At some point in the not too distant future, consumers will very likely have the ability to flip a virtual switch and start taking power from their neighbour’s battery bank, rather than from the central grid. What’s more, the software will allow them to pay for the power without money, using bitcoins or kilowatt-hours from their own solar panels or other onsite generation delivered a few days earlier or later. Bitcoins, for those who haven’t heard, are a digital currency, built on what’s called “blockchain” software. These tools allow users to make online transactions, confident the “money” is coming from a certain person and that each unit of currency is only being spent once. They are used widely on the internet to transmit value, without relying on banks, and are completely unregulated by government.
Using digital currency, consumers will be able to cut back or eliminate their dealings with power companies and with banks at the same time. Power companies and banks may see it as competition, and regulators may see it as bypass. But the consumer will likely see it as primarily keeping up with the times, simply doing what’s normal when the technology allows.
The world of crypto-currency and the sharing economy has not yet impacted the energy sector in a big way. But it’s probably only a matter of time until it does. At the same time as generation technology is changing, there is major disruption possible in the way electricity is bought and sold, and in the kind of companies who are mediating the transactions. There will still be banks, high voltage transmission lines, and local power distributors, but they may not call the shots in the same way they do today. Because they can be used without asking anyone’s permission, blockchain applications can grow quickly. According to one report, research has uncovered hundreds of examples where blockchain technology is already being used in the energy sector.
To be sure, there is great uncertainty as to how the technology will pan out, who will own what, and how consumers will pay for energy services. However, two factors are relatively certain:
1. Official efforts will be relentless, to make sure that the new systems don’t allow users to evade their share of responsibility for debt service, in part because the existing system remains laden with debt.
2. Regulatory rules limiting the number of customers who leave the system will be impactful for the larger consumer, but virtually meaningless for the smaller consumer, at least at the outset. As a result, the unregulated sectors near the edge of the grid may be where major insights and disruptions originate.
Regulators will respond
Managing the socio-economic side-effects of digital currencies could be more challenging than deploying the technology itself. At the same time as new technology is being rolled out, powerful needs exist to retain two key principles:
a) Maintain equity between customer classes, and
b) Ensure that only economic bypass is allowed.
These enduring drivers will likely influence the transition, no matter what shape the system ultimately takes.
Regulators, acting sincerely in the public interest, will try to ensure that no class of consumers is disadvantaged in comparison to another. That will be tough if money is whizzing around the globe at the speed of light. The second driver, trying to ensure that the costs of long term assets critical to an integrated system are paid for by all or virtually all consumers, could run up against a wall of privacy enabled by digital technology.
As new technology comes along, enticing consumers to reduce their demands or virtually disconnect from the system, regulators will kick into action. In order to keep those two principles, they may need to come up with inventive new cyber-based approaches to maintaining equity between customer classes, and ensuring recovery of long term system costs. Considering the pace the technology is going, initiatives to develop new regulatory approaches could be uncharacteristically rapid.
The industry will devise new approaches for satisfying public concerns
One of the most promising responses to this problem is coming from the sector itself: A framework for governance of digital currencies. Thought leaders from the Muskoka Group recently proposed using a Global Solution Network, an international problem-solving organization, to advance a set of objectives for the health of the blockchain ecosystem. Key priorities include:
- Developing a road map and action plan for future government leaders
- Creating a strategy for better blockchain ecosystem health
- Actively supporting the Chamber of Digital Commerce.
Members of the group have set an impressive pace in terms of meetings with interested parties, consultation with policy makers, online publishing, and even TED talks. More information on the Muskoka Group is available at http://www.muskokagroup.org/
The fact is, many of the distributed energy resources likely to come on line in the near future will not be under the control of utilities or regulators. In principle there is value to be gained from DERs (Distributed Energy Resources) in part because they will be able to respond on a more granular level to changes in prices and system conditions. As long as you have enough players, price points and DERMS – Distributed Energy Resource Management Systems, the market is likely to generate efficiencies. However, a lot of incremental steps need to be taken before transactive markets will be significant. Key resolutions could take ten years or more, and technology will change further during the same time period. A properly managed transactive energy system coexisting with regulated service requires the implementation of layers of monitoring and control on the system that have never been seen before. For example, regulators have not yet resolved the question of whether there’s a rate policy problem associated with paying extra to DERs to help resolve a locational problem.
Disturbing the established social order often comes as part of the package with technical revolutions. For example, society sets up intricate systems for sharing the costs and benefits of established technologies. The systems are based on certain assumptions about how the technology works and how it will be paid for. When new technology comes along that doesn’t require central intermediaries the way the old technology did, the old assumptions, and perhaps even the old social contract, breaks down. There will not only be changes in what the technology is used for, there will be changes in the objectives of the regulatory system that oversees the use of the technology.
Key questions to be answered
If the goalposts are moving, then everyone in the system will need a new playbook of some kind. How far and how fast will change be permitted to go? Society wants to encourage entrepreneurial investment. But you won’t get the right kind of investor if the environment is totally fluid. If regulators, utilities, policy makers, industry reps and other concerned stakeholders can set a few parameters, then investors will have their required points of reference, and sensible money will flow.
This is exciting territory because it is simultaneously promising and beset with unresolved questions. How quickly should blockchain-based transactions be allowed to penetrate the electricity sector? What requirements for security and propriety need to be set in place? To the extent there are stranded assets or transition costs, how should they be allocated amongst customers? What safeguards, financial, technical, and social, will be needed? And the big question: Do policy makers effectively set limits on the advent of blockchain transactions in the sector, which will allow overseers to manage the stranded and transitional costs? If no upper limit is set, society is open to the risk of unpleasant disruptions with potential long-term consequences throughout the economy. On the other hand, if no basic level of penetration is prepared for, then large swaths of society may be unable to access the latest opportunities, as waves of game-changing innovations spread across the planet.
If government and regulators want to avoid the risk of significant economic dislocation, possibly including sizable bankruptcies, while also positioning the economy to benefit from technical innovation, they will need a policy framework on the appropriate pace and terms for adoption of blockchain technology. Policy will need to be developed and adjusted at multiple levels: International, national and state/provincial levels of government will all be affected and likely responsible for managing impacts in some way.
The Canadian Power Conference scheduled for November 20 and 21 2017 plans to host an open discussion on these issues as they relate to the energy sector. In preparation for that event, the APPrO Conference Committee invites members of the public to voice their concerns and suggest issues to address at the conference by posting comments on this article.
Stay tuned for further postings in the near future: APPrO plans to publish a feature article on the use of blockchain technology by the power sector on its magazine website in mid-June.
— Jake Brooks, Editor
See related editorial:
The sharing economy could be the next major disruption for the power sector
Note: This posting contains conjecture and opinion and should not be relied upon as definitive or used as a guide for any kind of investment decision. It contains the views of the author and may or may not reflect the views of APPrO or any APPrO members.
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