Blockchain could help China’s push for decentralized energy

Large utility companies have long held a monopoly on electricity production. Since the late 1800s both state-owned and privately-held enterprises have taken advantage of economies of scale to profit from the creation and distribution of power.

The situation in China is no different. A push for energy reform beginning in the 1980s eventually resulted in the dissolution of the State Power Corporation of China, but the country’s electric grids are still overseen by just two companies: the State Grid Corporation of China and China Southern Power Grid. These firms hold geographical monopolies—one in the north and one in the south—on the transmission of energy, which is largely generated by five state-owned enterprises.

The justifications for centralization are numerous: efficiency, innovation in transmitting electricity over long distances, regulation, and more. But the paradigm is shifting.

The development of increasingly efficient—and affordable —alternative energy sources is prompting the evolution of a system that isn’t characterized by the monopoly of centralized production. Instead, individuals themselves generate and sell electricity, mimicking the distributed nature of the technology that underpins it—blockchain.

“The bigger picture is that we establish decentralized autonomous energy communities,” Lathika Chandra Mouli, business development manager at Shanghai-based Energo Labs, told TechNode. “You have energy trading, and you have locally produced energy being consumed first, and then the grid is used as a backup.”

The system is more straightforward than it sounds. Prosumers—those who create and use electricity—are connected to consumers on a local utility grid (microgrid). Depending on a range of factors, including geography, these local grids can function independently of or in conjunction with the main power grid. The solar-equipped prosumers then sell excess electricity they have created to consumers.

The result is that energy is sold as a digital asset. Energo Labs built a distributed app (dApp) on the Qtum Blockchain to facilitate this, with plans to move to its own public chain later this year.  The app allows users to check their local energy market, negotiate prices, and set automatic buy and sell thresholds. It is currently being used in a proof of concept pilot project at De La Salle University in Manila, Philippines.

Decentralized infrastructure

While peer-to-peer energy exchange is relatively novel, the idea of decentralizing energy production is not. Traditionally, large-scale power plants are set up close to power-generating resources. Electricity is then transmitted over long distances to reach centers that distribute it to consumers.

But transmission costs can be enormous, primarily due to energy loss over long distances. In China, average losses account for around 5.5% of all energy produced, resulting in substantial carbon emissions and higher electricity prices.

“Large-scale wind farms and solar parks helped the development of these industries in their early stages,” Shen Wei, a research fellow at the Institute of Development Studies (IDS), told TechNode. “But it has become obvious that there are side effects for such modes of development.”

This is especially true of the energy producers in China’s north-eastern regions—Gansu and Xinjiang—where local energy usage is low, and electricity needs to be transmitted to the east coast where the demand is much higher.

Decentralized production aims to address these transmission issues by placing energy sources closer to consumers. Proximity minimizes energy losses and infrastructure expenditure, thereby curtailing costs. Government subsidies are driving this general trend in eastern China while removing or decreasing them for large-scale production systems.

“Companies are looking at distributed systems for wind and solar in particular,” said Shen. “There are a lot of debates about this: technologically, politically, and economically. I think this trend is inevitable; it’s just how the companies will realize that and adapt to it.”

Energy trading

However, these systems are generally only geographically decentralized. They still render individuals powerless when it comes to energy generation, while large utilities control the production system. Energo Labs and other companies are trying to change this by making consumers active participants in the creation process.

To do this, every household on a microgrid requires links to other homes and a smart meter. The device measures how much electricity is produced, consumed, and transacted. Additionally, prosumers need solar panels and energy storage systems, allowing them to store and sell excess energy they produce.

It’s not just houses that could be affected by energy trading. In high-density areas where residential apartments dominate, access to solar panels and storage could be shared, with savings being distributed among residents.

But there are obvious limitations. “Energy storage will change how energy trading happens and how renewable energy is produced and consumed,” said Mouli. She says access to energy storage is what the company is betting on.

