Blockchain technologies as enabler for decentralized and regional energy balancing services - Seminar Paper Adrian Degode

E-Energy - Information Systems and Machine
Learning for the Smart Grid
– SEMINAR SUMMER SEMESTER 2016 –
Blockchain technologies as enabler for
decentralized and regional energy balancing
services
– SEMINAR PAPER –
Submitted by:
Adrian Degode
Student ID: 3110192
Advisor:
Stefan Reichert

Table of Contents
1. Introduction................................................................................................................................................................1
1.1 Contribution and Outline.............................................................................................................................2
2. Grid flexibility as key towards a successful energy transition ..............................................................3
3. Challenges and Barriers for the Sharing Economy in the Energy Market ........................................5
4. Blockchain Technologies: A Game Changer for the Energy sector......................................................7
4.1 An Introduction to Blockchain Technologies......................................................................................7
4.2 Smart Contracts – A Key Element for Future Energy Trading.....................................................9
4.3 Microgrids as Foundation of an Implementation of the Blockchain and Smart Contracts
in the Energy Market ................................................................................................................................................10
5. Evaluation and Discussion.................................................................................................................................14
Limitation and future research .................................................................................................................................17
References..........................................................................................................................................................................18

Blockchain technologies as enabler for decentralized and regional energy balancing services
1
1. Introduction
“Some people don't like change, but you need to embrace change
if the alternative is disaster.” - Elon Musk
Facing global warming (climate.nasa.gov/evidence) and a world population that is expected to
reach 9.7 billion people by 2050 (United Nations Department of Economic and Social Affairs,
2015), global demand for electricity will undoubtedly further grow in the future (IEA, 2015; Pyke,
2012). The amount of renewable energy production around the globe, especially in the area of
photovoltaics and wind turbines, increased notably within recent years (IEA, 2013; IEA, 2014)
and is expected to increase further in future (IEA, 2015). This new way of decentralized electricity
production, as helpful as it may be for fighting climate change, also implies new problems for the
energy markets. Grid providers around the world struggle with increasing amounts of
intermittent renewable energy being fed into their grids, searching for new ways of coping with
this changed grid situation in efficient ways. Furthermore, in combination with ongoing
decentralization, the idea of the sharing economy leads more and more to the desire of consumers
to participate in the energy market by not only consuming but also producing energy, thus to be
prosumers. While the concept of a market indicates the possibility of trading for all market
participants, yet, these power-generating prosumers did not have any real possibility to access
the energy market which, until today, remains a reserved privilege of utility companies around
the globe. While new business models from the sharing economy are trying to find new ways for
prosumers to participate and to share their electricity with others, an outdated grid architecture
and energy policies still hinder the sharing economy from fully deploying its potential. A radical
rethinking of the present large scale grid architecture towards smaller, more efficient community-
and microgrids could be needed to leverage an energy revolution that is able to deal with future
energy production that, most likely, will be decentralized for the biggest part. A fairly new,
groundbreaking technology called blockchain, which originates from the area of the crypto-
currency Bitcoin (Nakamoto, 2008), has recently gained a lot of attention as it paves the way
towards new revolutionary market concepts for a number of industries, including the energy
sector. By using the blockchain technology and combining it with smart contracts, smart meters
and energy storage systems, new small-scale energy trading markets comparable to energy stock
exchanges like the EEX could evolve and thereby offer a viable architecture to balance the power
grids with a bottom-up instead of a top-down approach. As a consequence of the ongoing
digitalization of the energy sector and the decentralization of energy production and also with
regard to new energy market models of the future, the classical utility companies will not be able
to do business as usual but will need to embrace change and quickly adapt to the changing market
conditions if they want to survive in this market. However, it is unclear which role utility
companies will play in future energy markets.

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1.1 Contribution and Outline
The work presents a comprehensive overview of the problems for the energy industry that arise
with the energy transition and the increasing decentralized energy production also with regard
to the idea and the movement of the sharing economy and its business models in the energy sector.
Furthermore, the work provides an adequate introduction to the blockchain technology and the
follow-up technology of smart contracts. Thus, also the key advantages of these technologies and
their potential for future energy trading are given. For utility companies and executives of the
energy industry, this work additionally offers a viable model for a blockchain implementation
which could serve as a general starting point for further development of business models in that
area. Finally, the transformation of the classical utility company in the future is discussed and
possible directions for new business models for utility companies are provided.
The remainder is structured as follows: Chapter 2 begins with a general introduction to the
problems for grid stability that arise with the energy transition and therefore explains the
importance of flexibility in production, storage, and consumption of energy and the resulting
implications for the energy market. Chapter 3 then shortly introduces to the idea of the sharing
economy and furthermore points out the barriers that need to be overcome for this movement
and existing sharing economy companies to be successful in future. In chapter 4, a definition of
the blockchain and a brief introduction to the core idea and advantages will be given, followed by
an introduction to the blockchain related key technology of smart contracts which takes an
important role for future energy trading. Combining these two technologies, this work then offers
a realistic energy market model in chapter 4.3. This paper closes with an evaluation and
discussion about future energy markets and possible new business models for classical utility
companies which might prevent these companies from becoming extinct in future.

