentators in the industry.

Indeed, judging by some articles appearing in the digital press there is widespread lack of understanding of the potential of distributed energy resources (DERs) when coupled with blockchain. Some quite serious analysts have openly professed a lack of understanding of what problem this technology is trying to solve.

Maybe this is the fault of technology companies that haven’t set out their stall clearly enough.

But the charge that the value proposition isn’t clear is a valid one and does need addressing.

That’s not surprising because to understand the proposition fully you have to go beyond the crypto and blockchain elements and understand the foibles of the legacy electrical industry.

Essentially you can sum it up as this. As more and more people go solar, the price doesn’t go down.

In fact, to some extent it goes the other way and becomes more expensive. This is quite a counter intuitive state of affairs and it reflects the complexity of the electricity market.

The Sun is Free, But It’s Making Things Expensive

As more and more people come off the grid it leaves the people left behind to shoulder more of the costs. You can look at this in terms of fixed and marginal costs, but either way the upshot is clear. More defectors from the grid means more of the rest have to pay for keeping the system going.

This means of course that grid prices rise and more and more defectors buy into solar and out of the grid. This becomes a vicious circle and in economics it is called a ‘utility death spiral’; it’s one of the reasons electricity is getting more expensive.

It is also one of the issues DERs and blockchain can eventually sort out. By providing an alternative to what is essentially overpriced infrastructure, it will help distributed solar and wind do what they eventually must do – bring down the price.

Utility Death Spiral DiagramPower Ledger / Dr. Jemma Green

But this isn’t the only piece of dysfunctional status quo that DERs are challenging.

A Curious Differential

Depending on whom you ask, there’s a substantial gap in pricing that reflects a huge market asymmetry. As an example in some places in Australia there’s a 7 cent feed-in price to the grid (selling price) and a 26 cent buy back rate. Or as some see it, a shocking amount of profiteering on the part of the energy companies.

Now there’s a lot of debate about what this feed-in-to-buy difference actually is. Some commentators say it’s much smaller than 19 cents, depending on what assumptions are made about network costs and daily fixed charges.

But no one disputes the general point. The established energy companies charge substantially more for consumers to buy their electricity than they do to take it off your hands. And that high wholesale electrical prices are the ‘new normal’, a fact not lost on the Grattan report published in July 2018.

Now you might think that as renewable kilowatt production levels climb, and we build more and more low cost solar and wind farms, eventually that differential, whatever it is exactly, will be eroded, and that the wholesale price will come down.

However, this doesn’t appear to be the case.

In fact, you could double, triple, even multiply by ten, the amount of renewable kilowatts pumped out by solar and wind farms, and although good from a carbon perspective, unless you change the market dynamics the price differential would probably remain in place.

One of the reasons is that as you produce more electricity, you actually create a problem for the grid managing your oversupply.

Many wind farmers around the world are paid more to avoid supplying the grid when supply is high and power demand is low.

The price gap reflects the fact that the main suppliers have a difficult job to do. They have to manage the supply of electricity and demand in a world where unlike any other good or commodity you can’t really store it economically.

Sure, batteries have become better in recent years and even months, but for the most part storing electricity is neither easy nor cheap.

So unlike grain or cocoa beans, where you can warehouse huge supplies, electricity has to be very actively managed to protect against spikes and troughs. This is part of the reason for the buy-sell differential.

And this is where the real distributed renewable electricity proposition comes in. And it’s another way of thinking about and managing demand spikes.

Hold The Storage, We’re Managing The Price

If you can have a very responsive agile price mechanism, so that individual players, or rather their computer algorithms can choose their price, the problem of storage starts to go away.

If electricity is expensive at 20.33 one evening because everyone is taking a shower, the price mechanism kicks in and manages the system so that it heats the water up a little later when the spike is over, at 20.35.

If you want to cool your house down by a few degrees, your active pricing helps you pick the minutes on the distributed grid where electricity is plentiful and cheap.

Thermal applications lend themselves to time shifting and they can be big guzzlers of electricity.

If there is a high price in the market you can have your system set up to automatically despatch your energy and be paid instantly for it. And although there’s not a central authority controlling the data and you may not know who you’re selling to, you can trust that the measurement of how much electricity is sold and the amount you’re due to be paid will be paid.

Distributed electricity is able to be despatched where there is need in the system more readily than traditional energy assets connected to the transmission network.

So essentially distributed electricity coupled with technology can solve a vitally important problem, even if many experts can’t see it. It’s a problem that’s deeply embedded and priced into our legacy electrical networks and predicated on fossil-fuel based electricity.

Maybe this is why it seems like a nebulous solution, because it’s a problem we’re not very clear about. But there’s no doubt the problem exists. It’s this problem that explains part of the feed-in tariff to buy price differential.

Does the DER and blockchain solution mean that we’ll have disruption in all legacy systems tomorrow? Far from it.

When you look at how disruption happens in real markets you come to the conclusion that they will likely happen in places like Thailand where the legacy systems aren’t as profitable and where countries which are better placed to leapfrog their technology.

Technologies that can enable this transactive grid, using the blockchain, are starting to demonstrate how these new marketplaces will work there.

As Clayton Christensen, Professor of Economics at Harvard observed, disruption first comes to the markets where the big players can’t be bothered to play.

This will be especially true in the uptake of DERs.

So perhaps it’s no surprise that these are the countries where you find the first large scale commercial uptake of DERs using the blockchain.

How long it takes for this technology to jump over to the developed world players and really disrupt existing markets remains to be seen.

Some retailers and utilities are trialling peer to peer trading, using new daily fixed supply charges and wholesale energy prices and using blockchain to manage transactions, to offer more attractive options to their customers, but we can take this model a step further.

The differential of 7, 12 or 19 cents per kilowatt hour depending on who you’re talking to will come under pressure.

So too will the daily fixed costs electricity companies can charge.

Having a live price signal that any user can respond to has the potential to allow the market to help manage the system.

And when the history of energy is written it will be the change in the market paradigm rather than the political posturing that makes the difference and enables change.

Whether the energy commentators will eventually get their head around the concepts before then is another matter.

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