Blockchain microgrids: the future of energy transactions

Blockchain microgrids: the future of energy transactions


Author: Hamideh Bitaraf, Ph.D. – Microgrid Advisor

In the wake of Hurricane Harvey, utilities struggled to restore power to about 265,000 Texas customers, who suffered from power outages as of Aug 29, 2017 [1]. Puerto Rico is almost without electricity after a week that Hurricane Maria hit the island as of Sept 25, 2017. In these extreme weather situations, the value of microgrids becomes more visible: Microgrids can operate in an island mode when power outages occur, minimizing the vulnerability of power supply and increasing the reliability and resiliency of the grid.

With the increase of microgrids in the distribution system, energy transactions are undergoing a great transformation. In the blockchain concept, microgrids not only sell electricity back to the grid and provide ancillary services, but can also trade energy with their neighbor microgrids. But what is blockchain and how is this concept changing the energy industry? This article discusses microgrid revenue streams, the definition of blockchains and the blockchain technology in microgrids.

Microgrid revenue streams

Microgrids can provide multiple revenue streams to maximize the financial benefits as returns on investments. These revenue streams have a wide range, including peak shaving, increasing the renewable energy penetration and providing ancillary services. Microgrids can provide services to independent system operator services (ISO), utilities and customers, as shown in figure 1.

Figure 1: Microgrid revenue streams

When microgrids participate in wholesale markets, they can provide services to ISOs and receive revenues based on electricity market regulations. Energy arbitrage is a service where microgrids buy electricity at low rates (such as at night) and sell back at high rates during peak periods. Microgrids can provide frequency regulation as a service to ISOs to keep the balance between power supply and demand at all times. Each electricity market has set different regulations to participate in frequency regulation services. For example, the German market holds weekly auctions of the primary control and frequency regulation market and the service is paid as bid. The minimum capacity to participate in Germany’s frequency regulation market is 1 MW. Microgrids can also provide spin/non-spin reserve by their installed battery or a backup generator like diesel engines. Voltage support and black-start can be provided by microgrids.

Microgrids can help defer investments in large-scale power plants by increasing the distributed generation in the power system. For example, installing rooftop photovoltaic cells (PVs) decreases demand in the distribution system and provides resource adequacy, which means that transmission and distribution system upgrades can be delayed. Additionally, utilities can be charged high fees by ISOs when using congested transmission lines. Microgrids can relieve congestion on transmission lines and eliminate those high fees.

Microgrids provide benefits to customers as well. Batteries enable microgrids to increase the PV self-consumption and avoid renewable curtailments. Microgrids can operate in an island mode (off-grid) during power outages. This is critical for commercial and industrial customers, such as factories, who will have significant economic losses during power outages. Microgrids can reduce the total energy consumption by distributed energy sources, provide peak shaving for demand charge management and manage energy purchase based on time-of-use rates. These capabilities enable customers to manage their monthly electricity bills.

Microgrids are not limited to providing only one application; in fact, they can reach maximum financial value by participating in different markets and providing multiple revenue streams. Nevertheless, there are barriers to microgrids participating in different markets; the main barrier is electricity regulations. Microgrid revenue streams are possible if there is fair access to the market. All these value streams are the result of a transaction between a microgrid and a utility or an independent system operator. But what if microgrids could have energy transactions with each other as well? That might be the solution to regulatory barriers.

What is “blockchain” and how does it work?

Financial activities occur in business networks where the participants (such as producers, customers and market enablers) own and control their rights to assets. Asset ownership and transfers are transactions that involve buyers, sellers and intermediaries (such as banks) whose business agreements are documented in ledgers. Multiple ledgers, the systems of record for financial activities, are used to keep track of transactions.

A blockchain is:

“a tamper-evident, shared digital ledger that records transactions in a public or private peer-to-peer network. Distributed to all member nodes in the network, the ledger permanently records, in a sequential chain of cryptographic hash-linked blocks, the history of asset exchanges that take place between the peers in the network. All the confirmed and validated transaction blocks are linked and chained from the beginning of the chain to the most current block, hence the name blockchain. The blockchain thus acts as a single source of truth, and members in a blockchain network can view only those transactions that are relevant to them.”[2]

The blockchain technology is complex, but the idea behind it is very simple. It enables peer-to-peer (P2P) transaction directly between participants without involving a third party. The transactions are distributed to all participants instead of being stored in a central database, saving costs and time while increasing transaction integrity and security. [2]

Blockchain microgrids

The blockchain technology with P2P energy trading enables microgrids to trade excess energy from solar panels and batteries directly with each other without a retailer or a local utility in between. As a result, microgrids can negotiate and determine the value with each other. Figure 2 illustrates the differences between the traditional transaction model and the blockchain model with a P2P trading environment.

Figure 2: Transformation of the electricity market with blockchain technology

In the traditional transaction model, energy is produced via centralized generation and delivered to consumers through the distribution system operated by energy companies. In this system, banks operate as payment system providers, managing the financial transactions so that microgrids can sell back their excess electricity to the grid based on defined rates. Blockchain transactions, as a decentralized model, enable microgrids to trade their excess electricity directly with their neighboring microgrids, as shown in figure 2, without requiring energy companies or banks as intermediaries. Blockchain microgrids can ensure that local energy production is consumed locally as well, which will help prevent transmission congestion and defer infrastructure upgrades. In this market, consumers can choose to buy electricity from neighbors’ rooftop PVs, nearby wind power parks or centralized power plants.

Pilot projects in blockchain microgrids

There are two microgrid pilot projects currently operating with blockchain technology globally. One is located Brooklyn, New York, and the other one is in Australia.

The Brooklyn microgrid is a project based on blockchain platform to create a local energy network enabling a peer-to-peer trading platform. This platform is provided by LO3 Energy, which designed the platform as a solution for New York’s Reforming the Energy Vision (REV). The 50 or so homeowners, schools, a gas station, a fire station and a factory building are now able to trade energy without any intermediaries. Auctions oriented toward the top price per kilowatt-hour that an energy consumer is willing to pay determine the prices of these transactions. The value of this microgrid is that renewable energy by rooftop PVs stays in the neighborhood and is consumed locally, while being more resilient to extreme weather events. [3]

Power Ledger, an Australian startup company, was described as the “Uber of Power” for its potential to enable blockchain technology in the energy industry. The Power Ledger system uses blockchain to enable residents in a retirement village in the city of Busselton, Western Australia, to trade energy among themselves at a price greater than feed-in tariffs but lower than residential retail tariffs. Hence, it provides an incentive for developers to install rooftop PV and invest in renewable energies. This project includes 20 households and a clubhouse to track their energy usage. [4]

ABB microgrid advisory services

Microgrids are clearly a fast-growing industry with a bright future. ABB is providing an end-to-end solution for microgrids from advisory and consulting services to products and implementations. If you’re considering whether to invest in a microgrid project, or are building a microgrid, ABB’s Microgrid Advisory group can help to evaluate different value streams of microgrids in electricity markets around the world! Register to receive updates on ABB’s Microgrids Advisory services and be notified of newly available microgrids case studies, webinars and events. Visit our website, ABB microgrids solutions to read about ABB’s experience in microgrids projects