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2. Grid flexibility as key towards a successful energy transition
Today, a steadily increasing part of the produced renewable energy originates from residential
areas (SEIA, 2016), which due to the out-of-date grid architecture of most countries, poses a
potential danger to the stability of their power grids for the future. These grids were traditionally
built unidirectional, which means cascading energy from large power plants to the consumer.
However today, in times of decentralized renewable energy production, electricity flows in the
reverse direction into the grid and therefore endangers a system that has worked well for a
hundred years. While the term renewable energy sources can refer to various different ways of
energy production, such as biomass power plants, hydropower turbines or combined heat and
power turbines (Mohd, Ortjohann, Schmelter, Hamsic & Morton, 2008), the focus for the energy
transition clearly lies on renewable energy sources such as wind turbines and PV solar systems
which are intermittent, meaning they undergo large fluctuations. Furthermore, they exhibit
uncertainty, which means they are: “random or not known in advance.” (Ziekow, Strüker, Goebel
& Jacobson, 2013, p. 229).
However, as today’s power grids were designed for managing constant but not intermittent ways
of energy production, the rising amount of implemented distributed energy resources (DERs) in
the area of medium to low voltage distribution systems within recent years (IEA, 2013; IEA, 2014)
and also in the future (IEA, 2015), constitutes a challenge for Transmission System Operators
(TSO’s) (Denholm & Hand, 2011), whose job it is to maintain a reliable power grid. However, by
offering a combination of grid flexibility in terms of energy production, consumption, and storage,
energy fluctuations caused by wind- and solar power could be internalized.
The problem with flexibility in production however is that in contrast to conventional types of
energy generation, that means gas-, coal- and nuclear power plants (Van den Bergh & Delarue,
2015), production from wind turbines and PV solar systems cannot be controlled in terms of their
output other than completely disconnecting them from the grid. The latter, however, would result
in energy curtailment which is economically inefficient and therefore undesirable. Conventional
production, in turn, in terms of grid stabilization, is extremely slow when it comes to cycling the
production up and down, taking up to hours and days which is impractical. Furthermore, the cost
for cycling their production as needed is high (Van den Bergh & Delarue, 2015). Therefore,
alternative more efficient technologies that are able to deliver balancing power within short times,
are needed to successfully manage fluctuations in the power grids in future (Ziekow et al., 2013).
Within the last years, energy storage has been favored more and more as this technology. This is
mainly due to technological improvements in its efficiency (Naam, 2015) and the fact that the
price for storage units has decreased drastically over the last years (Nykvist & Nilsson, 2015).

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While there are numerous different ways of storing energy such as, pumped hydro storage,
compressed air storage or flywheels just to name a few, the most popular one for the future will
most likely be normal battery storage in small scales as it can be observed with regard to
worldwide development of the energy markets today, where big players such as Tesla have picked
up this topic.
By storing electricity when there is plenty and feeding it back into the grid when energy supply is
small, also known as Load Shifting, flexibility in storage can be a strong contributor to absorb
fluctuations and subsequently rebalance the grid. The only hindrance to implementing storage in
larger scales today, however, is the still very high price of these units (Martin, 2015). How
economically efficient their use can be, besides their production cost, also depends on the
legislation or the energy prices in the respective country. Nevertheless, storage units will
undoubtedly play a major role in new business models emerging in the energy market today, also
with regard to the sharing economy where companies such as LichtBlick from Germany are
entering the market with new business models such as their SchwarmEnergie.
Another possibility to improve flexibility in a grid is by means of consumption control. This
approach achieves its goal through the so-called Demand Side Management (DSM) which, instead
of following the classical way (balancing the grid by supplying the exact amount of electricity that
is demanded), rather controls demand by letting consumers participate in the system
(Gelazanskas and Gamage, 2014, p. 23). Although by today, not many small consumers participate
in Demand Response (DR) programs, there is a high chance of it to gain attention in future as the
energy transition is moving forward and will need to be appropriately dealt with.
However, with the help of permanently improving Information and Communication Technology
(ICT), increasing roll-outs of smart meters (Navigant Research, 2013; Ets insights, 2013), and a
world that is straight forward heading towards the Internet of Things, innovations like smart grids
and smart homes will most likely soon be successfully implemented in many developed countries,
making DSM easier than before to reach out to the critical masses. Yet, companies such as AutoGrid
from California, USA, offer complete big data packages for utilities all over the world that provide
automated processes in all of the three above-mentioned areas of flexibility.