Conveniently, this is also a focus of the Chinese government. In 2017, the country’s National Development and Reform Commission (NDRC) released a document calling for government institutions, energy utilities, and private companies to develop, support, and utilize emerging energy storage technologies.

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Regardless of storage systems’ decreasing prices, they remain one of the most significant barriers to adoption. This is especially true in urban areas, where energy consumption is extremely high, requiring not only large numbers of photovoltaic panels but also very efficient storage systems. Mouli says that finding financing for storage systems as well as for maintenance of all the equipment is one of the biggest struggles the company is facing.

For love or token

Despite high entry costs, peer-to-peer energy systems aim to incentivize investment in renewable technologies. Allowing individuals to sell their excess electricity, and more importantly, negotiate the price they want for the electricity, holds significant value.

Systems already exist where homeowners who generate more energy than they need can feed it into the main grid. However, producers don’t get to choose how much their electricity is worth—the energy utilities do.

“But here, you can basically sell your energy to a neighbor, and you can ask them for a particular price, or you can have different pricing mechanisms that have more economic incentives,” said Mouli.

Additionally, the system allows for homeowners to live a more carbon-neutral lifestyle and consciously choose a more sustainable option, she says. But the social impact is higher in rural communities, where there is limited access to the grid. A school with solar panels could function as a prosumer by distributing excess stored energy to surrounding houses at night, increasing security and quality of life for the entire community.

Useful byproducts

While blockchain provides a system for trading energy as a digital asset, it also creates a valuable resource: data.

A network of distributed hardware would be difficult to run with an effective management mechanism. Blockchain in this context allows for the safe storage of usage data, reduces operation costs by eliminating middlemen, and helps garner insights on generation, consumption, and transactions.

Analysis of usage data can then be used to predict problems such as outages in a large scale microgrid. But, most importantly Mouli says, the data will help energy trading gain wider acceptance.

“One of the most important applications we are focusing on is policy, she said. “So using the data to change policies on energy trading, and being able to approach utilities and governments to show the benefits of energy trading in different contexts, including financially and environmentally.”

Changes in Chinese energy policy are in part focus on addressing the power imbalance between the two grid operators and numerous electrical utilities. The government is seeking to deregulate the sector by revoking the grid companies’ ability to sell electricity, instead allowing private companies to enter the energy selling market.

But addressing cryptocurrency regulation is a more pressing issue for the nascent energy trading market. The Chinese government has led an intensifying crackdown on cryptocurrencies over the past year. In September 2017, regulators began moving to ban initial coin offerings (ICOs), exchanges, cryptocurrency events, and online forums that discuss virtual currencies. As a result, any form of token-based trading system in China will be affected.

Mouli says that Energo Labs’ focus is Southeast Asia and Taiwan, but they are speaking to various stakeholders in China. “Peer-to-peer still has a long way to go in terms of regulations in China,” she said, adding that the company eventually does want to provide access to their energy trading platform in China.

But it’s not just cryptocurrency regulations that pose challenges to peer-to-peer energy trading networks. Utilities and grid operators may be unwilling to forego control over the market.

“The grid companies are very powerful as a political interest group,” said Shen. They are so powerful, in fact, that they were able to limit reforms in the 80s to demonopolize the energy sector. Shen refers to the combination of energy industry players and the government as a “policy community.”

If industry players see a system like this as a threat, they have the power to influence policymaking and create regulations that make its functioning impossible.

“How [do we] persuade the grid to accept this strategy?” said Shen, referring to general decentralization of the energy sector. “The grid is so powerful, and my recent analysis is that every time they can successfully bend the policy orientations according to their own interests.”

But Mouli doesn’t see the energy trading as an opposition movement to traditional utility companies. In the new paradigm, she believes, their role will shift from generators and distributors of energy to that of an overseer of a new system. “They will still be responsible for maintaining all of the energy transactions, production, consumption, and ensuring that there is energy equality across the country,” she says.

Nonetheless, effective implementation in China is a long way off. In the meantime, energy utilities and private companies will lead the charge in the country’s push for renewable energy parity.