Introduction
In this investigation we look at the role of blockchain (and partly) IoT in removing barriers to adoption of solar energy. One barrier is that Green Investments lack transparency - blockchain offers a technology that enhances transparency. The second barrier is optionality available for producers of solar energy - blockchain addresses this by creating new incentives and by increasing the options available in terms of the disposal of excess energy produced.
In this article we will start in Section 1 by setting the context. It is first important to ask what may be obvious questions. Why are we looking at technology as a solution to improve the production of renewables? Is there a real need to encourage the production of renewables? This is not a climate change question this is about understanding our underlying assumptions when driving a renewables agenda. Next we look at the encouragement of governments - who themselves - are proactively taking steps to push renewables and, in the case below, solar energy. Also, why solar? Why not another renewable source? We have to question the assumption that solar is the best source of energy to produce.
One we have addressed the context we will then look in Section 2 at the perceived barriers to solar energy adoption. In Section 3 we will then look at how blockchain technology may address those identified barriers. We are looking at technological solutions but the focus is not on technology in general it is restricted to blockchain technology and, in part, when combined with Internet of Things.
To understand how blockchain can address barriers we have to understand what the technology is in the first place. Below we explore some of the main features of blockchain technology. This is not meant to be an exhaustive list nor a comprehensive anatomy of the technology.
Once we have grasped the concept of blockchain we look in Section 4 at its application to the barriers we have identified. Namely transparency/trust barriers in Green Investments and lack of optionality for producers of solar energy. Our analysis looks at the issues associated with Carbon Credits and Green Certificates and how they can be addressed with blockchain. In the optionality section we look at two ways that blockchain incentivises energy production. In this analysis section we refer to startups that are already tackling these problems using blockchain.
Our conclusion is that blockchain can potentially increase trust in Green Investments and strengthen incentives for energy production.
SECTION 1: CONTEXT
How can technology enhance the production of renewables?
Technology used as a mechanism to increase efficiency in an economy.
That can be through digitisation of paper based processes or through automating processes.
Technology can be used to create new business models and increase competitiveness in a particular sector. For example fintech is about the banking and financial system facing competition from startups that use technology to capture their market share. This is threat based innovation. This form of innovation has the power to push an industry to change. The sharing economy arises from a technology driver - P2P markets come from advances in web based technology from the early days of eBay.
Technology also has the ability to increase transparency in a particular sector. This can be anything from Google Maps technology giving the ability to see satellite imagery or drones being used to monitor solar panel landscapes.
The question is what are the challenges facing the energy industry in general and how will technology disrupt that industry?
In that respect we may decide to acknowledge certain trends:
- Fossil fuels dependency on the planet is reducing
- Policies are encouraging new forms of energy production
- Centralised energy may not be servicing everyone equally
If we believe that renewable energy is the future of energy - in a post-fossil-fuel world - then we have to assess the barriers to its wider adoption by: governments, businesses and individuals.
Some governments are bullish about renewables.
For example in the UAE - according to the Energy Minister of the UAE in January 2016 (quote from the National) - is “looking to increase its target for power generation from clean energy to 30 per cent by 2030”. In the UAE there is already a government commitment to build 100MW solar plant in Dubai and a 350MW solar plant in Sheikh Mohammad bin Rashid Al Maktoum PV Solar Park.
The UAE as a peninsula is of course geographically well suited to advance solar energy production and even be exporters of solar energy. The UAE Minister states: “When it’s availability is improved from 25 per cent to 40 or 50 per cent … we need to see technology evolving to cheaper ways of storing solar- generated power, then we could see the peninsula exporting [solar power] to Europe.”
If this enthusiasm for renewables in the UAE is actually part of wider initiative in the world to ‘go green’ then we have to look at the perceived barriers preventing the wider adoption of renewables.
Based on us understanding those barriers we can look at addressing them with - instinctively - technological solutions.
But here we are not looking at all technologies.
The purpose of this investigation is to look at what role blockchain technology can offer in removing particular barriers to adoption of renewables.
Also, the focus of this investigation is on solar as opposed to other forms of renewable energy production.
Why?
Solar energy is the most individually accessible form of energy production. Not everyone can build a nuclear power station, but most people may be able to generate energy from a solar panel.
Solar - as an accessible form of energy production - creates new entrepreneurship opportunities in an economy and allows for individuals to be both consumers and producers of renewable energy, or, in other words, ‘prosumers’. Overall solar energy is an ‘all-rounder’. It is welcomed by governments and prosumers alike.
In the next section we look at some of the barriers to solar energy adoption.