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3. Challenges and Barriers for the Sharing Economy in the Energy
Market
All over the world, companies like Airbnb, which is often said to be at the heart of the sharing
economy, gain more popularity and attention every day. While the idea of the sharing economy
was not originated in the energy sector, yet it has also arrived in this part of the market lately,
offering plenty ideas and new business models that try to make use of the positive trend of
renewable energy production on a residential level. While the Idea of the sharing economy is: “…
a socio-economic ecosystem built around the sharing of human and physical resources. … which
… includes the shared creation, production, distribution, trade and consumption of goods and
services by different people and organizations.” (Matofska, 2013), until today this idea could not
be fully deployed in the energy markets due to certain barriers.
Although there is an increasing number of Peer-2-Peer (P2P) based sharing companies from the
energy sector all over the world such as Vandebron (NL), Yeloha (USA) or Buzzn (GER), just to
name a few, the very outdated power system architecture with its TSO’s who have a natural
monopoly on the national grids, and furthermore the very obsolete current legal environment in
most countries, strongly hinder a large scale adoption of local energy sharing and trading. In
Europe e.g., it is not possible for a normal person to buy or sell electricity from and to a neighbor
for example. However, that is what the sharing economy is actually about, cutting off the third
parties and doing business P2P. Besides the usual OTC (over-the-counter) business deals, the
opportunity of buying and selling energy at an energy stock market such as the European Energy
Exchange (EEX), is only reserved for electricity utilities or large industrial companies that need
huge amounts of energy. Furthermore, the minimum trade amount is set to 1 Megawatt for the
futures market (www.eex.com) and to 0,1 Megawatt for the day ahead market (also called Spot
Market) (www.epexspot.com), which, even if any individual was allowed to trade electricity, due
to large minimum amounts would exclude almost every person from the EEX/EPEX. While the fact
that only licensed utilities are allowed to use the EEX is due to legislation, the high minimum
trading amounts are not. The latter has to do with the accounting systems of the Stock exchange
and the transaction costs which would be too high for trading small scale amounts.
Therefore, to allow also small energy producers to participate in the energy sector, there should
be better and more efficient ways of energy trading than a slow and bureaucratic process like
there exists today at energy stock exchanges. In future, new trading concepts should make use of
new information and communication technology and automated processes to drastically lower
the cost on the one hand and to increase flexibility and speed of trading on the other hand.

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Today, however, between the monopoly of Transmission System Operators and the end
consumer, by system architecture, there has to operate an intermediary such as classical energy
providers like e.g. e.on from Germany, or new companies from the sharing economy like buzzn or
Lichtblick. Formally, however, there is no difference between them as also energy companies
from the sharing economy, although having completely different business models, are equally
licensed as power utility companies. The reason for the need for third parties today is, that every
utility has to maintain virtual balancing groups, listing the energy consumption and production
patterns of the entirety of their customers. Every day, this information has to be handed over to
the respective TSO for it to thereupon manage the grid stability via positive or negative control
energy. An inherent part of balancing the grid thus originates from the ability of third parties to
precisely forecast the usage profiles of their customers’ household consumption and manage the
correspondence with the grid providers. In a perfect sharing economy without intermediaries
which completely leverages the P2P thought in the energy sector, this task and many others would
need to be fulfilled by the prosumers themselves which constitued a problem as yet, they lack the
resources for this duty.
Nonetheless, as decentralized energy production is constantly increasing due to the rising desire
of the people to participate in this market, the idea of a perfect sharing economy in the energy
sector should be considered as a scenario that will likely take place in future. Envisioning such a
scenario, the question arises as to which extent utility companies will still exist in such a market.
Therefore, possible scenarios should be assessed. The most promising one which has huge
potential to change the way energy markets and utilities will operate in the future, especially with
regard to the sharing economy, makes use of the so-called blockchain technology. A technology,
that, in combination with several other transformation processes in the area of energy policy and
technology, could enable a new way of fine-grained, small scale energy trading. An introduction
to this technology will be given in the subsequent chapter, followed by possible implementation
use cases for the energy sector.

