Does Blockchain solve an elusive or non-existent problem in the electricity markets?

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There is a famous piece of dialogue attributed to British Prime Minister William Gladstone and Michael Faraday. Faraday had just invented the electric generator and was showing Gladstone what he could do.

Gladstone comments: "Yes, but what use of the devil is it?" To which Faraday says "I have no idea, but I swear that one day you will tax it".

This exchange, both true and apocryphal shows the great mystery and misunderstanding that new technology often brings to every society.

And it is true that the electricity distributed & nbsp; paired with blockchain-based technology and cryptography is staggering for many, even expert, high-tech commentators in the industry.

In fact, judging by some articles appeared in the digital press, there is a widespread lack of understanding of the potential of distributed energy resources (DER) when coupled with blockchain. Some quite serious analysts have openly professed a lack of understanding of the problem that this technology is trying to solve.

Perhaps it is the fault of technology companies that have not quite clearly defined their position.

But the accusation that the value proposition is not clear is valid and must be addressed.

This is not surprising because to fully understand the proposition you have to go beyond the crypto and blockchain elements and understand the weaknesses of the electrical legacy industry.

Essentially you can summarize like this. As more and more people become solar, the price does not go down.

In fact, to a certain extent, it goes on from the other side and becomes more expensive. This is a rather counter-intuitive state of affairs and reflects the complexity of the electricity market.

The sun is free, but it makes things expensive

As more and more people leave the network, people are left behind at greater expense. You can look at this in terms of fixed and marginal costs, but in both cases the result is clear. More defectors from the grid mean that the rest has to pay to keep the system running.

This obviously means that the prices of the network increase and more and more deserters buy solar energy and outside the network. This becomes a vicious circle and in economics it is called a & # 39;Useful spiral of death'; it is one of the reasons why electricity becomes more expensive.

It is also one of the problems that DER and blockchain can possibly solve. By providing an alternative to what is essentially too expensive infrastructure, it will help to distribute solar and wind by doing what they will ultimately have to do – lower the price.

But this is not the only piece of dysfunctional status quo that DERs are demanding.

A curious differential

Depending on who you ask, there is a substantial difference in prices that reflects a huge market asymmetry. For example, in some places in Australia, there is an entry price of 7 cents to the network (selling price) and a repurchase rate of 26 cents. Or as some see it, an overwhelming amount of profits from energy companies.

Now there is a lot of debate about what this difference in feed-in-buy really is. Some commentators say that it is much smaller than 19 cents, depending on what assumptions are made about network costs and fixed daily costs.

But nobody disputes the general point. Established energy companies charge consumers more to buy their electricity than they do to get rid of it. And these high electrical wholesale prices are the "new normal", a fact not lost on the Grattan Report published in July 2018.

Now you might think that with the increase in production levels of renewable kilowatts and the construction of increasingly cheaper solar and wind farms, in the end that differential, whatever it is, will be eroded and the wholesale price will fall. .

However, this does not seem to be the case.

In fact, it is possible to double, triple or even multiply by ten, the amount of renewable kilowattts pumped by solar and wind power plants, and although good from the carbon point of view, unless you change the dynamics of the market, the price differential would probably remain in place.

One reason is that, by producing more electricity, it actually creates a problem for the network that handles oversupply.

Many wind producers around the world are paid more to avoid supplying the grid when the supply is high and energy demand is low.

The price gap reflects the fact that the main suppliers have a difficult job to do. They have to manage the supply of electricity and demand in a world where, unlike any other good or commodity, it is not possible to keep it economically.

Of course, batteries have improved in recent years and even months, but most of the time to store electricity is neither easy nor cheap.

Therefore, unlike cereals or cocoa beans, where large quantities of material can be stored, electricity must be managed very actively to protect against spikes and depressions. This is part of the reason for the buy-sell differential.

And this is where the true proposal of distributed renewable electricity comes into play. And it is another way of thinking and managing the demand peaks.

Keep the deposit, we are managing the price

If you can have a very responsive agile pricing mechanism, so that individual players, or rather their computer algorithms can choose their price, the problem of storage space begins to go away.

If electricity is expensive at 20.33 one night because everyone takes a shower, the price mechanism intervenes and manages the system so that it warms the water a little later when the peak is over , at 20.35.

