Distributed Power: How Blockchain Will Transform Global ... · technology for photovoltaics (PV)...

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A BLOCKCHAIN RESEARCH INSTITUTE BIG IDEA WHITEPAPER DISTRIBUTED POWER How Blockchain Will Transform Global Energy Markets Lawrence Orsini LO3 Energy October 2018

Transcript of Distributed Power: How Blockchain Will Transform Global ... · technology for photovoltaics (PV)...

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A BLOCKCHAIN RESEARCH INSTITUTE BIG IDEA WHITEPAPER

DISTRIBUTED POWERHow Blockchain Will Transform Global Energy Markets

Lawrence Orsini LO3 Energy

October 2018

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© 2018 Blockchain Research Institute. All rights reserved.

Realizing the new promise of the digital economy

In 1994, Don Tapscott coined the phrase, “the digital economy,” with his book of that title. It discussed how the Web and the Internet of information would bring important changes in business and society. Today the Internet of value creates profound new possibilities.

Don and Alex Tapscott launched the Blockchain Research Institute to help realize the new promise of the digital economy. We research the strategic implications of blockchain technology and produce practical insights that will guide our members in achieving success.

Our global team of blockchain experts is dedicated to exploring, understanding, documenting, and informing leaders of the strategies, market opportunities, and implementation challenges of this nascent technology. Research projects are underway in the areas of financial services, manufacturing, retail, energy and resources, technology, media, telecommunications, healthcare, and government as well as in the management of organizations and the transformation of the corporation.

Our findings, conclusions, and recommendations are initially proprietary to our members and are ultimately released under a Creative Commons license to help achieve our mission. Each research publication includes a video introduction by Don and an infographic for members’ use in communicating these ideas throughout their organizations. To find out more, please visitwww.blockchainresearchinstitute.org.

Leadership team

Don Tapscott – Co-Founder and Executive Chairman Alex Tapscott – Co-Founder Joan Bigham – Managing Director, International Hilary Carter – Managing Director, Canada Kirsten Sandberg – Editor-in-Chief Jane Ricciardelli – Director of Marketing Maryantonett Flumian – Director of Client Experience Luke Bradley – Director of Communication

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ContentsForeword 3

Idea in brief 4

Changing the power dynamic 4

Prosumers: Consumers participating in energy production 4

The many ways to power our lives 5

It’s about energy—and data 7

The convoluted process of selling energy today 8

The concept of “value stack” 9

Why blockchain? 10

Distributed ledgers are bound to change the grid 15

Nascent distributive energy growing around the globe 21

Where the industry stands now 23

Policy 23

Corporations 23

Energy producers 24

Central orchestrators 24

Conclusion and recommendations 25

Clearing roadblocks in policy and practice 27

Designing for generations 28

Leapfrogging where we can: Puerto Rico 29

Advocating and educating 31

About the author 32

Notes 33

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ForewordReliable power is a necessity for modern life. We require energy for all of our personal and business devices, our household appliances and assembly-line equipment, our ports and transportation systems, our buildings, hospitals, and factories. Since computers run almost all aspects of society’s infrastructure, breakdowns are not just inconvenient; they are potentially life-threatening and hazardous to national security. The tragedy of grid failure in Puerto Rico during and long after Hurricane Maria shows how vulnerable we are to disruption.

A smarter, more distributed grid would be far more robust and reliable. Developing countries could leapfrog current energy generation and distribution models and build smart energy infrastructure that is not just more resilient and better for the environment but more cost-efficient and affordable. Developed countries have a lot more work to do, weaning themselves off fossil fuels as they replace a patchwork of aging grids.

Some Canadian households have gone off the grid entirely. Consider Kate and Peeter Vihvelin in Bocabec, New Brunswick. They transformed an abandoned farm into a model of energy efficiency. Twenty solar panels and a wind turbine power all the buildings on their 39 acres in Charlotte County. Kate told the CBC, “[We] turn off the lights when we’re leaving the room, if they’re not needed. We do not waste hot water, and we live very much in tune with the weather.”1

“One thing we’ve realized is that the solar panels generate amazing amounts of power and we can’t use it [all],” Peeter added. “It’s really a question of balance. … You have to balance your loads and your generation so everything works out.”2 He sees value in offering his excess energy to people still connected to the grid. It is an important step to a more sustainable future, and the technology now exists to realize it.

Distributed ledgers are a component of this future, and an important one in creating peer-to-peer energy markets. Anyone who uses electricity should find this research and its author fascinating. Lawrence Orsini is the founder and CEO of LO3 Energy. He uses his personal experience—wide ranging from field auditing to high-level corporate consulting—to describe the power and potential of distributed energy. We are fortunate that he was eager and available to share his insights with Blockchain Research Institute members.

DON TAPSCOTTCo-Founder and Executive ChairmanBlockchain Research Institute

Developed countries have a lot more work to do, weaning themselves off fossil fuels as they replace a patchwork of aging grids.

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Idea in brief » As more people generate their own energy, blockchain could

provide an effective and transparent platform for them to complete peer-to-peer transactions. This marketplace would be more equitable to the small-scale producer-consumers (prosumers) and encourage the development of distributed energy infrastructure, which would prove more efficient and reliable than today’s grid structure.

» Blockchain-enabled meters, or smart meters, can effectively collect and communicate data and revolutionize how people use and trade energy. Today, utility companies control such data; however, in the future, individual consumers should get the rights to collect, store, and share it. There would be monetized incentives for them to decide who to share the data with on a blockchain-enabled system.

» Today’s energy price is volume oriented: the more we use, the more we pay—no matter the source of the energy, how long the transmission distance, or the time of day, including during peak time grid congestion. When data on energy usage become instantly available via blockchain, energy price would reflect the true cost of the unit used and introduce better ways to regulate the grid traffic.

» The months-long grid failure in Puerto Rico provides a valuable lesson to everyone. The current grid structures are often more vulnerable than one imagines. The grid crisis pushes us to reimagine the grid for the future generations. A smarter, more distributed grid would prove more effective and resilient.

Changing the power dynamic

Prosumers: Consumers participating in energy productionTechnology is breaking down the entry barrier to many industries. Ordinary people with means to housing and driving are matching up with visitors and car haulers. Platforms like Airbnb and Uber transform how people travel and stay—they even transform how people socialize and connect to each other. This development mobilizes the extra human and material resources of the drivers and homeowners and gives consumers more options.

Similarly, blockchain technology enables people with a means of producing and selling energy to do so without investing in large-scale

As more people generate their own energy, blockchain could provide an effective and transparent platform for them to complete peer-to-peer transactions.

The current grid structures are often more vulnerable than one imagines. The grid crisis pushes us to reimagine the grid for the future generations.

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infrastructures. It also provides options for consumers interested in renewable and resilient energy, so that they can consume energy in ways that reflect their values before the mainstream companies adapt. We sometimes use bottled water to illustrate this point: is a five-dollar bottle of water that different from free tap water? The answer is yes and no. They differ in terms of environmental consequence, nutrition, marketing, and consumer perception (i.e., consumers’ conscious choice to reflect their values through their behavior).

With platforms like Uber and Airbnb, individuals need not own a hotel to rent rooms or buy a medallion to drive a taxi.3 Anyone with a spare room or a running car and some extra time could register and plug into a pool of thousands of potential customers. Today’s technology creates a sharing economy, where people with more than they need can become prosumers. When it comes to energy, blockchain helps to create a new, smart marketplace for individuals to trade energy. But because transmitting energy involves interactions with the grid and therefore requires more physical coordination, in practice, sharing household excess is more complicated than renting out a spare room.

The many ways to power our livesSince the early 1900s, most of the developed world has relied on the centralized grid as the sole provider of energy. However, as soon as technology for photovoltaics (PV) solar panels became viable in the late 1970s, more people showed strong interest in self-generating energy and going partially or completely off the grid.

The consumer drive behind generating energy on one’s own is multifaceted and profound. It gives people, most of whom are from the developed world, the freedom to choose how they consume energy. In other markets, knowing where and how products were sourced and making a conscious choice based on provenance attracted many consumers. Some people choose to buy their produce from farmers’ markets, organic stores, or even grow it in their own backyards. When buying clothes, some people no longer consider only the design and the fit but also whether the material is upcycled and the process is sweatshop- or cruelty-free. The list runs long. Today’s technology affords a level of supply chain transparency and gives consumers information to decide for themselves.

