Digital Energy Trade with Blockchain: Purchase Power Directly from Your Neighbor

The blockchain electrifies the electricity industry: It drastically reduces commercial transaction costs. This makes it possible to market even the smallest amounts of electricity. This could enable blockchain to become a key technology for smart grids and sector coupling.
The energy transition needs communication. Between the individual stakeholders and interest groups – as well as in technical terms: To get a grip on the increasing decentralization and fluctuation of power generation, the individual components of the energy system must be linked to each other in smart grids across sectors. This is the prerequisite for the interactions that are necessary between producers and consumers; between equipment, platforms, and systems; between battery storage units and heat pumps, eVehicles, and CHPs. However, how can the countless transactions be efficiently controlled, documented, and calculated in such closely-knit, yet finely divided energy system?

In commercial transactions of all types, a mediator generally participates, who brings the buyer and seller together, assumes legal responsibilities, and deals with payments. This is commonly the supplier in the energy sector. However, their services come at a price – they can generate high transaction costs. Therefore, many experts in the energy sector are placing their hopes in a technology that has long been considered a plaything for nerds: blockchains. Originally developed as the technical foundation for the digital currency, bitcoin, blockchains allow businesses to act without the involvement of a third party.

How does this work? The blockchain stores the data resulting from a transaction multiple times. This takes place on decentralized, independent computers, whose processing power is provided for participants in the blockchain – private individuals, initiatives, or corporations. This hardware structure can comprise hundreds or even thousands of computers. If a new data set is generated, then all of the computers update the blockchain so that each of them holds all transaction data at all times. If anyone wanted to manipulate the data, they would have to hack into numerous computers. This makes the technology extremely secure. In addition, the blockchain could significantly reduce commercial expenses, as intermediaries are eliminated. ‘Could’, because first the currently high computing costs for validating data must be reduced. It is, ultimately, not very efficient if each individual computer has to check every single transaction. However, experts are currently working on methods that should perform this many times faster and much cheaper.

Compared with conventional, centrally organized systems, blockchains guarantee a significantly higher level of data security. “The blockchain establishes trust between commercial partners,” explains Tobias Federico, CEO for the consulting firm, Energy Brainpool. At the same time, they entail – at least potentially – only minimal transaction costs. “This makes them very interesting for an energy market that is becoming less centralized,” states Federico. Ultimately, the energy market of the future is not going to be dominated by today’s large power plants, which trade in gigawatts or megawatts, but instead by those that produce kilowatts, or even mere watts. “Small, decentralized units produce and consume very small amounts of electricity. The transactional system established for wholesale simply does not function here. In contrast, blockchains would be a very efficient solution for these tasks,” explains Federico.

Blockchains could be used in a smart grid everywhere that energy is bought or sold in the smallest amounts, for example: at battery storage units, heat pumps, or industrial systems that participate in the balancing energy market, or at charging stations for eVehicles. Even household devices could be efficiently linked to the smart grid using blockchains. For example, it would be possible to operate refrigerators so that they support the network: equipped with Internet access and blockchain software, they could autonomously draw electricity from photovoltaic networks in the neighborhood, precisely when they are supplying a lot of power.

Models like this are still pipe dreams. “I do not believe that blockchains will establish themselves quickly along a broad front. Before this occurs, the costs for validating data must be reduced,” explains Federico. In addition, the current regulatory framework runs counter to the use of blockchains in many sectors. For example, individual households are currently prevented from purchasing electricity for their consumers directly from the producers. This is because such transactions occur outside of the balancing circuit, and thus off of the network operator’s radar, which is legally not permissible. Therefore, Federico sees the first applications as taking in place in those areas that are not subject to these regulations – for example, in the calculations for network-stabilizing measures.

It is therefore not surprising that companies have selected this particular area for collecting practical experience with the concept. For example, the network operator TenneT and the battery manufacturer Sonnen have begun a field test, in which 6000 domestic battery storage units are used to hold wind energy during network bottlenecks and also to supply the power downstream of the choke point (Redispatch). The processes are automatically invoiced using a blockchain, which detects each individually stored and released kilowatt hour of each battery unit. Philipp Schröder, the CEO of Sonnen, is convinced that, “the future of energy production will consist of millions of small, decentralized electrical sources, prosumers, and consumers. Blockchain technology is the key to actually enabling the massive and simultaneous exchange of data between these actors.

Text: Ralph Diermann