At the recent Blockchain in Energy conference hosted by Greentech Media (GTM), the theme was entirely clear: the perception of blockchain in the energy industry has matured from proclaiming blockchain a disruptive panacea that would completely vault a heavily regulated industry into the transactive grid of the future to placing blockchain as a tool in the firmament of the technology stack for the currently transitioning grid. In the words of Scott Clavenna, GTM’s Chairman, “ICOs were the worst thing that ever happened to blockchain.” Said differently, the massive publicity surrounding the value increase of cryptocurrencies and the attendant utilization of blockchains such as Ethereum for raising funds created a wave of hype that promised the future energy grid now and obscured a critical analysis of the role the technology could play.
From 2016 to 2018, blockchain energy companies raised $324 million, a good portion of which came through ICOs premised solely on white papers. Industry experts saw use cases for blockchain in every facet of the energy sector, and the road to the transactive grid seemed clear-cut even if the details of the on-ramp still needed to be clarified. Blockchain appeared to be on the cusp of disrupting the energy industry. The allure of disruptive technology evoked dreams of success found most famously in startups in Silicon Valley, stoking the appetite for blockchain.
This fervor proved unsustainable. The landscape today is not tinged with the same effervescent confidence that the future is right around the corner. Instead, the reality of attempting to transform a heavily regulated industry with fixed returns and little appetite for risky innovation solely for innovation’s sake has created a smaller but hardier ecosystem of companies seeking to solve the myriad complex problems of an energy grid morphing from the traditional hub-and-spoke model to, in the words of the conference attendees, the flexible grid. To succeed, an impetus to deploy blockchain solutions is necessary for these companies. Despite the excitement surrounding blockchain when it first entered the energy industry, that impetus has not come as quickly or as widespread as many initially thought that it would.
Much of the current innovation with blockchain in energy is occurring in Europe. With a stronger emphasis on renewable energy resources, a greater penetration of vehicle electricification and the accompanying effects on the grid, regulators have allowed distribution system operators to experiment with blockchain-based solutions. American regulators have not, as of yet, granted American utilities the same latitude to experiment. Without an objective and clearly identifiable need, like that in Europe, it should come as no surprise that experimentation with blockchain solutions in American utilities runs into roadblocks that have little to do with the underlying technology.
The nature of a heavily regulated monopoly, like the American utility system, is that major policy decisions intersect between technical, strategic and legal concerns. Blockchain projects fall under the umbrella of a major policy decision and thus the experiment to prove that something can be done often runs into the question of whether it should be done. The steady transition to distributed energy resources (DERs) has inverted the traditional thinking about the energy grid. In the past, a utility would forecast load and manage generation. With renewable energy resources taking a larger role in the DER stack, utilities find themselves attempting to forecast generation (will the sun shine? will the wind blow?) and manage load. New problems require new solutions and the technical features of blockchain satisfy many of the criteria established to ease the transitioning grid.
It remains clear that blockchain projects can and should be deployed to ease this transition. However, will the “aha” moment for blockchain adoption come from a disruptive startup or from within the established industry? The story for the disruptive startup is well established in high tech culture, even if it has not caught on with the same fire in the energy industry. Part of the fervor for ICOs can be attributed to the desire for disruption. We now see that the disruption that early startups hoped to create has not, as of yet, borne fruit. More curious is the possibility for change from within an established player in the industry.
A blockchain solution is a necessarily technical solution to complex technical problems. One panel consisting of primarily representatives of utilities explained that the unique internal dynamics of heavily regulated monopolies are an additional impediment to this technical solution. A proponent of a blockchain solution must first choose a proof-of concept that will have a great chance for success, persuade the appropriate stakeholders that the risk of failure is worth the benefit of success and then must actually succeed. Having successfully proven the technical solution, that proponent must then argue for widespread adoption and scaling of the technical solution while ensuring that any regulatory or other non-technical concerns are satisfied. This process is patently fatiguing and clearly shows the need for an internal champion of blockchain technology, ideally one in a position with strategic responsibility and the technical chops to understand the intricacies of the problem and the solution.
An internal champion should be planning for the flexible grid now rather than waiting until it is forced to act. Navigating the energy industry is entirely different from the environments in which disruptive technologies have traditionally thrived. There is little room for error; no matter what, the lights must stay on. For a company to implement a blockchain project successfully, it must consider regulatory barriers, privacy implications, and complexities associated with digital securities among various other obstacles. Mintz is here to help your organization wrap its head around these potential challenges as you plan for the future.