Blockchain and The Utility Industry aka Beauty & The Beast.
Ignoring the recent hype over the increasing price of Bitcoin, cryptocurrencies and the underlying technology (Blockchain) are starting to move out of the hype cycle and mature. Just a bit. While bitcoin dominates the cryptocurrency news headlines - we’ve had the hype, the issues of Mt Gox and the fraud of the DAO Hack - we’re finally getting clarity about blockchain and its true value. That semblance of clarity is exactly what blockchain needs before it can make its way into the energy industry, an industry ripe for disruption and, at $1.1Tn, one with a lot of low hanging value. Now we can get to the serious business of applying innovative technology to a critical industry, utilities, which is my focus for this post.
The Utility Industry
The utility industry is averse to innovation. This is because the instability and disruption inherent in new and innovative ideas goes against the fundamental premise of the industry; that premise is to provide stable, secure and reasonably priced electricity/water. Anything that seemingly threatens the utilities performance of that basic function is anathema. What this does is stifle opportunity for startups/technology companies trying to sell into the industry. One of the few companies that has done well selling to utilities, though it did not reach its full potential, was Opower. The company had a business model that relied on the same mechanism of electricity bill delivery that the utility was used to and comfortable with; paper. Paper, it was what the utilities could deal with and they accepted OPower’s innovation in behavior modification. It took 3–5 years after other industries adopted behavioral psychology before it snuck into the utility industry.
To sell to the utility your innovation must be
- simple, clear in its value and stable (e.g. Smart Meters),
- delivered through a mechanism that the utility understands (OPower) or
- benign in its ability to disrupt the steady flow of electricity ( e.g. Twitter for Customer Service).
OPower: Simple. And delivered via paper.
There is a fourth alternative and it is the combination of the 3 above. This fourth alternative is where I think Blockchain might be able to find some success in the utility industry in 2017…
Seeing as the technologists I’ve spoken to on the blockchain side do not do ‘utility speak’ and the utilities do not do ‘blockchain (or innovation) speak’ I thought it would be best to translate for both sides so that we can unleash the opportunities for value possible from the combination of these two languages. Let’s dive in.
To avoid the abstract nature of these sort of guides I will walk you through the life of the power that flows from the generation plant into the light bulb in your home and where/how blockchain can impact the flow of that electricity.
I worked here! It was pretty cool.
A Day In The Life Of An Operations Guy In The Utility Industry
The power plant I worked at supplied electricity to ~500k homes in and around London. Before the turbines were fired up to supply you electricity, the plant had to get into long term financial contracts with gas and diesel suppliers. Running Excel spreadsheets, we calculated how much gas was needed to generate how much electricity. The information from the spreadsheet was copied and pasted into a Word document which we then sent to the gas company to confirm how much we needed from the gas company. The idea was that we had to contract for enough gas and diesel to ensure that, while the power plant was working, we had enough fuel to run the place. The same spreadsheet was then sent to the control room team, who considered those of us in spreadsheets as soft engineers, who were responsible for keeping the turbines running to generate the electricity. The same spreadsheet was also sent to Merrill Lynch Commodities exchange who sold the electricity on the wholesale market on our behalf.
People, Spreadsheets, Money and Electricity. Errors waiting to happen!!
On the allotted day and time the control room team kept the turbines running. If there was an issue to resolve (for example turbine #2 of 4 tripped), I got a phone call because that reduced the amount of electricity that the end use customer (you) could get. And you didn’t want that. To ensure you got your electricity, I would engage with The National Grid to buy more electricity from someone else at that point. The National Grid electronically put me in touch with someone else selling electricity and I would buy electricity at the market price for the time frame the turbine was out. You got your electricity, every one got paid and the grid operator was happy. Reconciliation of all those transactions happened after the event.
As you can imagine, mistakes happened. Let’s use the example of a simple mistake that had cascading effects. Let’s pretend
- the broken turbine came back up before I had accepted the offer of electricity from a third party
- imagine the offer price meant the station lost money for every kilowatt/hour sold?
- this means that I supplied electricity from that recovered turbine (using gas and water I’d paid for based on the long term contracts the power station had signed) and the third party (believing I was buying their power) also generated more power and
- we both supplied your home in real-time?
So who was supposed to pay whom? It quickly became messy in post event reconciliation since the communication of the contracts was done via email….But what if the blockchain could help remove this oft occurring headache?
At its most basic level, the blockchain is a distributed ledger and the value it provides is the ability to use algorithms to reliably and anonymously record transactions, with every transaction recorded just once and time stamped.Note: for private/permissioned blockchain/distributed ledger — identities of the parties on the nodes on the distributed network are known
“At its heart, blockchain is a self-sustaining, peer-to-peer database technology for managing, reducing and eliminating intermediaries and recording transactions with no central bank or clearinghouse involvement”
While this technology is new, and pretty much futuristic to the staid utility industry, the error possibilities are multiples less than the possibilities with the current status quo which is Excel spreadsheets. The infrastructure layer of the blockchain is currently being built by companies (see image below) who have selected parts of the stack where they can add the most value.
Using our example above (utility settlement operations failure)
- once we had turbine recovery we could register the amount and price of the electricity now available on the ledger
- since we had the price and time the power station could calculate whether to bring up the turbine or still buy from the third party because
- we could initiate a contract as close to real time as possible, knowing the price differential.
- the national grid could determine, again looking through the ledger, who had supplied what at which time in real time.
- Everyone’s life becomes easier…