In the United States, most of our electricity power comes from petroleum, natural gas, and coal, all of which are nonrenewable and generate heavy pollutants in the mining and burning process. Environmentally conscious individuals are not waiting for the industry to reform: they are pursuing viable small-scale options for clean household energy (Figure 1, next page).

In addition to the environmental considerations, there are economic incentives for some people, especially those living in rural areas. In the 1990s, Cam and Michelle Mathers bought a home on 150 acres of woodland in eastern Ontario. They decided to go off the grid after

Blockchain helps to create a new, smart marketplace for individuals to trade energy

Today’s technology affords a level of supply chain transparency and gives consumers information to decide for themselves.

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discovering that connecting their new home to the energy grid would cost them $100,000. Instead of using the traditional grid, the Mathers set up solar panels. There were eight on the property already, and they added four more at $75 each.4

“Our arrays now hold 2,300 watts’ worth of solar panels, which is more than sufficient to run a refrigerator, a freezer, two laptop computers, an LCD television and DVD player, satellite TV and Internet, a washing machine, and a kitchen fully stocked with appliances,” Cam Mathers wrote.5

In 2016, an average American family consumed a monthly 897 kilowatt-hours (kWh), and many chose to look for alternative ways to power their daily life.6 A few square feet of solar panels, for one, could fulfill an entire family’s need for electricity. Apart from solar power, wind is another clean source of energy, especially if one lives on a spread-out property.

For now, however, connecting renewable generation systems other than a small solar system is subject to many more state and local requirements for permission and site selection. These systems also depend heavily on availability of natural resources. Apart from these situations, individuals have come up with several savvy ways to

No matter where we live—a New York City apartment, a recreational vehicle, an Earthship, or an Ontario farm—we have better options for producing and consuming energy.

Figure 1: US energy consumption by energy source, 2017

Source: US Energy Information Administration, Monthly Energy Review, Tables 1.3 and 10.1, preliminary data, April 2018. Used according to US Energy Information Administration guidelines.

Sum of components, measured in British thermal units (Btu), may not equal 100% because of independent rounding.

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create or save energy.7 No matter where we live—a New York City apartment, a recreational vehicle, an Earthship, or an Ontario farm—we have better options for producing and consuming energy.

While we did not find official statistics on how many families have gone off-grid, USA TODAY reported that, in 2006, about 180,000 families were living off-grid, a third more than a decade earlier.8 Although going off-grid is the ultimate version of using alternative energy, more people choose to use renewable power generation, such as a solar system, and remain connected to a grid.

When prosumers produce more energy than their households could consume, there will be electricity fed back to the main grid. Net metering is the method through which they receive compensation. The approach, just as it sounds, involves a meter that registers both the electricity used by the household and the electricity generated by it. The difference between the two decides the amount they pay or get paid.

According to Accenture, a technology consultancy, 69 percent of consumers are interested in having a marketplace for energy trading and 47 percent plan to participate in solar projects in their communities.9 With a strong demand for alternative energy supply for ordinary households, and more and more individuals starting to produce energy on their own, it is only a matter of time before there is potential for a smart marketplace for easy energy trading that is vastly different from what we know today.

Once there is a reliable marketplace platform, our solar panels and other power generators will no longer be just a possession but also an asset. Generating and selling energy isn’t new, but a platform for hassle-free and immediate trading will change the game completely.

It’s about energy—and dataThe benefit of blockchain for energy is more than a trading platform for alternative energy. Ride hailing apps changed how people call cars, rental listing apps changed how people find lodging, and dating apps changed how people find partners. But the heart of these developments is the effective collection and curation of data (including the algorithms associated with making intelligent use of the data), not cars, houses, or human chemistry.

To unlock endless possibilities in energy, we need more data. We are working to unlock the data at the grid edge, a catch-all phrase for networked innovation outside our current energy grid, innovation that is

» Digitized in that it leverages the Internet

» Distributed in terms of the generation and storage of energy

Although going off-grid is the ultimate version of using alternative energy, more people choose to use renewable power generation, such as a solar system, and remain connected to a grid.

Generating and selling energy isn’t new, but a platform for hassle-free and immediate trading will change the game completely.

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» Electrified in that more things on the network are powered by electricity rather than fossil fuel.10

» We can build many interesting services on the infrastructure. While collecting as much data as we want is not that difficult, we must think through two tricky parts.

First, we must figure out which data to collect and communicate. In a sense, it is like organizing receipts: it’s not about keeping absolutely everything bulging in our wallets or stuffing up our drawers, but keeping the useful ones and having them ready when needed.

Secondly, we must establish data as a commodity. As of now, the utility has all the data or at least access to the data. We believe that data streams should be the property of those who generate them. Once everyone acknowledges that, we must devise a method for giving us control over who has access to which of our data and at what price.

The convoluted process of selling energy today If we produced more energy than our household could consume, then we should go ahead and sell it, right? But how? Because of the physics of electricity—we cannot store it in a jar or transport it in a car—selling energy is nothing like renting out a spare room via Airbnb or selling an old air conditioner on craigslist. The excessive energy, in the form of electricity, goes to the main utility grid, which sets in motion an onerous process of selling back to utility companies (Figure 2).

Figure 2: Today's utility infrastructure

Source: US–Canada Power System Outage Task Force, “Figure 2.1 Basic Structure of the Electric System,” Final Report on the 14 Aug. 2003 Blackout in the United States and Canada: Causes and Recommendations, energy.gov, April 2004, p. 5. Used according to the US Government Works guidelines.

If we produced more energy than our household could consume, then we should go ahead and sell it, right? But how?

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The utility grid is a circuit transmitting electricity from the power station, to residential, commercial, and industrial consumers. To maintain the circuit balance, the real-time input from the generation end should be even with the amount of electricity drawn from the grid on the consuming end. Therefore, to avoid grid disruption from the entrance of self-generated power, it should be accounted by the grid operator to ensure proper coordination. Later in this paper, we will further discuss the benefit of blockchain application on maintaining grid balance.

To measure the excess energy, a bidirectional meter tracks the electricity generated by the household and deducts the electricity it consumes, which become credits that power companies can pay for. A number of US states allow some form of this practice, known as net metering.

While net metering is not that complicated, the business setup of this process is very much a one-way street—the utility decides the terms and the prosumers have no say at all. If you produce more than you need, or need more than you produce, you have no choice but to go to the utilities. While net metering can be used for renewable energy, it is not necessarily always the case.

With renewable energy, another credit concept has been introduced for its generation, in addition to the value of the electricity itself. An agency, sometimes the government, issues renewable energy certificates (RECs) to endorse ownership of renewable energy. For every 1,000 kWh transmitted to the grid, the owner receives one REC.

The process of obtaining and trading RECs is so time-consuming that it cannot be accounted in a cost-effective way for small-scale prosumers; only large companies have the economic interest to pursue it. If there was a marketplace that could make it easy to buy and sell such credentials, smaller systems would have the incentive to buy and sell RECs, therefore making money from not only the energy they produced but also from their choice to use renewable sources.

The concept of “value stack”How we pay for energy today resembles how we pay for traditional cab rides. With a set price per mile, a customer pays according to the distance traveled. Similarly, today’s utility customers pay according to the amount of energy consumed.

Even though this volume-based approach may seem reasonable at first, it does not quite reflect the actual cost, as well as the real-time demand and supply dynamic. Gas prices fluctuate; traffic conditions alter; rush-hour demand can go off the chart; rainy days and snow days happen. Despite all these variables, taxi drivers’ meters run the same, which is not the most efficient approach for the market and the traffic. For similar considerations, the energy industry has

While net metering is not that complicated, the business setup of this process is very much a one-way street—the utility decides the terms and the prosumers have no say at all.

The energy industry has been exploring a pricing mechanism that honors not only how much energy one uses but also how the energy is generated and delivered.

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been exploring a pricing mechanism that honors not only how much energy one uses but also how the energy is generated and delivered.

One possible way to price effectively is a value stack system. The value of a unit of energy will depend on several variables, such as time of usage (on- or off-peak), distance of distribution (nearby or distant source), and nature of source (less carbon and pollution intensive and environmentally friendly or fossil fuel).

As a result, energy producers must be the most effective to compete in the market and will probably tip the scale toward distributed energy resources a little bit once the market entry barrier is removed.

Why blockchain?First, some have used blockchain for cloud storage, but it can do more with the available data. Once we have energy-related data in blockchain format, it becomes the basis for energy transactions. Consumers have always searched for smarter ways of doing this. In some parts of the United States, European Union, and Asia, they use smart meters to send data wirelessly. These meters not only sense the stored data but also find a way to communicate data, both of which require computation. A thermometer, for example, can read temperature but cannot store the data, send it, or process it in any useful way.