If you want to freshen up your home by a few degrees, your active prices help you choose the minutes on the distributed grid where electricity is plentiful and cheap.

Thermal applications lend themselves to time shifting and can be large consumers of electricity.

If there is a high price in the market, you can have your system configured to automatically send your energy and be paid immediately for it. And even if there is a central authority that controls the data and you can not know who you are selling, you can be sure that the amount of electricity sold is measured and the amount you will have to pay will be paid.

Distributed electricity can be shipped where there is more need in the system more easily than traditional energy resources connected to the transmission grid.

So essentially distributed electricity coupled with technology can solve a problem of vital importance, even if many experts can not see it. It is a deeply rooted and valued problem in our legacy and fossil fuel based electricity networks.

Perhaps this is why it seems a nebulous solution, because it is a problem we are not very clear about. But there is no doubt that the problem exists. It is this problem that explains part of the feed-in tariff to buy the price differential.

Does the DER and blockchain solution mean that tomorrow we will have an interruption in all legacy systems? Away from it.

When you look at the perturbations in real markets, you come to the conclusion that they will probably happen in places like Thailand where legacy systems are not so lucrative and where countries are in a better position to bypass their technology.

The technologies that can enable this transactive grid, using the blockchain, are starting to show how these new markets will work.

As noted by Clayton Christensen, Harvard economics professor, the rupture comes first in markets where big players can not be bothered to play.

This will be particularly true in the recruitment of DER.

So perhaps it is no surprise that these are the countries where the first large-scale commercial dissemination of DERs is found using the blockchain.

It remains to be seen how long this technology takes to move players in the developed world and actually destroy existing markets.

Some retailers and utilities are experimenting with peer to peer trading, using new fixed daily procurement costs and wholesale energy prices and using blockchain to manage transactions, to offer more interesting options to their customers, but we can take another step forward with this model.

The differential of 7, 12 or 19 cents per kilowatt hour depending on who you are talking to will come under pressure.

Similarly, the daily fixed costs of the power companies can be charged.

Having a real-time price signal to which every user can respond has the potential to allow the market to help manage the system.

And when the history of energy is written, it will be the change in the market paradigm rather than the political posture that makes the difference and allows change.

If the energy commentators will eventually be able to put their heads on the concepts before then, it's another matter.

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There is a famous piece of dialogue attributed to British Prime Minister William Gladstone and Michael Faraday. Faraday had just invented the electric generator and was showing Gladstone what he could do.

Gladstone comments: "Yes, but what use of the devil is it?" To which Faraday says "I have no idea, but I swear that one day you will tax it".

This exchange, both true and apocryphal shows the great mystery and misunderstanding that new technology often brings to every society.

And it is true that distributed electricity paired with blockchain and cryptography technology is staggering for many, even high-tech experts in the field.

In fact, judging by some articles appeared in the digital press, there is a widespread lack of understanding of the potential of distributed energy resources (DER) when coupled with blockchain. Some quite serious analysts have openly professed a lack of understanding of the problem that this technology is trying to solve.

Perhaps it is the fault of technology companies that have not quite clearly defined their position.

But the accusation that the value proposition is not clear is valid and must be addressed.

This is not surprising because to fully understand the proposition you have to go beyond the crypto and blockchain elements and understand the weaknesses of the electrical legacy industry.

Essentially you can summarize like this. As more and more people become solar, the price does not go down.

In fact, to a certain extent, it goes on from the other side and becomes more expensive. This is a rather counter-intuitive state of affairs and reflects the complexity of the electricity market.

The sun is free, but it makes things expensive

As more and more people leave the network, people are left behind at greater expense. You can look at this in terms of fixed and marginal costs, but in both cases the result is clear. More defectors from the grid mean that the rest has to pay to keep the system running.

This obviously means that the prices of the network increase and more and more deserters buy solar energy and outside the network. This becomes a vicious circle and in economics it is called a & # 39;Useful spiral of death'; it is one of the reasons why electricity becomes more expensive.

It is also one of the problems that DER and blockchain can possibly solve. By providing an alternative to what is essentially too expensive infrastructure, it will help to distribute solar and wind by doing what they will ultimately have to do – lower the price.

But this is not the only piece of dysfunctional status quo that DERs are demanding.

