Peer to Peer Energy Trading: Activating Renewables

By: Avery Smith

The traditional idea of a singular energy utility company distributing energy is an under-engineered and inefficient way to distribute energy in a marketplace beginning to be dominated by renewables. Renewables are plagued by inconsistency, often depending on weather and location. In this sense, even as renewable electricity has begun to be generated at the same scale as traditional methods, the real breakthrough in widespread adoption will follow the appearance of a real method to store and distribute variably-generated sources of energy.

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Blockchains have arisen as a solution to solve this market inefficiency. A blockchain is a digital, public ledger in which records can be stored and transactions can be executed and validated between individuals. In the conventional sense, blockchains have allowed consumers to execute simple monetary transactions: a user attempts to send money to another user, and the participating community verifies the validity (i.e. ensures the sender has available balance, ensures the sender is real). However, the recent development of "smart-contract" based blockchain solutions has allowed the technology to evolve far beyond peer-to-peer payments. A smart contract can be defined as a program which leverages the computing power of a blockchain to validate a contract. Contributing peers can all publicly view the terms of the contract and execute a transaction under a given set of conditions. For example, smart contracts can be used to manage employment agreements, ensuring that employees are paid fairly and transparently.

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The complexity of these "smart contracts" is not limited to simple applications. Energy startups have already begun to see blockchains as a venue to eliminate the middleman of a utility company, allowing users to trade energy between each other at a dynamic price. The application of this trading has already been fleshed out by several startups. For example, startup P2PEP explains in their whitepaper: “All you have do to is download our DApp and start trading renewable energy. For large scale renewable energy producers, this is extremely appealing since there are a lot of users on the network that are tired of the environmentally unfriendly energy they are forced to use today and are craving for someone to sell them greenenergy at a decent price.” The execution of contracts directly between producers and consumers will avoid the mispricing of the underlying asset. Instead, pricing would be flexible and based not on the thoughts of some arbitrary central planner, but rather on supply and demand. This will allow renewables to flourish in that it will incentivize individual producers of electricity (e.g. households with solar panels) to sell energy to network peers at a rate higher than that paid by a utility company, given an increased demand. 

 

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For example, in New York City, LO3 energy has begun its "Brooklyn Microgrid" project. Here, consumers and producers were able to set a minimum and maximum purchase price for electricity. Then, on top of a blockchain, energy was distributed in more efficient manner. Although it has not been analyzed from an academic perspective, LO3 claims that this method of distribution has increased security and efficiency in the local grid. Further, energy startup Grid+ has leveraged the Ethereum blockchain in order to attempt pass wholesale pricing to consumers. Although this project has not yet been implemented on a large scale, it has raised $40 MM in an initial round of funding.

Although it remains to be conclusively proven, these blockchain powered energy distribution methods, and all smarter forms of grid technology for that matter, will provide the necessary infrastructure for renewable energy to freely move through the marketplace. This will not only drive usage and lower cost, but finally provide the venue for unsubsidized renewables to truly jump the hurdle and become a dominate force in the market.