Secondly, blockchain technology makes it possible to track transactions. It is important because when you generate energy, you want to be able to track its journey to consumption. The data

Wind Turbine by fxxu, 2017, used under CC0 1.0.

The data availability and tractability on blockchain make it easier to conduct transactions without friction.

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availability and tractability on blockchain make it easier to conduct transactions without friction.

The distributed nature is another advantage of blockchain. There is no central entity serving as gatekeeper to massive information, no single basket that holds all the eggs, and so there will be no incident like Yahoo’s or Equifax’s leak in the realm of blockchain applications.11 In this light, it is more secure for all users.

How blockchain makes a peer-to-peer marketplace possible

The rigid and one-directional process and expenses incurred from selling energy and handling RECs are the main factors that deter prosumers. Blockchain technology can make energy transaction happen without the intermediate agencies, and therefore have the potential to eliminate both setbacks.

A blockchain-enabled meter can track the amount of energy that is generated and consumed in real time. We no longer need someone to come read our meter once a month and send the reading off to an accounts department to initiate billing and so forth. Blockchain can make the energy production information available and visible in real time to anyone involved.

With the timely availability of this information on a blockchain platform, entities could complete energy transactions in a matter of seconds. The significance of this immediacy goes beyond satisfying a savvy and impatient prosumer; it could expand in scale or even go mainstream in today’s economy.

With tracked information, blockchain can make energy transaction more market driven. By sending real-time price signals, it can modify generating and consuming behaviors to regulate grid balance.

Blockchain is not just a new high-tech way to settle utility bills. It is also a good communication protocol for prosumers and consumers. It disrupts the existing energy hierarchy and self-organizes on the grid edge, which is impossible with ordinary databases.

The peer-to-peer (P2P) market is not the only use case of blockchain in energy. There is a whole universe beyond it. However, whether these potentials can reach full-fledged development still largely depends on regulation.

The grid: Then and now

When electricity became a part of modern life in the 1800s, government was not regulating the market. As a result, a number of companies supplied electricity, especially in the cities where populations were traditionally dense, and the will and ability to pay for electricity were high. Some may think such high competition would be harsh for utilities, yet beneficial for the customers. However, once one of the suppliers pushed out its competitors by

With the timely availability of this information on a blockchain platform, entities could complete energy transactions in a matter of seconds.

In 1907, the National Civic Federation and NELA spoke out in favor of state regulation of electric companies because they wanted the state to regulate the development of municipal systems.

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offering dirt-cheap rates, it found itself in a monopoly position to ask for whatever rates it desired.

In 1898, the president of the National Electric Light Association (NELA) proposed that state agencies regulate electric utilities. At first, this idea was not popular among the investor-owned companies, but it gained favor when the number of municipal systems tripled between 1896 and 1906. The public appeared to favor municipal electric systems over unregulated investor-owned systems. In 1907, the National Civic Federation and NELA spoke out in favor of state regulation of electric companies because they wanted the state to regulate the development of municipal systems. Within ten years, 33 states had instituted agencies that regulated the sale of electricity.12

Some have argued for staged industry deregulation to increase competition.13 But many believe that the electric utility industry should be regulated because it is a natural monopoly industry, meaning if it is completely left to the market, it would end up with one or a few companies dominating the entire market. The main reason relates to financing—the fixed cost of establishing infrastructure is prohibitively high, while the variable cost, or the day-to-day operational expenses, is relatively low. In this case, the larger the production scale, the lower the cost and the cheaper the electricity. At the same time, if a few companies take over the market, they would avoid duplicating facilities such as power lines.

A related reason for regulation is that it encourages infrastructure innovation. In a longitudinal study of the effects of deregulating the electricity market in Japan, researchers Nan Wang and Gento Mogi found that R&D expenditure decreased and the pursuit of patents increased, as the nine Japanese utilities focused more on short-term, business-oriented projects rather than long-term, public-oriented, and environmentally sustainable solutions.14

Another reason for regulation is grid balance: the output must equal the input at all times. In other words, the electricity generated and transmitted on the grid must be consumed nearly simultaneously. Unlike other physical products that we can store for later consumption, we cannot effectively store electricity on the grid in any way. This situation requires surgical coordination and planning to operate the electric grid that individual companies simply cannot do.

How the utility industry works today represents what the industry needed under the limited technology and resources available when the rules were set up. However, many no longer apply to today’s situation (Table 1, next page).

Here is a simplified rundown of the structure of today’s electricity market. The grid supply chain mainly consists of three components: generation, transmission, and distribution. According to the Federal Energy Regulatory Commission, there are 230 investor-owned utilities, comprising the largest energy sector in terms of assets and revenues.

How the utility industry works today represents what the industry needed under the limited technology and resources available when the rules were set up.

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Besides that, there are 2,000 publicly-owned utilities (POUs) and a number of co-operatives and federal authorities. Among them, few are truly independent. Some investors perform all three functions and very few POUs own generation or transmission.

Depending on the state, some markets are regulated and some are deregulated. In a deregulated market, such as New York State, an independent system operator oversees the transmission, whereas the market is open for various energy suppliers or retailers.

In terms of oversight, in addition to independent system operators, the industry-led North American Electric Reliability Council sets and enforces reliability standards, and the Federal Energy Regulatory Commission “regulates the interstate transmission of electricity, natural gas, and oil.”15

Regulate for the grid future

Those pushing for change in the energy sector generally agree that regulators must revamp regulations to catch up with developments in the industry. However, reformers seem to have their hands tied, trapped in current regulations with no way out. This section offers some basics on current regulation and a blueprint for more effective regulation.

Today’s regulations come from numerous offices, from federal to state, with numerous procedures and standards, which heavily regulate the process of energy production, transmission, and delivery. As UK policy expert Laura Sandys put to Greentech Media, it’s like having “very expensive Sellotape around the system.”16

Those pushing for change in the energy sector generally agree that regulators must revamp regulations to catch up with developments in the industry.

Table 1: Comparison of market assumptions and reality

Today’s market based on these assumptions The new reality

Consumers have no frame of reference for a kWh; it is a metric with no intrinsic value, only relative value.

New consumer expectations for local or green products, convenience, or resiliency.

The market’s entire focus is on managing from the center and the supply side.

Grid problems almost always come not from the center but from the edge, where they are very hard and expensive to resolve.

Infrastructure capital costs are repaid by consumers through broad, not specific, pricing mechanisms.

Traditional energy generation struggles to compete and recover costs due to ever-cheaper renewables.

Building more generation and grid infrastructure is the only way to manage distributed energy resources.

Better, smarter utilization of the grid reduces costs for customers and increases security.

Time and location of production and consumption are not fully valued.

Time and location—along with other attributes—matter a lot and will have significant value.

Few centralized nodes such as power plants, and limited data.

Big data and millions of new devices such as solar panels, exist at the grid edge.

Source: Lawrence Orsini, Bill Collins, et al., “Exergy: Business White Paper,” Exergy.Energy, LO3 Energy, 13 April 2018, p. 6.

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First, a number of regulations dictate what kind of system is allowed to be connected to the grid, which is also known as interconnections. In order to have a new system added to the grid, it must meet a long list of standards on all aspects of technical performances, as well as having certifications for equipment.

To ensure that generation systems can be integrated into the grid safely, the system to enter the grid network is asked to meet a set of requirements, ranging from generation capacity and speed to stability.

Once a state allows a system in, if P2P or buying from a third party is not banned outright, state regulators and local market operators require a third party to facilitate energy transactions under current regulations. This third party must adhere to another set of rules relating to privacy and exchanging energy data with utilities. The setup requires them to demonstrate business capability as well as protection for consumers.

If we want to sell more than energy—like energy data—then additional restrictions with local operators will apply. To be eligible to provide any kind of service to the New York Independent System Operator, an entity must meet a high capital requirement of $10 million in assets or $1 million in net worth, merely to show credit worthiness to enter the business.

These regulations focus on the process instead of the outcome. Combined with current energy industry practices, they are less about making our energy system work effectively than about keeping the legacy model running. Many of them, especially the financial requirements, are stifling small business with new approaches to enter.

In a recent paper, “Reshaping Regulation,” led by Sandys and others, experts pointed out several key principles for reforming the regulations, starting from what we want for the future instead of what we have now.17

Several of the main points from this report express what we have wanted from years of experience in this field.

