An overview of Power Utilities Industry
Abstract
Blockchain is the technology designed to process innumerous transactions simultaneously by creating a trustful network and supported by cryptocurrencies. As stated by Harvard business review (Lakhani, 2017), “it has the potential to create new foundations for our economic and social systems”, by creating immutable transactions in a growing network system, by at the same time, protecting the data.
Throughout the world blockchain based solutions have reached various integrated systems simultaneously and has been a disruptive market force since its inception through Satoshi Nakamoto’s white paper in 2008 titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. Since then, the topic is gaining space in board meeting across the world.
Nowadays, the concept of blockchain is conquering space in other sectors and going beyond the traditional financial applications, but also being applied to governance, healthcare, energy and utilities. Executing smart contracts using the blockchain logic reduces the time taken by users to manually negotiate and evaluate each offer made. Besides smart contracts, blockchain can also help mitigate risk of frauds by validating data and assuring that it is immutable.
Indeed it is possible to observe that security of transactions remains a prime agenda while developing and executing complex contracting scenarios on the blockchain, its opportunity cost at this nascent stage becomes a key point in making the best strategic decision for any company, as stated in Deloitte’s blockchain report (Deloitte, 2019).
A specific focus on power and utilities sector helps ensuring growth of the fuel of the developing economy. With IOT, Microgrids and Artificial Intelligence becoming more common in business’s environment, contextualizing a digital growth by adopting Blockchain solutions that makes possible to benefit both the governance mechanism and create a positive market force.
- Introduction to Blockchain Technology
Currently, Blockchain is considered one of the top trend technologies topics, that’s presents a huge potential to change the market, not only regarding financial services, but also in other industries. A few indeed can possible evaluate Blockchain’s benefits and describe it as a disruptive “foundational” innovation, that empower and changes business processes across industries, as mentioned in WEF report (World Economic Forum & Accenture). Within the common digital currency that was established and all networks that were made possible, Blockchain stepped into a next level when its disrupting potential was followed by the non-financial service institutions.
“Blockchain technology will do for transactions what the internet did for information.” Ginni Rometty, CEO of IBM
With so many new solutions being developed and tested every day, a technology that promises efficient governance is on its way to evolve into a breakthrough in the global economy. While some countries, for example Germany, have the suitable environment for the technology application, where it has been broadly accepted and absorbed by the society, other countries still perceiving it as risk averse on the whole automation proposal. In other words, it appears that the acceptance of such disruption is not just a matter of availability of proper infrastructure, but much like a system of socio-economic factors aiming feasible scalability.
- Blockchain Basics
To fully understand the possible changes that blockchain technology can provide, it is vital to consider what unique problem do blockchain and digital ledgers solve. There has been extensive research carried out on blockchain and their use cases highlighting how the market is slowly showing affinity towards adapting such digital peer-to-peer networks for clearing systems and other solutions, as mentioned in dena’s report (Richard, Mamel, & Vogel, 2019).
Most of companies are investing in new technologies in order to improve their day-to-day operation as well as their performance. As main service management challenges, it is possible to mention: variations in types of data collected from different assets; general data storage, user manuals, operation and maintenance records; lack of a unified view for participants across the value chain; sustainable asset reliability, since it requires coordination with multiple parties for service management; and also, end-to-end traceability of parts, services, payments, contracts and discounts.
Blockchain plays a big role in addressing those challenges in the field service management by capturing data securely from asset leveraging its capabilities to get insights and predict failures. Additionally, verifying and validating compliance with immutable record of each service step; and providing transparency and traceability of service activities and completion can be nominated as turning point characteristics. Finally, another advantage worth to mention, is the usage of smart contracts to execute payments based on sensor data, reconcile parts, discounts, and order refills as well as generate reports.
2.1 Blockchain Definition
As KPMG report (Seibold & Samman) defines, Blockchain is “a digital record of ownership that differs from traditional database technology, since there is no central administrator or central data storage; instead, the ledger is replicated in a peer-to-peer network, and each transaction is addressed by a unique private key”.
The name “blockchain” is described according the "chain" definition or so called “blocks”, which describes a distributed database capable of recording an increasing volume of data, so called blocks, which are secured from interferences and any type of modification. Each block contains a timestamp and a link to a previous block (hash) which is encrypted. Blockchains are designed to be resistant to modification of the data — once recorded, the data cannot be altered retroactively.
When thinking about the practical applications of the technology, Harvard Business Review (Lakhani, 2017) states that for global businesses it represents not only a dramatic shift in how they will manage transactions in the future, but also how they structure their internal operations going forward.