SECTION 2: BARRIERS TO SOLAR ENERGY ADOPTION
There are 2 perceived barriers to wider renewable energy adoption:
1) Green Investments have lacked transparency and trust (hindering investment of capital)
This is due to a few factors namely Green Investments are:
- generally unregulated
- remote
- difficult to audit
2) Limited optionality for prosumers
This is due to a few factors namely:
- Centralised infrastructure reduces opportunities for participatory economics
- Reduction in the incentives provided to renewable generation (selling energy back to the grid isn’t as profitable as it once was)
Business Models
There are 2 main business models in blockchain and the solar industry that are seeking to address the above problems:
1) Green (solar) Investment Transparency: use of blockchain (sometimes combined with Internet of Things) to increase transparency and audibility. There are namely two trends:
- blockchain to enhance transparency of crowdfunding of solar plants
- Green Certificates - blockchain used to issue Green Certificates and to trade them
2) Increasing Optionality for Prosumers:
- Peer-to-peer Energy Trading - blockchain reduces the need for intermediaries and utility companies
- Additional incentives (solar coin) - alternative asset class/ network effect increases capital value of coin
SECTION 3: WHAT IS BLOCKCHAIN TECHNOLOGY?
Features:
1) Shared ledger versus siloed databases
- more efficient design
- no reconciliation needed of data
- relevant parties see the same data
2) Immutable data
- everyone in the network has the same instance
- change requires the consent of the network
- once consent achieved impossible to change data
3) Create unique digital records
Eric Schmidt said that: “Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value”.
This is an innovation as the fear of going digital can be because a digital file is duplicable. Whereas with the discovery of blockchain you can finally have something that is digital and unique at the same time.
4) Blockchain removes/reduces need for certain intermediaries
Bitcoin is a new type of payment system. It has users but no bank or central administrator of the payment network (the role of those intermediaries is removed). Yet the payment system still functions.
Since Ethereum (another blockchain protocol) it is possible to write automatically executing scripts on a shared ledger.
This is relevant as if you have money and programmes that are now on a blockchain then you can remove the role of certain financial actors.
One such example is a Clearing House. A Clearing House is there to ensure that cash versus delivery happens of share. With smart contracts the swap of cash and a share can happen automatically once the conditions of the trade are met.
5) Blockchain allows people to trade even if they don’t trust each other
In essence, Blockchain shifts the role of trust in an economy.
But Trust is the foundation of an economy.
This is so because our society is based on trusting certain intermediaries.
Blockchain technology simply says that you can trust technology rather than intermediaries but not have to compromise on functions.
You can have a functioning payment system without a bank. You can have a functioning security trading system without a clearing house.
This is an important discovery as if you can’t trust an intermediary then you won’t do business with them.
However blockchain can create a trust layer that allows people - who would not normally do business with one another - to do business because they both trust the technology and not each other.
Let’s see how the above features of blockchain apply to the solar industry and remove barriers to adoption.
SECTION 4: APPLICATION OF BLOCKCHAIN TO THE BARRIERS TO SOLAR ENERGY ADOPTION
1) Green (solar) Investment Transparency
We said above that energy investments can be fairly risky for investors and that there is a perceived lack of trust.
Let’s look at why that is?
In the next section we will look at the example of the Carbon credit.
Carbon credit
A carbon credit is a certificate or permit which represents the right to emit one tonne of carbon dioxide (CO2) and they can be traded for money.
Carbon credits are generally not regulated investments.
They are ‘alternative investments’.
This means that brokers of such alternative investments are not required to be regulated themselves.
If Carbon credit brokers were regulated then then brokers would generally owe a duty of care to the investors and would have to act in the investor’s best interest.
This also means that a regulated broker would - to a large extent - be required to check the suitability of the investment for the investor.
At present this pre-sale due diligence is not provided in relation to Carbon Credits.
This means that generally it is the investor that is required to do the due diligence on the investment product itself and takes the full risk on the investment.
But how can you take the full risk on an investment if you don’t have all the information?
In the case of Carbon Credits they are often generated in one country and sold to investors in another country.
For example a Carbon Credit might originate in Mongolia but be sold to UK investors.
This creates remoteness between the investment instrument and the investor which can be problematic if the investor needs to verify claims made by a particular Carbon Credit broker.
One such claim is that the Carbon Credit itself is ‘certified’. Promoters of investments such as Carbon Credits often say that the investment is certified.
However as the UK Financial Conduct Authority has said: “this certification is voluntary and involves a wide range of bodies and different quality standards that are not recognised by any UK compensation scheme”.
So - in the instance above - the FCA even acknowledges that they cannot protect the investors from the mis-selling of Carbon Credits.
The answer to this problem is not necessarily to regulate Carbon Credits as a regulated investment instrument but to look at tools available to increase the transparency of the investment.
Blockchain is a way to offer transparency on these unregulated investments.
As we said above, Blockchain technology can create an immutable and tamperproof distributed database.
This means you can take the carbon credit and place its entire history onto a blockchain.
The certification of the carbon credit can be signed on the blockchain.
The trading of the Carbon Credit can be recorded on the blockchain.