» “Regulate for how consumers consume, not how businesses are organized.”18

» “Regulation should incentivize and penalize for outcomes, not manage processes other than in relation to the safety of the system.”19

» “Regulate for system optimization to deliver the most productive, efficient and affordable system.”20 This is the definition of exergy, a concept we celebrate.

» “Facilitate consumer choice. Regulation should enable new business models to be trialed, succeed, and even fail, while maintaining very strong consumer rights.”21

These regulations focus on the process instead of the outcome. Combined with current energy industry practices, they are less about making our energy system work effectively than about keeping the legacy model running.

Experts pointed out several key principles for reforming the regulations, starting from what we want for the future instead of what we have now.

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Distributed ledgers are bound to change the gridAs many of us grow used to conveniences like lower pricing and more service options—such as Airbnb and various hailing services—blockchain is going to disrupt the traditional grid and the dynamic of the entire energy and power utility industry.

More specifically, blockchain coupled with advanced meter infrastructure, more commonly known as “smart meters,” can wipe out the monthly meter reading and can, instead, monitor and share data of power production and consumption in real time. It can also simplify the process of trading RECs, effectively creating a virtual P2P marketplace.

But more importantly, it will also change the bigger picture of the industry. Today’s electricity distribution runs not so differently from how it did a century ago. Among its many shortcomings, its wastefulness is hard to ignore.

First, the percentage of energy output of fossil-fuel-based power plants is shockingly low: the plants release only a third of the energy in the fuel into electricity. When electricity travels through the power lines, the electrons clash and the electricity power becomes heat in the lines and the air around them.

According to estimates by the US Energy Information Administration (EIA), about five percent of all the electricity generated in this country every year is lost in the long-distance transmission and distribution. This percentage varies by state, with the greatest loss of electricity in Indiana, at 13.3 percent each year.22 A reporter at Inside Energy describes this loss:

Carbon Power Plant by 1238720, 2015, used under CC0 1.0.

About five percent of all the electricity generated in this country every year is lost in the long-distance transmission and distribution.

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You can actually hear those losses: That crackling sound when you stand under a transmission tower is lost electricity. You can see the losses, too: Notice how power lines sag in the middle? Some of that is gravity. But the rest are electrical losses. Heat, like the kind from lost electricity, makes metal power lines expand. When they do, they sag. Powerlines are saggier, and leakier, on hot days.23

The excessive resources on standby also cause waste. As noted, to maintain grid balance, electricity production and consumption must remain the same in real time. In other words, it must be generated when it’s needed to be used. To achieve this, grid operators monitor generation and demand. Every day power system operators come up with an estimation of electricity consumption for the day after and orchestrate different generation facilities as the demand fluctuates. To ensure the system can meet a surge of demand close to real time, it must have a production facility on standby. However close to reality this estimation is, the difference will cause extra generation availability to go without being utilized.

To test out different ways to regulate this difference in supply and demand on a distribution level, Con Edison rolled out battery trailers to store and distribute electricity to facilitate the grid. Known informally as battery on wheels, these trailers specifically target the soaring demand for electricity on steamy summer days in New York City and serve as a backup for emergencies.24 The electric vehicles quite literally transport energy to avoid shortage or congestion on the grid.

This strategy is the equivalent of financing and building a ten-lane highway, only to make sure it can accommodate the heaviest of traffic every year around Memorial Day, Labor Day, and Thanksgiving. In this regard, the more flexible the supply and demand, the less waste. We can achieve this flexibility by collecting and sharing information through blockchain technology.

Like traffic, electricity consumption has its rush hour and off-peak period, related to the time of the day as well as the season of the year. A blockchain-enabled grid can use real-time price signals to encourage consumers to be more flexible about the timing and the amount of electricity they consume, according to grid traffic. At the same time, for producers, real-time price signals encourage them to produce energy when and where consumers need it most. These signals also discourage them from producing energy when and where it would negatively affect the grid.

In addition to the benefits of effectively regulating the grid traffic, close to real-time pricing makes more sense to the consumers. In the traditional energy market, transactions happen in an almost blind fashion: we use energy without knowing how much we are using and how much we’d be paying, until the bill comes a month or so later. Transactions with real-time info will be much more transparent and mindful of such information; consumers will be paid to reduce consumption during peak time and increase consumption when it’s down time.

A blockchain-enabled grid can use real-time price signals to encourage consumers to be more flexible about the timing and the amount of electricity they consume, according to grid traffic.

In addition to the benefits of effectively regulating the grid traffic, close to real-time pricing makes more sense to the consumers.

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Building the next generation infrastructure

The current energy infrastructure is similar to the New York City subway. First built in 1904, the subway was in no way prepared to carry the millions of people that now dwell in the city. In addition to the routine delays on any given day, the vulnerable subway system shows little resilience to unusual weather and other circumstances. The question is not whether the system needs a remake but when, how, and who can do this.

Likewise, parts of the energy infrastructure were constructed in the early 1900s, with a majority of transmission and distribution lines erected shortly after World War II with a fifty-year life expectancy. In 2017, the American Society of Civil Engineers gave this energy infrastructure a D+ grade: “Without greater attention to aging equipment, capacity bottlenecks, and increased demand, as well as increasing storm and climate impacts, Americans will likely experience longer and more frequent power interruptions.”25

Ongoing investments are made to keep the system going. Joshua Rhodes, a researcher at the University of Texas at Austin, values the current power system—including the power plants, wires, and transformers—at around $1.5 trillion to $2 trillion. To replace it would likely cost around $5 trillion.26 This replacement cost presents us with a challenge and an opportunity.

In addition to wasting energy, high maintenance costs, and higher replacement cost, the traditional grid contributes to pollution. According to EIA, 65 percent of the 4.08 trillion kWh of electricity

Coal Fired Power Plant Nuclear Reactors by 526663, 2010, used under CC0 1.0.

In addition to wasting energy, high maintenance costs, and higher replacement cost, the traditional grid contributes to pollution.

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generated in 2016 came from fossil fuels such as coal, natural gas, and petroleum. Coal is known to produce no more than 50 percent of the electricity at almost 80 percent of carbon emission.

To address these challenges, physicists look to achieve exergy, the maximum output possible from a certain process. Some estimate that we could achieve there would be an 86 percent inefficiency in converting and transporting energy into a useful product.27

Given the cost of replacement and the potential for an all-new system, we must ask ourselves and our government officials tough questions. Should we continue to maintain what we did more than a hundred years ago? Or should we utilize what we know and are capable of doing today to deliver cheaper and cleaner energy to everyone? Can we transition seamlessly from one to the other?

The subway analogy runs beyond the physical attributes of the infrastructure. Some of today’s subway cars are equipped with trackers that can send out signals regarding the trains’ movements and whereabouts. With this function, train stations can better advise passengers of the arrival schedule, and they can make arrangements accordingly. With blockchain technology, meters will be able to collect and communicate data to help run the system more efficiently.

Distributive energy, especially community grids and P2P models enabled with blockchain, would solve all of these problems without the trillions of dollars of investment in the current grid. Using solar panels or other clean alternatives, we would produce energy local to the consumption.

How blockchain can change the game

Now is time to transition to a new energy ecosystem that ensures energy access, resiliency, efficiency, security, decarbonization, and democratization of the grid—all at the lowest cost possible.

Blockchain, on many different levels, can help achieve that goal. Before we dive into the overall application—a token system devised by our team at LO3 Energy, a transactive energy start-up—let’s look at the various ways blockchain can support transactive energy. By transactive energy, we mean “a system of economic and control mechanisms that allows the dynamic balance of supply and demand across the entire electrical infrastructure using value as a key operational parameter.”28

First, blockchain can provide a platform for local P2P energy sales. Today we use a blockchain-enabled hardware, known as a transactive grid (TAG) meter, to tag units of energy produced locally and offer them to neighboring participants using the same meters.29 These interactions are all tracked and recorded on the blockchain. In the near future, users will be able to control this process with a mobile app or a website, where they could set their preferences, allowing devices and local grid systems to conduct energy transactions in close to real time.

Distributive energy, especially community grids and P2P models enabled with blockchain, would solve all of these problems without the trillions of dollars of investment in the current grid.

Now is time to transition to a new energy ecosystem that ensures energy access, resiliency, efficiency, security, decarbonization, and democratization of the grid.