To summarize, Blockchains make possible ordering and verifying transactions in a distributed ledger, where a network maintains and validates a record of consensus of those transactions with a cryptographic. With blockchain responsible for payments, the storage of information becomes cheaper without intermediaries; secure with consensus; automated with smart contracts; as well as auditable via cryptography.
2.2 Blockchain Characteristics
The key to success is a combination of different characteristics that enables this trustworthy technology, such as: decentralization. All network participants have access to the ledger used in order to have transparency. Since the record of the transactions is available to the network, there is no need for central authorities. Besides that, a transaction timestamp is recorded in a block, which makes possible tracking and verifying information.
A Blockchain uses digital signatures to prove transactions identities; these can be tied back to real life identities with some reverse engineering. Another convenience is the use of the “Smart Contract”, meaning that Blockchain is programmable. Instructions embedded within blocks allow transactions actions to be carried out when certain conditions are met.
Blockchain technology would not function without consensus, which means that all network participants have agree to the validity of each of the records. The participants use their computers to authenticate and verify each new block; and new blocks are only adopted by the network once a majority of its participants agree that they are valid. All of these characteristic works together to assure the use of the technology without requiring intermediaries.
Any validated records cannot be changed, in order words, inputted data is immutable. Blockchain has built-in mechanisms to prevent change of historical records, that is, data that exists earlier in a Blockchain cannot be altered. Another security mechanism that Blockchain uses is cryptography, so all transactions can be traced back to their cryptographic identities ensuring the security.
2.3 Blockchain Challenges
Although Blockchain’s potential is appealing, there are also substantial drawbacks that need to be overcome in order to implement it successfully within any industry. Regulatory and market changes in particular could restrict blockchain’s uses on a global scale. As a matter of fact, according to Holbrook (Holbrook) the main concerns regarding Blockchain technology nowadays are listed next:
First of all, ‘performance’. The technology still not able to attend enterprises needs in terms of transaction speed. ‘Privacy’ is another big concern; the identity of participants can be, and has been, reverse engineered. Many use-cases call for sensitivity or privacy, which cannot be guaranteed today. A huge amount has been invested in current systems in order to solve ‘legacy debt’ and ‘compliance’, replacing the intermediaries in transaction is not a trivial process. An interesting fact is that even ‘security’ has been pointed as a challenge to overcome.
Although the basic Blockchain protocol has proven very secure, private keys can be a problem; and especially due to the fact that users of the technology hold their private keys in their own devices, which have proven to be insecure. All of this without mentioning the ‘Real Cost for User’, that can be seen through the enormous environmental impact, due to the high energy consumption. Given that, Blockchain technology may not be long-term sustainable, what represents a significant ‘technology innovation’ challenge that has to overcome in order to succeed.
Besides all the challenges strictly connected to the technology itself, Blockchain projects face many constraints while developing it inside a company as well as when implementing it. The Deloitte’s 2019 Global Blockchain Survey (Deloitte, 2019) shows that ‘Implementation’ together with ‘Regulatory issues’ represent the biggest concerns between the respondents when asked about the “barriers to greater adoption in Blockchain technology”. Technology driven companies are preparing themselves for every possible scenario in the Blockchain evolution and are building use cases around these different scenarios.
2.4 Blockchain Fields of Application
The challenges regarding Blockchain technology have led to an outbreak of alternative solutions, including Distributed Ledger Technologies (DLTs). Given that, one might say that the technology will be a critical in the digital transformation (and disruption) of many industries.
So, according to Deloitte’s 2019 Global Blockchain Survey (Deloitte, 2019) different types of Blockchain i.e. public, private and permissioned are being effectively used by different end users to solve issues like governance, supply chain and payment clearance along with financial closures.
Besides the widely known applications in the financial services, Blockchain technology is gaining space between enormous use cases beyond payment and transactions. When having in mind non-financial services, it is possible to highlight ‘Data validation’, ‘Data access/sharing’ and ‘Identity protection’ as top 3 Blockchain applications, also according to Deloitte’s 2019 Global Blockchain Survey (Deloitte, 2019). Furthermore, other areas of focus might deserve some attention too, such as ‘Track and trace’, ‘Certification’ and ‘Asset transfer’. Those applications open door to further possibilities in new industries, such as ‘Manufacturing’, ‘Retail’ and ‘Energy Resources’ (Deloitte, 2019).
The underlying objective remains the same, maintaining a consensus on the terms of agreement and mitigating and diversifying the risks as far as possible in the extended transaction time and environment, no matter in which industry the technology is being applied to.