When the buyer wants to buy a blockchain based Carbon Credit he/she can look at the full history and test all the claims made by a Carbon Credit broker.
Further, if the investor still doesn’t trust that the Carbon Credit is valid they might write a smart contract to say: “I will pay for the Carbon Credit if the Certification Authority signs your Carbon Credit. The buyer would send the purchase price into the smart contract and it would be swapped with the seller’s Carbon Credit as soon as the Certificate authority signs the Seller’s Carbon Credit.”
Let’s look at another example of Green Investments.
Green Certificates represent 1 megawatt hour of electricity.
Those certificates represent proof of renewable energy generated. They are usually issued by a local government agency. The owner of the Certificate is able - like a commodity - to trade the Certificate itself.
A UN report into Green Certificates (GC) stated a few risks associated with GCs.
Namely it mentions that a “reliable tracking system of the whole life cycles of the certificate is a must”.
This is the same problem that Carbon Credits have.
So in the same way that we have shown the application of blockchain to Carbon Credits the same is true with Green Certificates.
In fact Nasdaq has already started in this area. Nasdaq and Filament are working together to create Green Certificates on the blockchain. Those GCs when created are also tradable on the blockchain. GridSingularity in Europe is working in a similar field to added GCs to the blockchain.
Sunexchange is working on enhancing the crowdfunding of solar panels using blockchain. Sun exchange uses blockchain to address the transparency issues of solar panel investments.
So startup ventures are already looking at increasing the transparency of Green Investments by using blockchain technology.
Of additional interest in how some of the startups are increasing the transparency of Green Investments by combining Internet of Things with blockchain.
At Chain of Things we worked with Solcrypto JV at our event in London in June to create a blockchain connected solar monitoring device.
Luke Johnson from Solcrypto had built a device that connects to solar panels and records the data that the panel produces - we worked together to make it log directly onto a blockchain.
The datalogger device is connected - via mobile telephony - directly to a blockchain. By doing it in that way the solar energy data flows directly from the solar panel to an immutable ledger - and, as such, minimises the risk of tampering of the data. A similar notion is being worked on by Nasdaq and Filament.
Direct logging from the panel - as an Internet of Things device - to the blockchain means you end up with a full - completely audible - history of the lifecycle of every solar panel.
So to conclude this section Green Investments have a transparency issue.
To enhance the amount of capital that goes into Green Investments you need to increase the transparency and ‘trust’ in those investments.
Blockchain provides a means to give a full and immutable provenance of solar energy from the panel straight onto an immutable ledger. Certificates produced link to the energy data on the blockchain and are an immutable digital record.
The use of smart contracts in Green Investments reduces the need to trust a counterparty in a Green Investment transaction which is likely to be remote in nature (as explained above).
The other area where blockchain removes barriers to adoption of solar energy is in increasing optionality for prosumers.
2) Increasing Optionality for Prosumers
If we want to encourage the increased production of solar energy more generally we need more people to get involved in being producers.
The options available are to buy solar panels and then, if there is any excess energy produced, sell that excess back to the grid.
However government subsidiaries to incentivise people to sell back to the grid are diminishing. If the price isn’t high enough to encourage people to produce solar energy then the incentive will not be strong enough for individuals to become producers.
If you look at bitcoin, it is digital asset. It has value that draws from the bitcoin community. The more people that find out about bitcoin and start to use it as a result the increase it will have in price.
Solar coin takes the same principle and technology of bitcoin and says that if you produce renewable energy we will reward you with Solarcoin. In the beginning Solarcoin may not provide an immediate return to producers but it is a supplementary incentive to encourage individuals to be solar energy producers.
Where the return comes in for the producer is when more people enter into the Solarcoin network. The more that enter the network the higher the market price of Solarcoin. So the incentive provided by Solarcoin is intended to be a capital appreciation over time.
Solarcoin aims to address the fact that governments are unable to sustainably subsidise feed-in tariffs and that private currency incentives can ‘plug’, to some extent, the gap in incentives.
Another area where prosumers are being given optionality is with P2P energy trading.
P2P energy trading gives an additional option to the solar energy producer. Which is rather than selling back to the grid, an energy producer can sell to their neighbour. This option may not there because the price is better. It might be there for other reasons for instance sustainability of a community, promotion of local energy production and consumption. In any event a new option has been created for Producers using blockchain.
LOE Energy were the first to investigate this area with the Brooklyn Microgrid project. There is an Australian startup called Powerledger that is also looking to provide blockchain based microgrid transactions.
In conclusion we can see that blockchain can increase optionality for producers of solar energy by creating new incentives to produce renewables and giving producers the opportunity to sell back to the grid or to their neighbour.
To summarise blockchain offers transparency and trust to the solar industry. When blockchain is coupled with IoT it magnifies the level of audibility of renewable energy claims. And as we have seen blockchain increases the options available to individual producers of energy.