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In addition to creating and selling energy locally, blockchain-enabled microgrids have another value in their ability to meet the balancing need of the broader distribution grid. The distributed microgrid can switch between two states: it can be connected to the main grid (“grid connected mode”) or disconnected from it (“island mode”). Counterintuitive as it may seem at first, the simpler implementation between the two through blockchain is actually the grid connected mode. This is because the overall inertia of the larger area electric power system allows for longer response times for grid balance. The islanded microgrid, however, has far less inertia to rely on when it is balancing itself, and therefore requires much faster control feedback loops that come from more direct and dedicated control systems.

The Brooklyn Microgrid brings this concept to life. Developed by LO3 Energy, this microgrid is a blockchain-based energy platform running in Park Slope, a neighborhood in Brooklyn. There at grid edge, on the world’s first blockchain microgrid, more than fifty participants can use their devices to trade PV-generated energy securely and directly with their neighbors.

Such microgrids, off-grid community installations, and other configurations that break from the traditional grid will make up a significant portion of tomorrow’s energy market. The microgrids market alone is estimated to reach $23 billion by 2021.30

At the moment, we are envisioning a token system, also based on blockchain, to reduce barriers and best facilitate the coupling of local electric generation with facilities that can efficiently evaluate, store, trade, and utilize this energy.

Power Poles Upper Lines by Michael Schwarzenberger (blickpixel), 2014, used under CC0 1.0.

In addition to creating and selling energy locally, blockchain-enabled microgrids have another value in their ability to meet the balancing need of the broader distribution grid.

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The token system consists of two layers. The top layer will use blockchain to establish and manage a global network of energy market participants. It also establishes the location and proof of ownership with high security and will be used to attract consumers, prosumers, and communities to the marketplace. This mechanism incentivizes market participants to acquire and hold tokens. They will also be rewarded for participating in local energy markets. Other market participants—such as generators, aggregators, and service providers—can also acquire and hold tokens.

The second layer is a set of local, fast-acting and resilient blockchains around the world powered by grid-edge smart assets. Tokens on this layer will be minted by local distributed ledgers at fixed intervals. Each such token will be linked to a specific asset and will represent the collective energy usage data at that intersection for that specific time interval. These tokens will allow access to each participant’s data. They are validated, secured, and accounted for in the local distributed ledgers. Such permissions and access can be bought, sold, enabled, and disabled by market participants. These added layers of the token system can upgrade the use cases mentioned above.

For local sales, adding the token function to this system will incentivize the capture of unique attributes (such as the source of the energy) that may reflect and respond to important pricing influences for the local energy network operation. It allows third parties to participate in managing aggregation of energy consumers and exposes data to dynamic market pricing, creating the ability to better reflect the true costs and benefits of locally produced energy. The two key attributes needed for the effective implementation of the local energy transaction are identification of generation source—for example, if it’s clean renewable generation—and the unit of energy created for consumption.

The token system will more efficiently implement in the case of microgrids and will allow for expansion to adjacent use cases as projects like the Brooklyn Microgrid evolve into a broader and more integrated distributed energy resources (DER) solution. A goal of the token approach is to enable a common extensible platform that can facilitate valuable network utility from diverse but synergistic use cases, opening paths for effective community participation.

However, there are several practical limitations and barriers to achieving the design and use of a token-based transactive-energy platform. First, governments must modify rigid regulations. We also must establish standardized protocols to ensure interoperability. Last, but not least, is a technical problem. The time smaller grids must utilize transactive energy for system control is too short to utilize blockchain effectively; whereas exchange of energy in relatively large blocks can be accomplished because there is sufficient time to buffer and process.

A goal of the token approach is to enable a common extensible platform that can facilitate valuable network utility from diverse but synergistic use cases, opening paths for effective community participation.

The token system establishes the location and proof of ownership with high security and will be used to attract consumers, prosumers, and communities to the marketplace.

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Nascent distributive energy growing around the globe As of now, a number of teams have been exploring distributive energy all around the world (see Figure 3).

South Australia

In recent years, South Australia has been the leading frontier of switching to renewable and distributive energy—a move partly incentivized by government subsidy and falling solar prices. As prosumers send their excessive energy to the grid, it becomes less necessary to build expensive, large-scale infrastructure.

The region has seen significant growth in total renewable generation in the past few years. More than 30 percent of all the residents in South Australia have installed rooftop PVs. Rooftop PV capacity almost doubled from the end of 2013 to that of 2017. In the same period, wind capacity increased by 41 percent, according to the Australian Energy Market Operator. To transition from traditional energy to distributive energy, South Australia faces the challenge

Source: LO3 Energy, used with permission.

Figure 3: Regions exploring distributive energy and reached out to LO3

In recent years, South Australia has been the leading frontier of switching to renewable and distributive energy.

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of maintaining grid stability because of inability to vary generation from large power plants. Generation from renewable resources can be volatile with ups and downs, therefore there is an urgent need for a new model that coordinates production (both traditional and distributive) and consumption better.

LO3 Energy is working with a local energy retailer in Australia to explore new ways of selling local energy and implementing dynamic pricing related to consumer demand in real time. Even though the early efforts are not yet improving grid balance, the new energy exchange mechanisms, combined with existing and new infrastructure and assets, will be able to grid balance in the future by influencing consumer behavior with the pricing system. For example, a household can be paid for using less energy at peak times because this flexibility actually benefits the grid.

Germany

In an effort to cut down carbon emission, the German government has come up with a national policy, known as “trade-in tariff,” to subsidize renewable energy adoptions on both large, centralized and small, distributed scales.

This aggressive policy led Germany, one of the most industrialized countries, to make big strides toward clean energy, as well as distributive market adoption by paying a set price for every unit of electricity one produces and sells back to the grid. By 2015, renewable energy made up almost a third of the country’s electricity generation.

Dam River Water by Russ McElroy (russmac), 2015, used under CC0 1.0.

LO3 Energy is working with a local energy retailer in Australia to explore new ways of selling local energy and implementing dynamic pricing related to consumer demand in real time.

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Yet, it turns out that the rapid rise of renewables failed to replace fossil-fuel power generation effectively in the country. Instead, it introduced some new challenges to the market. When the weather benefits wind and solar energy generation, excess supply would flood the grid, at times dropping the energy price below zero.

One problem that has emerged is that the shift to renewable energy is geographically disproportionate. One town in Southern Germany named Wildpoldsried, for example, generates seven times as much as it consumes, according to London-based journalist Stanley Reed, writing for The New York Times.31 While the locals may be applauded for the energy generation and extra money they would be making, it is not good for the big picture. When generation is clustered in one area and demand is clustered in another, producers and consumers need long-distance transmission, and that makes electricity much costlier.

We are working with local partners in Germany to run pioneer programs to test best ways to match demand and production. One such case is located in Landau, a town with a microgrid community in Southern Germany. We are trying to use the resource within this microgrid community to help balance the rest of the grid. When the rest of the grid is lacking energy, the microgrid can be incentivized to produce—it is somewhat like a sponge, with the ability to absorb the gap in supply and demand on the main grid.

Where the industry stands nowEnergy is omnipresent in our modern life. It drives our economy and runs our planet. In this light, enabling a better way to transact and account for energy with blockchain is likely the largest use case for this technology. However, various players in the industry are not necessarily on the same page with the latest developments.

PolicyAs we discussed before, the industry has been heavily regulated for various reasons, the most prominent of which is that it is a necessity. Therefore, the price and abundance of it must be ensured. At the same time, experts and legislators are divided on whether deregulations would benefit consumers at this point.

CorporationsMeanwhile, many large companies, including utilities, have set up innovation teams to explore the possibilities for a digitalized and smart grid. Siemens, for example, founded an independent unit, next47, in 2016.32 Operating in cities all over the world, including Palo Alto, Shanghai, and Munich, the team has a big part of its effort focused on decentralized electrification and blockchain applications.

Energy is omnipresent in our modern life. It drives our economy and runs our planet.

One problem that has emerged is that the shift to renewable energy is geographically disproportionate.

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Similarly, GE, ABB, and Alstom and Schneider Electric have ventures pioneering in this field. For the most part, the teams are separated from their core business groups, keeping the main businesses undisrupted by the new researches.

Energy producersAs appealing as distributive energy and a smarter grid may seem, there are more reasons the industry is reluctant to move forward. Large energy producers are invested in the old ways of how electricity works and set up their operations accordingly. For example, they usually choose generation sites far away from the population and its consumers; energy generation is often cheaper in less populated areas, and it makes economic sense to generate and transmit in bulk.