- Blockchain and Energy
3.1 Market Perspective and Challenges
The benefits that Blockchain provides are closely aligned with key transformational trends in power and utilities. According to the World Economic Forum (World Economic Forum, 2017) in the ”The Future of Electricity – New Technologies Transforming the Grid Edge” report, besides electrification, digitalization and decentralization are pointed as “trends of the grid edge transformation”.
Globalization and emerging markets are increasing its operation complexity around the globe, consequently extending its supply chain networks. Nevertheless, digitalization uses digital business models to create demand and establishes a concept based on consuming driven by experience and sustainability factors, two main technologies trends discussed in Davos according to WEF (Forum, 2020).
The transformations in the energy sector are tangible according to Deloitte’s report (Deloitte, 2018), macro and micro-economic trends are transforming global supply chains and most of them are already showing some results not only in the Power Utilities segment, but also in the Oil & Gas industry. The commodity complexity, whole supply-chain and product lifecycle, configures a challenge scenario to work with and give space to an increasing focus on consumer protection, product traceability and sustainability requirements, due to policy and regulations requirements.
Additionally, the volatility of the economy is causing financial, market, network and supply instability. In other words, the unstable commodity prices and broad supplier sites is increasing supplier lead time and costs. All of this associated with the political uncertainty and natural catastrophes, leads to disruptive events that Blockchain can make a difference by supporting industries to overcome the momentum and increase significantly its performance.
3.2 Industry Disruption
As previously mentioned, Blockchain is designed to enable significant performance efficiencies, as a result of low infrastructure costs and secure transactions that no longer need a centralized or ‘trusted’ third party. It is possible to mention a practical example of the technology application, which are the automated processes applied by using smart contracts aiming gain of efficiencies.
When thinking about the applications related to infrastructure and supply chain management, blockchain can be integrated with existing ERP which makes possible to record all transactions (beginning to end) and trace the item from point of origin to point of consumption. A business model would be the application of sensors on product packing and freighters that are internet enabled, registered in the Blockchain and linked with Smart Contracts to determine out of bound conditions, as stated by Papadodimas (Georgios Papadodimas, 2018).
Beyond a shadow of doubt, financial services and retailers are leading the way with Blockchain-based technology, nevertheless other industries, such as Construction and Power and Utilities are providing a variety of Blockchain solution-based. Many companies are already investing in wide range of projects, this statement is supported by IDC report (IDC FutureScape, 2019) when the pre-dictions shows that “By 2023, enterprises will invest nearly $11 billion in blockchain services — for example, consulting, implementation, maintenance, support — spending over one-third of that in-vestment on managed services.”.
3.3 Value Proposition in Energy Markets
According to Delloite in its Global Blockchain Survey (Deloitte, 2019), Commodity trading needs improved standardization, efficiency, and tracking of goods. But whether Blockchain is the technology that will deliver these benefits remains to be seen; industry players have yet to fully adopt it. The benefits that Blockchain technology provides are apparent but there are also critical disadvantages on several fronts.
Power and gas markets already benefit from high levels of standardization and transparency, and they deal in homogenous products. Therefore, according to BCG report (Belt & Kok, 2018) it is possible that, the existing systems offer not so many possibilities to be disrupted. The main reason for adopting Blockchain platforms will be to improve the efficiency of transactions, which would be definitely an advantage for markets, such as power and gas that have high transaction volumes. Blockchain uses possibly means a trading costs reduction, but it will have little direct effect on how the market functions. Most leading players in energy market have invested significantly in IT systems already, to manage their back office processes. Thus, the Blockchain insertion will be done gradually.
Blockchain has similar representative use cases for the energy market that enables the value chain in similar ways than to other industries. In other words, the technology provides improvements in the operations by implementing ‘smart contracts’ to manage energy prediction and forecast, for example. According to dena (Burger, Kuhlmann, Richard, & Weinmann) it means that, cost would be reduced and all trade would be verified and storage. Likewise, smart contracts are used to automate payment processing for the services and parts provided by partners. This aligned with the data tracking, makes possible to identify field resources and parts available across partner network more efficiently; also beneficial for the data audit that the industry requires.
According to Deloitte (Deloitte, 2019), manage infrastructure in real-time can be mention as one more leverage, by enabling more efficient monitoring and maintenance of power-industry infrastructure based on secure, real-time data communication tools. It allows a faster response between the providers mechanisms by triggering maintenance based on anomalies determined or even by processing automatic payments.
