EPSRC-SFI: Blockchain transactions in the electricity industry: beyond tokenised energy

Cryptocurrencies such as Bitcoin are underpinned by a computer technology called blockchain, which has existed for around ten years. There are now proposals to use blockchain technologies to allow consumers to buy electricity directly from generators, in the form of tokenised energy.

This project will investigate the new opportunities that could arise if the trading of tokenised electricity gains broader adoption. In particular, the project will examine the role another new blockchain technology, known as smart contracts, can play in such a business landscape. Smart contracts allow financial and business arrangements to be codified directly into the blockchain itself, where they execute in a way that cannot be interfered with. This project will explore the potential for deploying smart contracts in various new roles connected with tokenised energy trading, for instance:

- to allow trading of other useful electricity services, such as targeting and rewarding reductions of consumption at times of high system stress;

- to coordinate the generation and consumption of electricity within local energy communities so they do not burden the physical utility network;

- to provide financial functions such as price guarantees for consumers or revenue-sharing schemes for community-owned energy resources.

A particular focus of the project will be on renewable energy: can these blockchain technologies speed up the decarbonisation of electricity grids?; and can empowering communities, consumers and renewable generators with new financial tools create a cleaner and more collaborative electricity system?

Overall, this project is a forward-looking piece of research which will guide how system operators adapt to blockchain technologies. The goal is give a well-rounded perspective on the full potential value that can be captured, rather than narrowly focusing on just the trading of tokenised energy itself. The project will show how positive interaction effects can arise, so that a vibrant blockchain sector can emerge across the electricity value chain, with each new piece of smart contract functionality complementing and adding value to the entire ecosystem.

This project aims to demonstrate how blockchain smart contracts can create a participatory financial ecosystem that offers value across the electricity sector.

Prosumers (consumers who own and proactively manage distributed energy resources) will benefit from new smart contracts that increase the utilisation of their energy resources, and de-risk their ownership. Smart contracts will be designed that facilitate the formation of cooperative federations between groups of prosumers, allowing them to enter into larger and longer-term energy and flexibility contracts. Hedging and risk-sharing arrangements built into the smart contracts will help address electricity price uncertainty, variable renewable generation and penalties for flexibility service non-delivery.

Blockchain-enabled peer-to-peer trading offers value for prosumers, and if properly managed, for the system as a whole. Matching local renewable generation with flexible demand can reduce upstream power flows and losses, alleviate the need for renewable curtailment and help defer costly distribution, transmission and generation infrastructure upgrades. However, a major unresolved challenge is how network constraints can be managed, without re-introducing a distribution system operator as a central authority. The project will address this by developing a novel methodology for calculating peer-to-peer network incentives, in the form of fees and subsidies, which help steer blockchain markets away from outcomes which would violate network constraints.

System operators will be able to make use of smart contracts to procure flexibility services from prosumers. Since, smart contracts are decentralised and directly negotiated, they are particularly suited for establishing transparent and competitive markets. Integrating owners of smaller scale flexible resources (e.g. electric vehicles, heat pumps) into flexibility markets would help increase liquidity and allow constraints to be managed on a more granular level. This is expected to become increasingly important, given government policies supporting the rapid electrification of heat and transport.

Overall, the aim of the project is to go beyond how blockchain smart contracts can benefit particular electricity market participants, by articulating how they can create value across the sector. Ultimately, the successful translation of the technologies developed during the project would be reflected in lower energy bills for consumers, even as the UK and the Republic of Ireland pursue ambitious decarbonisation objectives.