There is also an entry barrier—producers have to be large enough to join the market and such producers are incentivized to build big and far away. In addition to economic reasons, generation in remote areas also avoids pollution in population centers, and is usually closer to natural resources. Today, however, such considerations no longer stand, because the economic incentives have been reshuffled. Producers can build smaller and closer to consumption, as well as prioritize clean energy resources.

Central orchestratorsFor the time being, it is realistic to rely on the main grid while starting to incorporate various alternatives. To do so, certain changes to the grid’s operation are required.

Power Plant Geothermal by WikiImages, 2013, used under CC0 1.0.

As appealing as distributive energy and a smarter grid may seem, there are more reasons the industry is reluctant to move forward.

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Central orchestrators direct the traffic on the grid to maintain supply and balance. To meet the needs of new ways of generating and consuming electricity, the operators must come up with reliable ways to integrate small DERs.

At this point, some pilot programs have debuted in an effort to explore ways to accommodate the mushrooming small generators. The system operator in New York, for example, launched a program in October 2017 with rolling enrollment.33

Blockchain in the energy industryFinally, we must consider how the energy industry differs from other fields that have been adopting blockchain technology. Blockchain is a reliable and secure tool to store and record information. It also provides a platform for transactions, and most of the use cases such as bitcoin, digital ID, and cloud storage are largely divorced from physical infrastructures. Blockchain adoption in the energy industry requires extra considerations for physical operation, including maintaining service reliability through factors such as voltage, frequency, and designated response time.

Conclusion and recommendationsNow that we have discussed the various aspects of using blockchain for technology, some folks may be thinking, “These all sound great, but why can’t we leave it for the future?” Because, as William Gibson said years ago, “The future has arrived—it’s just not evenly distributed yet.”34 Gibson was describing cyberspace, but the quote well describes today’s energy market. The technology is ready, the market is ready, and the industry and the consumers should get ready too.

First of all, as we mentioned before, the generation and transmission infrastructure is about to reach expiration. To rebuild a similar system will be wildly expensive. Moreover, it simply makes no sense to invest money so that we can produce and distribute electricity the same way people did a century ago.

At the same time, consumers are really demanding to shake up how they interact with energy. In this regard, the current market options are failing consumers. Even where consumers have choices in their energy supply, suppliers offer renewables at a premium; the design of the grid makes decarbonization difficult even as suppliers add new renewable generation. Nowadays, more consumers are expecting to affirm their values through choice and behaviors. Transactive energy is a pathway to cleaner and smarter services.

The sharing economy, on the other hand, has matured at an incredible pace in the past few years, which prepares the market for transactive energy. The sharing model, by its nature, drives economic

Today’s energy market: the technology is ready, the market is ready, and the industry and the consumers should get ready too.

Blockchain adoption in the energy industry requires extra considerations for physical operation, including maintaining service reliability through factors such as voltage, frequency, and designated response time.

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value to a much more direct and efficient solution, often utilizing P2P connection. Similarly, blockchain, as a transaction foundation, also enables these highly decentralized models to thrive.

Accompanying these changes, regulation is beginning to catch up. Already 195 countries have agreed to aggressive greenhouse gas emissions abatement measures through the Paris Agreement on climate change. In parallel, the focus in many countries is to move toward power sector deregulation—designed to encourage more competition (which advances innovation)—by separating the functions of generation, transmission, distribution, and retail supply into different business processes and corporate entities. The movement toward low carbon and more “new market entrants” entering the energy sector is fixed, but the pace at which it is achieved will vary.

In addition to these social factors, a number of technology developments make transactive energy within reach. DER, including solar PV panel systems and the corresponding power conversion electronics and energy storage components, continue to drop in price. The lower price barriers allow more consumers to participate. The vast and increasing amount of independently owned and operated grid-edge assets will be harnessed through transactive-energy methods.

Interconnection standards are becoming more widely adopted, enabling easier “plug and play” grid connection of DER, which lowers cost and timeline barriers for distribution system interconnection. Microgrid technology is also advancing rapidly with the development and wider adoption of standardized systems.

Solar Roof Panels by RosiePosie, 2012, used under CC0 1.0.

Already 195 countries have agreed to aggressive greenhouse gas emissions abatement measures through the Paris Agreement on climate change.

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Rapid advances within the Internet of Things domain, coupled with increasing availability of low cost communication network bandwidth, are permitting intelligent monitoring and control capabilities at the edge of the grid. This added precision applies to both generation and load management. This in turn results in improved capabilities for intelligent aggregation, automation, and monetizing an aggregate response through providing grid services.

Finally, computing and network processing power continues to advance at roughly the rate of Moore’s Law with the advent of 10 nanometer process nodes running at lower power levels and faster clock speeds, as well as the 5G wireless standard that will soon dramatically reduce latencies and raise bandwidth in the telecom network. Artificial intelligence and other computing advances only open up further opportunities for transactive energy.

Clearing roadblocks in policy and practiceDespite the readiness of technology advancement and market demand, the pathway to transactive energy is not without obstruction. On the policy side, even though governments are paying increasing attention to and reaching some level of consensus of the urgency of transitioning to cleaner energy, the regulation of the energy market remains rigid and differs greatly even within the United States.

Another source of resistance to change is the incumbents. Today’s energy companies operate based on producing energy in the large plants at the center of the utility grid and pushing it to the grid edge where it’s consumed. This model locks in roughly 10 percent returns on capital investment for the regulated electricity companies. At the same time, it discourages innovation. Utilities are supposed to keep the lights on and are regulated monopolies; therefore, they are not innovative in nature. In this light, the policy is misaligned for the business model: it doesn’t make sense to have utility to lead—you can’t ask the incumbent to disrupt their own business.

To counter this situation, New York regulators are pushing policy through a program called “Reforming the Energy Vision,” also known as REV.35 The most important policy change is enabling non-wire alternatives: REV ensures that reluctant utilities can’t go directly to expensive updates of the current model without looking at other alternatives. In other words, it gives the incumbents the nudge to find solutions instead of just continuing to build on top of the problem.

Challenges also come from within the revolution. To apply new technology to emerging energy trends, innovators have the task of developing an entirely new structure that represents the physical laws. They also must devise other aspects of the industry, such as set up pricing that reflects the new way of generation and transmission when delivering electricity to consumers.

Utilities are supposed to keep the lights on and are regulated monopolies; therefore, they are not innovative in nature.

It doesn’t make sense to have utility to lead—you can’t ask the incumbent to disrupt their own business.

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Designing for generationsUpon seeing the potentials and the challenges, we recognize that we are designing how the future generations of people and things will interact with energy. We are moving into uncharted water, discovering new details of the design daily, and trying different ways to put ideas into reality. Certainly, many of these trials may not succeed, but they are nevertheless pushing us into the correct direction. Friends, it is truly exciting. To conclude this paper, we’d like to offer a few points of reference to show the direction we are currently navigating toward.

We must streamline P2P models and expand blockchain usage beyond the simplest energy exchanges. To have a lively, innovative energy sector that’s capable of trying different models—some of which will become the platform of the future—relies on regulations adapted for this purpose. Realistically, a number of these early attempts won’t lead to eventual fruition, but they are nevertheless part of a crucial process that can lead us to the right ones. In this regard, we need a flexible business and regulatory environment to allow innovators the resources to invest in such projects.

What are some of the expanded uses for blockchain in energy? With a network of automated machines collecting and communicating data from grid edge up to transmission and generation levels, grid management can achieve automation. At this point, there is no one predetermined approach to achieve grid optimization, but the idea is that with the data availability and transparency, decision-making on different levels will be smarter and more efficient.

Similar to transparency in the fashion industry, where people came upon the realization that the traditional business setup with layers of middlemen makes it impossible to ensure ethical manufacture (sweatshop-free, fair wage, and working environment as well as small energy footprint and minimized waste). There is no easy way for the international brands, let alone end consumers, to trace where, how, and by whom the clothes are made. That’s why a number of fashion start-ups make transparency part of their mission and branding, which, at least in theory, ensures more reasonable price and quality, and provides customers with the information that could help them make the best purchase decision.

Likewise, in the energy industry, blockchain can be an effective vehicle for us to track where, how, and when the energy is generated and consumed in a confidential and secure way. This data transparency and accessibility will help optimize the grid in different ways and on different levels.

We are currently applying these concepts in various pilot projects. On the macro level, once we have a blockchain system to help manage energy data, the information can help figure out energy decisions, such as infrastructure planning. Alignment of the exergy concept is more than engineering or economic optimization. It extends to total resource efficiency and helps factors like environmental concerns and social equality to weigh in in the energy process.

