In economic terms, electricity (both power and energy) is a commodity capable of being bought, sold, and traded. [1] An electricity market is a system enabling purchases and short-term trades, generally in the form of financial or obligation swaps. Bids and offers use supply and demand principles to set the price. Transactions (bids and offers) in electricity are typically cleared and settled by the “market operator” or a special-purpose independent entity charged exclusively with that function such as an Independent System Operator (ISO).
Let us illustrate the function of a typical ISO like the one in the State of New York in the USA. [2] It’s mission is to reliably manage New York’s power grid and energy markets consisting of 11,000 circuit miles of transmission lines. Their membership includes organizations which own 760 power generation units generating over 1,400MW of power. Its mission also is to “coordinate and direct the flow of electricity every minute of every day over the NY state’s high-voltage transmission system.“
How is energy trading managed by a typical ISO like the one in NY State? Today, energy trading is done using a scheme as in Figure 1. Each ISO partner has the capability to access ISO’s server through secure links as shown in Figure 1. Through this scheme, each ISO partner can buy or sell energy as is required. This is a reliable scheme, but it has two serious weaknesses. The first weakness is the settlement time as it can take 7-10 days to finalize the payment related to the transaction between partners. The second weakness stems from the fact that the bank fees associated with settlement can be quite high.
A future looking system for energy trading will be powered by Smart Contracts over the Blockchain as shown in Figure 2. The ISO Server inserts energy trading settlement information on Blockchain and all the partners can now access the information in a secure way.
The next step in evolution in energy trading would use a private Blockchain network, owned and operated by the ISO, to interconnect the ISO server node with the partner nodes. This is shown in Figure 3. All data exchange for energy trading is done through the blockchain network. All trading settlement information is inserted by the ISO node on the Blockchain. In addition, the ISO will create its own cryptocurrency for settlement of the trading, thus reducing the settlement time and removing large centralized banking institutions as middle men.
Blockchain use cases are proliferating in the energy domain. The evolution will be gradual, but the Utilities have already started the research and development in this area.
What we have illustrated in Figure 2 and 3 are just the beginning.
We believe the possible application of Smart Contracts in the energy domain are limitless.
Private Blockchain networks will be the mechanism for energy trading and ISO specific crypto currencies will be used extensively for the settlement of trading contracts. This future is here and now.
In future blogs, we will discuss additional energy use cases for Smart Contracts over Blockchain in the energy domain.
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