Additionally; dena (Burger, Kuhlmann, Richard, & Weinmann) acknowledge that as increasing competition and grid efficiency, due to the fact that the automation enables small energy producers to sell excess energy, thereby. The ‘smart contract’ concept plays a crucial role on more time, by being responsible for aggregating all production data and executing sales contracts of energy trade; establishing energy preferences for purchase and seamlessly manage flow without a centralized authority.
3.4 Blockchain Use Cases in the Energy Sector
As mention by BCG in (Belt & Kok, 2018) “Blockchain solutions could have a far more dramatic impact at the retail end power markets”. The technology is being used to develop peer-to-peer (P2P) online platforms, making possible to the best match between producers and buyers to trade energy; and provides a secure system that can verify instantaneous, autonomous transactions as market conditions change.
Furthermore, the technology makes possible the use of a cryptocurrency as a payment method; enables digital identity and signatures; secure distributed asset registries; provides green electricity certificates, and a allows a carbon market with fraud-proof registration. All of this not forgetting to mention that, it establishes a grid management by making possible the commercialization of power to communities (microgrids), settling payments with no central controller as well as, distributing grid balances supply and demand. Besides that, it is an incentive to set up a carbon market with fraud-proof distributed registry, where it could be also possible to collect the carbon taxes direct from appliances; maybe even implement an autonomous metering, billing and settlement.
PG&E (Pacific Gas and Electric Company) is a great example of digital ledgers application in energy sector. The company is taking advantage of the technology for equipment tracking; and also, it is creating carbon credits, as a result of its work alongside BMW that has a focusing on EV drivers. (King, 2018)
TenneT and Sonnen are collaborating to use Blockchain to stabilize the power grid, by integrating decentralized home energy storages system in the grid via Blockchain, as well as absorbing and discharging excess power in a matter of seconds. It is a precursor project in Europe using digital ledger technology, and it has a tremendous potential to reduce bottleneck in the grid; manage flow of electricity securely and intelligently; and integrating decentralized energy sources and secure supply. (TenneT, 2019)
The disruptive potential previously described can be also applied in the oil and gas segment across the lifecycle of energy commodities in upstream, midstream and downstream business operations. Blockchain can simplify management of assets, costs and revenues across multiple owners. Production can be monitored real-time and compared against nominations and minimum volume commitments. Transactions can then occur as soon as verification is received from all parties. (Koeppen & Bazilian, 2017) Commodities moving through truck, rail and waterborne vessels can easily be tracked and transacted against.
A key implementation in the industry is to automate parts of the commodity trading deal life cycle, where the technology “has the potential to transform the entire deal life cycle minimizing human intervention from trade execution to payment”. (Deloitte, 2016) While most of these applications leverage smart contracts and obtain the benefits of a decentralized storage system, it is also important to highlight the secure nature of the data exchange in the context; which reduces risk of fraud and error and would bring significant savings.
According to the survey conducted by ‘dena’ – German Energy Agency (Burger, Kuhlmann, Richard, & Weinmann), 87% of the Germany Energy Executives are implementing or at least planning to implement Blockchain technologies in their respective companies. They also believe that collective verification of transactions (‘disintermediation’) could replace utility’s role; as applications can bring together millions of end point users and device at the same time that it reduces authentication requirements.
- Conclusion
Blockchain continues to build significant momentum, mainly due to fact that promises to disruptive and transform business models in many industries. This has been seen as opportunity since many companies are exploring it as the potential solution to numerous challenges, targeting its potential to disrupt – by decreasing transaction times, smart contracts, lowering transaction costs, minimizing frauds and making micro-transactions possible.
“The blockchain has the ability to enhance reliability in business processes by eliminating political and economic risks associated with trusting a centralized system.” — Vitalik Buterin
This paper did a systematic review of the promising application of blockchain technology in different industries, and the main purpose was to expand the influence of blockchain technology in the energy market industry. In summary, blockchain technology has excellent potential in the energy markets industry, that still need some time to mature, although there are many opportunities, challenges, and risks already out there to overcome.
Specifically, this paper first introduces the core theory of blockchain technology in Section 2, including definition, characteristics, challenges and fields of application. Finally, this paper demonstrates the possible application scenarios of Blockchain in energy markets from four aspects in Section 3: market perspectives and challenges, industry disruption, its value proposition and uses cases.
The following conclusion were drawn: Blockchain technology can bring many opportunities to the oil and gas industry, such as reducing transaction costs and increasing transparency. Nonetheless, it also deal with many questions that need to be addressed by technical and regulatory resolutions. Yet, it is still very early days for Blockchain adoption, but the potential disruptive impact is significant enough to justify the appraisal, experimentation and implementation by energy market and other sectors enterprises today.
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