Blockchain can be an effective vehicle for us to track where, how, and when the energy is generated and consumed in a confidential and secure way.

To have a lively, innovative energy sector that’s capable of trying different models relies on regulations adapted for this purpose.

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Energy is important in a modern society not only because it supports our everyday lives by providing us with means to light and cook but also because the availability of such a necessity is a matter of social justice. The prolonged shortage of electricity in Puerto Rico after Hurricane Maria, for example, is a failure of infrastructure, business, and government. Ultimately, the powerlessness of local residents, who have to live without electricity for months, is profound and reflects deep social injustice for economical, racial, and political reasons.

Leapfrogging where we can: Puerto RicoOn 20 September 2017, millions of Puerto Rican residents experienced a total blackout after Hurricane Maria hit the island. According to the Rhodium Group, it is the most severe power failure in American history, and the second worst in world history.36 The blackout lasted for as long as seven months for some people, only to happen again in the following April when a contractor moved a bulldozer too close to a high-voltage line.37

Life without electricity isn’t just a matter of losing air conditioning, heat, and refrigeration; it can also paralyze billions of businesses and disrupt operations of all local hospitals. The lack of electricity suspends modern life as we know it. Indeed, the lack of grid stability and resilience is no less a danger than natural catastrophes like hurricanes. Puerto Rico lacks both grid stability and resilience: it could withstand neither hurricane nor human error, and it failed to bounce back quickly after adversity.

Grid disruptions happen all over the globe but at different frequencies and lengths (see Table 2, next page). Obviously, it has some correlations to how developed the region is. But does this mean the developing countries would lag behind forever?

Not if the local government and agencies manage to upgrade local infrastructure with the latest technology. In the past, some developing countries have completely missed technological revolutions and skipped a generation of technology, updating straight to the newest advances. For example, countries like Ghana and Kenya have skipped landlines and have gone to a high mobile phone ownership. Some could say China is leading the transition to mobile because it never quite adopted computers as people in Western developed countries did.

This pattern, known as leapfrogging, could happen in the energy industry as well. Both developing and developed countries facing challenges in energy supply should weigh up their options in building or upgrading their electric infrastructure for not only effective and stable energy supply but also economic growth and better quality of life. Blockchain technology and distributive energy is the future, and developing countries could take the opportunity to leap beyond the struggles experienced by developed countries with grid structure built decades ago.

Developing countries could take the opportunity to leap beyond the struggles experienced by developed countries with grid structure built decades ago.

The lack of grid stability and resilience is no less a danger than natural catastrophes like hurricanes.

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Back to Puerto Rico. Its electricity crisis is rooted in its infrastructure. According to a report in IEEE Spectrum, the vast majority of the island relies on 10 oil-fired power plants and three other plants fueled by natural gas and coal. Seventy percent of the power generation happens in the south, whereas 70 percent of the demand lives in the north. The island’s energy supply relies on transmission lines that run 4,000 kilometers long—that’s more than a roundtrip from New York to Florida. As Hurricane Maria approached, all the transmission lines went down gradually. Within hours, the island was entirely swallowed by darkness.38

What happened in Puerto Rico is far from unique. The traditional grid is not optimized for everyday energy delivery and is vulnerable to extreme weather and other unexpected events. A more local, distributed grid would prove more efficient and more resilient. A blockchain-enabled smart grid would be able to communicate better, both externally and internally, with various parts of the grid, which is especially valuable during a crisis.

In general, the increase of data availability now makes it hard for decision makers in the industry to ignore issues, such as local air quality, which previously were often buried. Energy-related

Table 2: Grid stability in select countries/economic centers

Economy System average interruption duration

index (SAIDI)

System average interruption frequency

index (SAIFI)

Japan: Tokyo 0.1 0.1

Germany 0.2 0.2

United States: New York 0.3 0.1

United Kingdom 0.3 0.2

Denmark 0.5 0.5

Mexico: Mexico City 0.8 1.0

Canada 1.0 1.4

China: Beijing 1.2 0.4

India: Delhi 2.9 2.7

Philippines 4.6 4.0

Iran, Islamic Republic 5.2 4.8

Puerto Rico 8.0 4.4

Turkey 16 8.6

Kenya 81 17

Pakistan: Lahore 658 411

Source: “Getting Electricity,” Doing Business: Measuring Business Regulations, World Bank Group, June 2017.

The traditional grid is not optimized for everyday energy delivery and is vulnerable to extreme weather and other unexpected events.

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data, managed in the blockchain ledgers, is going to shed light on important issues and become the first step toward changes in more than matters of electricity; it will help us do better on a number of issues, including the environment, social equality, economic growth, and workforce development. Consider the Washington Post’s new motto, “Democracy dies in darkness.”39 The darkness of the energy industry, starved of readily available information, is going to end.

Advocating and educatingThe readers of this research are probably a self-selected bunch who agree that blockchain will do great things across different industries and push us to reimagine our lives. For most folks out there, the word “blockchain” still feels a bit futuristic. How are we going to make this a reality? In the 1990s, a computer felt like a magic box and the Internet sounded like sci-fi. The future is nearer than we think. Most of us need not know how IPv6 works or how the motherboard operates to enjoy all the features on our smart phones. When building a community of blockchain-enabled, distributive energy, we need targeted advocacy to educate a subset of consumers, often known as early adopters.

At the same time, we should educate the market to replace the current volume-based energy pricing with the concept that the value is derived from other more important elements: if it’s from a clean source, if it’s delivered effectively, or if it’s used at a time to help release the grid from congestion.

As these changes are underway, we should bring it to policymakers and ensure that they recognize that today’s grid physics and business model is quite out of date. Our goal is to help them set up industry standards to pave the way for wider applications.

We should educate the market to replace the current volume-based energy pricing with the concept that the value is derived from other more important elements.

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About the authorLawrence Orsini is the founder and CEO of LO3 Energy. With more than ten years of experience in all aspects of commercial energy efficiency programs—design, management, implementation and marketing—as well as a strong understanding of the Energy Efficiency policy and regulatory environment, Lawrence is well versed in the inner workings of the efficiency industry. Lawrence’s broad industry experience runs the gamut, from field auditing to managing relationships with Fortune 100 utility and corporate clients, affording him a unique ability to draw connections between policy-driven utility energy efficiency program requirements and bottom-line-driven business spending.

AcknowledgmentsLawrence Orsini would like to acknowledge Han Zhang, Julianna Yun Wei, and Will Grey for their contributions to the paper.

DisclosuresLO3 Energy developed the Brooklyn Microgrid mentioned in this paper.

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Notes1. CBC News, “Learning to Live off Grid: 'Every Little Thing Counts,'” CBC News, Canadian

Broadcasting Corp./Radio Canada, 9 June 2018. www.cbc.ca/news/canada/new-brunswick/living-off-grid-lifestyle-1.4698759, accessed 2 Oct. 2018.

2. CBC News, “Learning to Live off Grid.”

3. In some jurisdictions, however, asset owners may need to secure permits, licenses, or insurance comparable to what hotel and taxi owners have. For example, see Airbnb, “What regulations apply to my city?” Airbnb, Inc., n.d. www.airbnb.com/help/article/961/what-regulations-apply-to-my-city, accessed 15 Aug. 2018.

4. Cam Mather, “Lessons from Off-Grid Living,” Mother Earth News, Ogden Publications, Inc., Oct./Nov. 2014. www.motherearthnews.com/renewable-energy/energy/efficiency/off-grid-living-lessons-zm0z14onzkon, accessed 4 July 2018.

5. Mather, “Lessons from Off-Grid Living.”

6. US Energy Information Administration, “How much electricity does an American home use?” updated 7 Nov. 2017. www.eia.gov/tools/faqs/faq.php?id=97&t=3, accessed 4 July 2018.

7. For instance, in 2012, Lawrence Orsini, the author of this paper, built a machine that allowed him to warm up his apartment with heat from his computers.

8. Paul Davidson, “Off the Grid or On, Solar and Wind Power Gain,” USA TODAY, Gannett Co. Inc., updated 12 April 2006. usatoday30.usatoday.com/tech/news/techinnovations/2006-04-12-off-the-grid_x.htm, accessed 4 July 2018.