A curious differential

Depending on who you ask, there is a substantial difference in prices that reflects a huge market asymmetry. For example, in some places in Australia, there is an entry price of 7 cents to the network (selling price) and a repurchase rate of 26 cents. Or as some see it, an overwhelming amount of profits from energy companies.

Now there is a lot of debate about what this difference in feed-in-buy really is. Some commentators say that it is much smaller than 19 cents, depending on what assumptions are made about network costs and fixed daily costs.

But nobody disputes the general point. Established energy companies charge consumers more to buy their electricity than they do to get rid of it. And these high electrical wholesale prices are the "new normal", a fact not lost on the Grattan Report published in July 2018.

Now you might think that with the increase in production levels of renewable kilowatts and the construction of increasingly cheaper solar and wind farms, in the end that differential, whatever it is, will be eroded and the wholesale price will fall. .

However, this does not seem to be the case.

In fact, it is possible to double, triple or even multiply by ten, the amount of renewable kilowattts pumped by solar and wind power plants, and although good from the carbon point of view, unless you change the dynamics of the market, the price differential would probably remain in place.

One reason is that, by producing more electricity, it actually creates a problem for the network that handles oversupply.

Many wind producers around the world are paid more to avoid supplying the grid when the supply is high and energy demand is low.

The price gap reflects the fact that the main suppliers have a difficult job to do. They have to manage the supply of electricity and demand in a world where, unlike any other good or commodity, it is not possible to keep it economically.

Of course, batteries have improved in recent years and even months, but most of the time to store electricity is neither easy nor cheap.

Therefore, unlike cereals or cocoa beans, where large quantities of material can be stored, electricity must be managed very actively to protect against spikes and depressions. This is part of the reason for the buy-sell differential.

And this is where the true proposal of distributed renewable electricity comes into play. And it is another way of thinking and managing the demand peaks.

Keep the deposit, we are managing the price

If you can have a very responsive agile pricing mechanism, so that individual players, or rather their computer algorithms can choose their price, the problem of storage space begins to go away.

If electricity is expensive at 20.33 one night because everyone takes a shower, the price mechanism intervenes and manages the system so that it warms the water a little later when the peak is over , at 20.35.

If you want to freshen up your home by a few degrees, your active prices help you choose the minutes on the distributed grid where electricity is plentiful and cheap.

Thermal applications lend themselves to time shifting and can be large consumers of electricity.

If there is a high price in the market, you can have your system configured to automatically send your energy and be paid immediately for it. And even if there is a central authority that controls the data and you can not know who you are selling, you can be sure that the amount of electricity sold is measured and the amount you will have to pay will be paid.

Distributed electricity can be shipped where there is more need in the system more easily than traditional energy resources connected to the transmission grid.

So essentially distributed electricity coupled with technology can solve a problem of vital importance, even if many experts can not see it. It is a deeply rooted and valued problem in our legacy and fossil fuel based electricity networks.

Perhaps this is why it seems a nebulous solution, because it is a problem we are not very clear about. But there is no doubt that the problem exists. It is this problem that explains part of the feed-in tariff to buy the price differential.

Does the DER and blockchain solution mean that tomorrow we will have an interruption in all legacy systems? Away from it.

When you look at the perturbations in real markets, you come to the conclusion that they will probably happen in places like Thailand where legacy systems are not so lucrative and where countries are in a better position to bypass their technology.

The technologies that can enable this transactive grid, using the blockchain, are starting to show how these new markets will work.

As noted by Clayton Christensen, Harvard economics professor, the rupture comes first in markets where big players can not be bothered to play.

This will be particularly true in the recruitment of DER.

So perhaps it is no surprise that these are the countries where the first large-scale commercial dissemination of DERs is found using the blockchain.

It remains to be seen how long this technology takes to move players in the developed world and actually destroy existing markets.

Some retailers and utilities are experimenting with peer to peer trading, using new fixed daily procurement costs and wholesale energy prices and using blockchain to manage transactions, to offer more interesting options to their customers, but we can take another step forward with this model.

The differential of 7, 12 or 19 cents per kilowatt hour depending on who you are talking to will come under pressure.

Similarly, the daily fixed costs of the power companies can be charged.

Having a real-time price signal to which every user can respond has the potential to allow the market to help manage the system.

And when the history of energy is written, it will be the change in the market paradigm rather than the political posture that makes the difference and allows change.

If the energy commentators will eventually be able to put their heads on the concepts before then, it's another matter.