Over $1B of Venture Capital funding was poured into blockchain technology in 2014 and 2015, and the rate is doubling annually. Around the world organizations like Goldman Sachs are scrambling to figure out the impact of blockchain in their business. Can they capitalize on it or will they be disrupted by it? In this post we will discuss what blockchain is, why it is important, and suggest five ways it could change the utility industry landscape.
What is Blockchain?
All drama surrounding Bitcoin created a mystical field around blockchain, the technology behind Bitcoin. There are many ways to describe blockchain, however most are too abstract or technical. A 2016 Deloitte report put it very well:
Imagine a remote town that has a book to record every important transaction in the town – who owns what land, who sold a particular cow to which person and when, who is married to who, etc. This book is open, official, and no one can alter it. This makes verifying ownership and origin a very easy task. Blockchain takes this concept and applies it at a much larger scale, by using cryptography and distributed computing (where no single computer has control over the records).
We will explore the specifics of how this works in an upcoming article, but for now let’s focus on blockchain’s impact.
Why is it important?
Verifying ownership and origin nowadays is still a complex task requiring overly complicated systems and institutions. For example, think about why it still takes days to clear a check or ACH transfer, or how long the process of buying and closing on a house can take.
Blockchain provides a way to verify ownership and origin with a speed and accuracy we have never had before. Think about the money you pay in any given transaction, the house you live in, the car you drive, the cup of coffee you drink, the diamond on your finger, etc. What if there was a new way to verify who else has claim, or if the origin of the item you are purchasing is valid? In this way blockchain can shake the core of existence of many systems, from your local county office (where you record your real estate transaction), to global financial institutions where you bank your money or trade your stock.
Blockchain can benefit not only rich countries with large markets, but even developing or underdeveloped areas, where transparency is in dire need.
How could blockchain change the Utilities industry?
1. Carbon certificate trading
Blockchain can be used to provide a way to verify origin, track the trail of transactions, and settle the carbon certificate market. This would make it easier for companies to buy, sell, and prove to regulatory bodies that they meet requirements.
2. Market transactions
In deregulated markets, finding out which electric retailer really "owns" the customer can be a complex task, involving complicated stacking rules. Blockchain can simplify and streamline the process while providing more reliable transactions.
3. Energy settlements
Energy settlements are currently handled by a centralized clearing house (e.g. ISOs, or ERCOT). This process could likely be handled more accurately and efficiently using blockchain technology.
4. Distributed generation
Some question the role of utility companies in the future, stating that centralized generation by large power plants could be replaced by distributed generation (power generation at the point of consumption). This would mean that one could be an energy producer in the morning and a buyer in the evening. Blockchain could be the technology to handle origin verification and transaction settlement between producers and buyers. In fact, blockchain technology helped facilitated the first peer-to-peer energy transaction in Brooklyn in 2016.
A report published by Pike Research forecasted that utilities would make a total of $4.1 billion in significant new investments in cyber security for industrial control systems between 2011 and 2018. With the explosive growth of Smart Meters, Smart Grid devices, and IoT devices, it is increasingly important that only authentic devices are allowed in Utilities network. Blockchain has the potential to provide a solution.
Every now and then, technology develops new innovations that carry the promise of changing our society forever. The advent of the printing press, steam power, the combustion engine, electricity, the computer, and countless other products that we now consider a part of our everyday lives are just a few examples. It could be that the next big transformative technology has arrived – and it's not big data, AI, or IoT – it’s blockchain.
In the Utilities industry, with current value chain structure and regulation, we should not see a lot of blockchain projects move beyond concept stage in the near- and mid-term. However, the technology could have profound effects in the long term or even sooner if innovators like Elon Musk has his way. Goldman Sachs has decided to start investing in blockchain, not only as a means to hedge against disruption, but as a way to participate and thrive in the open economy of the future. Utilities and regulators, too, must look for ways to participate and thrive in this open economy, or run the risk of being left behind.