9. Accenture Consulting, “New Energy Consumer: New Paths to Operating Agility,” Accenture, 2017. www.accenture.com/t20171113T063852Z__w__/us-en/_acnmedia/Accenture/next-gen-5/insight-new-energy-consumer-2017/Accenture-NEC2017-Main-Insights-POV.pdfla=en#zoom=50, accessed 4 July 2018.

10. Alex Gray, “What Is the Grid Edge? (And Does It Really Mean Cheaper Energy Bills?),” www.forum.org, World Economic Forum, 10 March 2017. www.weforum.org/agenda/2017/03/what-is-grid-edge-electricity, accessed 25 Aug. 2018.

11. Taylor Armerding, “The 17 Biggest Data Breaches of the 21st Century,” CSO Online, InfoWorld, IDG Communications, 26 Jan. 2018. www.csoonline.com/article/2130877/data-breach/the-biggest-data-breaches-of-the-21st-century.html, accessed 25 Aug. 2018.

12. Virginia State Corporation Commission, “Staff Investigation on the Restructuring on the Electric Industry,” Report, 7 Sept. 2017. www.scc.virginia.gov/comm/reports/restrct3.pdf, accessed 4 July 2018.

13. See Peter Navarro, “Electric Utilities: The Argument for Radical Deregulation,” Harvard Business Review (Jan.-Feb. 1996), Harvard Business School, 1 Aug. 2014. hbr.org/1996/01/electric-utilities-the-argument-for-radical-deregulation; and “Is It Time to Deregulate All Electric Utilities? Supporters of deregulation say market forces are the best way to lower costs and foster innovation. Opponents say so far, deregulation has delivered little benefit to customers,” Wall Street Journal (Online), Dow Jones & Company, 14 Nov. 2016.

14. Nan Wang and Gento Mogi, “Deregulation, Market Competition, and Innovation of Utilities: Evidence from Japanese Electric Sector,” Energy Policy, 111 (Dec. 2017): 403-413. doi.org/10.1016/j.enpol.2017.09.044, accessed 2 Oct. 2018.

15. “About NERC,” www.nerc.com, North American Electric Reliability Corporation, n.d. www.nerc.com/AboutNERC/Pages/default.aspx; and “What FERC does,” www.FERC.gov, Federal Energy Regulatory Commission, 14 Aug. 2018. www.ferc.gov/about/ferc-does.asp, both accessed 24 Aug. 2018.

16. Jason Deign, “What Grid Regulation Could Learn From the Food Sector,” Greentech Media, Wood Mackenzie, 9 Nov. 2017. www.greentechmedia.com/articles/read/what-grid-regulation-could-learn-from-the-food-sector#gs.g_wSj3E, accessed 4 July 2018. Sellotape is a British trademark for transparent adhesive tape.

17. Laura Sandys, Jeff Hardy, and Richard Green, “Reshaping Regulation: Powering from the Future,” Imperial College Business School, Grantham Institute, Energy Systems Catapult, and UK Power Networks, 18 Oct. 2017. www.challenging-ideas.com/wp-content/uploads/2017/10/Challenging-Ideas_single.pdf, accessed 4 July 2018.

18. Sandys, Hardy, and Green, p. 14.

19. Sandys, Hardy, and Green, p. 22.

20. Sandys, Hardy, and Green, p. 4.

21. Sandys, Hardy, and Green, p. 22.

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22. Jordan Wirfs-Brock, “Lost In Transmission: How Much Electricity Disappears Between A Power Plant And Your Plug?” Inside Energy, 6 Nov. 2015. insideenergy.org/2015/11/06/lost-in-transmission-how-much-electricity-disappears-between-a-power-plant-and-your-plug, accessed 4 July 2018.

23. Wirfs-Brock, “Lost In Transmission.”

24. Con Ed Media Relations, “Con Edison Developing Energy Storage System On Wheels,” Con Edison News, Consolidated Edison Company of New York, 12 July 2016. www.coned.com/en/about-con-edison/media/news/20160712/energy-storage-on-wheels, accessed 18 Aug. 2018.

25. ASCE, “Energy,” 2017 Infrastructure Report Card, American Society of Civil Engineers, 9 March 2017. www.infrastructurereportcard.org/cat-item/energy, accessed 19 Aug. 2018.

26. Joshua Rhodes, “The old, dirty, creaky US electric grid would cost $5 trillion to replace. Where should infrastructure spending go?” The Conversation, The Conversation US, Inc., 16 March 2017. theconversation.com/the-old-dirty-creaky-us-electric-grid-would-cost-5-trillion-to-replace-where-should-infrastructure-spending-go-68290, accessed 4 July 2018.

27. John Laitner, “Linking energy efficiency to economic productivity: recommendations for improving the robustness of the US economy,” WIREs Energy and Environment 4, no. 3 (May/June 2015): 235–252.

28. GridWise Architecture Council, “GridWise Transactive Energy Framework Version 1.0,” GridWise Architecture Council, US Department of Energy, Jan. 2015. www.gridwiseac.org/pdfs/te_framework_report_pnnl-22946.pdf, accessed 18 Aug. 2018.

29. Ray Adler, “LO3 Energy: Distributed Grid Solutions Bringing People, Tech and Energy Together,” CleanTech Alliance, 7 July 2017. www.cleantechalliance.org/2017/07/07/lo3-energy-distributed-grid-solutions-bringing-people-tech-and-energy-together, accessed 18 Aug. 2018.

30. “Microgrids, Update 2017: Global Market Size, Competitive Landscape, and Key Country Analysis to 2021,” GlobalData PLC, June 2017. www.globaldata.com/store/report/gdpe1024emr--microgrids-update-2017-global-market-size-competitive-landscape-and-key-country-analysis-to-2021, accessed 18 Aug. 2018.

31. Stanley Reed, “A Small Firm in Germany Has Big Ambition in Green Energy,” New York Times, New York Times Company, 17 Oct. 2017. www.nytimes.com/2017/10/17/business/energy-environment/germany-renewable-energy-solar-wind.html, accessed 30 Sept. 2018.

32. "next47: Siemens founds separate unit for start-ups,” Press Feature, Siemens, 28 June 2016. www.siemens.com/press/en/feature/2016/corporate/2016-06-next47.php, accessed 30 Sept. 2018, accessed 18 Aug. 2018.

33. “NYISO Announces Distributed Energy Resource Pilot Projects,” Press Release, New York Independent System Operator, 26 July 2018. home.nyiso.com/press/press-release-nyiso-announces-distributed-energy-resource-pilot-projects, accessed 30 Sept. 2018.

34. Garson O’Toole, “'The Future Has Arrived—It's Just Not Evenly Distributed Yet: William Gibson? Anonymous? Apocryphal?” Quote Investigator, WordPress, 24 Jan. 2012. quoteinvestigator.com/2012/01/24/future-has-arrived, accessed 15 Aug. 2018. Gibson also said, “The future has already happened,” in “Cyberpunk Documentary,” Cyberpunk, directed by Marianne Trenchand, featuring William Gibson and Timothy Leary, Episode 3, 00:13:11, YouTube, YouTube, 1990. www.youtube.com/watch?v=xxTuEGEl9EQ, accessed 19 Aug. 2018.

35. “Reforming the Energy Vision,” New York State, n.d. rev.ny.gov, accessed 4 July 2018.

36. Trevor Houser and Peter Marsters, “The World's Second Largest Blackout,” Rhodium Group, Rhodium Group LLC, 12 April 2018. rhg.com/research/puerto-rico-hurricane-maria-worlds-second-largest-blackout, accessed 15 Aug. 2018.

37. James Wagner and Frances Robles, “Puerto Rico Is Once Again Hit by an Islandwide Blackout,” The New York Times, The New York Times Company, 18 April 2018. www.nytimes.com/2018/04/18/us/puerto-rico-power-outage.html, accessed 4 July 2018.

38. Maria Gallucci, “Rebuilding Puerto Rico’s Power Grid: The Inside Story,” IEEE Spectrum, IEEE, 12 March 2018. spectrum.ieee.org/energy/policy/rebuilding-puerto-ricos-power-grid-the-inside-story, accessed 4 July 2018.

39. Paul Farhi, “The Washington Post's New Slogan Turns out to Be an Old Saying,” The Washington Post, WP Company LLC, 24 Feb. 2017. www.washingtonpost.com/lifestyle/style/the-washington-posts-new-slogan-turns-out-to-be-an-old-saying/2017/02/23/cb199cda-fa02-11e6-be05-1a3817ac21a5_story.html?noredirect=on&utm_term=.64e4f0eda78aSource, accessed 30 Sept. 2018.

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