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4. Blockchain Technologies: A Game Changer for the Energy sector
Although the blockchain technology was already mentioned by (pseudonym) Satoshi Nakamoto
(2008), it took until today, that the Blockchain hype arrived in the economy worldwide. Besides
the most obvious area to implement it, the finance industry, blockchain technologies recently also
gained attention in combination with the energy market and the energy transition.
4.1 An Introduction to Blockchain Technologies
To understand the way in which the energy market could benefit from such a technology,
however, it is important to first get a general idea about what a blockchain is and how it works.
While the term blockchain technologies is used a lot recently, people often actually use it to
describe different things, starting from meaning the bitcoin blockchain over virtual currencies to
smart contracts. The most common understanding, however, is a blockchain as the so-called
distributed ledger. In other words, a record of transactions or information in general, that is
distributed as a copy to every computer in the respective participating network (Swan, 2015;
Grewal-Carr & Marshall, 2016). Therefore, while the technology behind blockchain is very
complex, the core idea itself is rather simple. According to Don and Alex Tapscott (2016a), from
the Harvard Business Review a blockchain can be described as:
“… a vast, global distributed ledger or database running on millions of devices and open to
anyone, where not just information but anything of value – money, titles, deeds, music, art,
scientific discoveries, intellectual property, and even votes – can be moved and stored
securely and privately.”.
Following this notation, one might say: just another database. A database, however, that according
to Swan (2015, p. 1), is: “updated by miners [participants of the network], monitored by everyone,
and owned and controlled by no one.”, which clearly distinguishes it from every other database
on the market. Furthermore, a blockchain owes its potential to several valuable characteristics
where the most striking one, is probably the way it establishes trust. While in our world today it
is quite usual that trust is provided by intermediaries such as the government, banks or tech
companies, with the blockchain, in contrast, trust is achieved by a smart system architecture and
the collaboration of the masses (Tapscott, 2016). While every entity that participates in a
blockchain can review the information that has been stored in it, changes or new entries to the
system can only be done by reaching a so-called consensus among the majority of all the
participating entities. However, every information that has entered the blockchain may never be
deleted anymore, fortifying the trust component even further. In addition, according to Gault

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(2015), “(…) a blockchain contains an accurate and verifiable record of every transaction ever
made”.
This brings us to another valuable attribute that, according to Schatzky and Muraskin (2015) from
Deloitte University, is one out of five key characteristics offered by this technology: A Blockchain
is Irrevocable as any transaction entered will remain stored securely forever. While this
characteristic makes this technology highly accurate and therefore also cost saving, it also
enforces the irrefutability of a blockchain. Furthermore, a blockchain is Immutable in so far, as it
is technically almost impossible to alter any information stored in it without being detected. To
fulfill such an action, the attacker would need at least more than 50% of the whole computing
power of the network. In combination with that, another hindrance for attackers is the fact that
the blockchain is encrypted: “It uses heavy-duty encryption involving public and private keys … to
maintain virtual security.” (Tapscott, 2016b). This attribute again strengthens the trust
component as it heavily reduces the chance for fraudulent activities.
Another characteristic mentioned by Schatzky and Muraskin (2015) is Reliability and
Availability. While a blockchain is usually shared among large amounts of different participants,
in contrast to ordinary databases, it has no single point of failure (Tapscott, 2016b), and is
therefore protected against outages or attacks. Therefore, if one entity within the network fails
whatsoever, the remaining participants will continue their operations and keep the system
running as usual. Yet another strength of the blockchain is that it is completely Digital. Nowadays,
any information, document or asset, in general, can be expressed digitally in the form of code and
thus managed and stored in a blockchain. As today, we are living in a world that is digitalized more
and more, this trait is also one of the reasons why the blockchain technology applies to so many
different areas of application and is said to be a truly disruptive innovation that will change the
world. Finally, Schatzky and Muraskin (2015) name Transparency in terms of every participant
being able to see transactions executed on the blockchain, as a valuable characteristic. While
transparency is primarily seen as a positive attribute (e.g. easing auditability), depending on the
use case, too much transparency towards the public, however, may not be in the interest of the
operator. Therefore, different types of blockchains exist: Public blockchains and Private
blockchains. Bitcoin e.g. is based running on a public blockchain, which means that anybody can
write and read data in and from the ledger without permission.
Furthermore, participants on a public blockchain are anonymous in so far as they are only
expressed by a random number to the public which is their personal address or in the case of
bitcoin wallet. In private blockchains however, a priori all participants are known and have
permission to write information into the ledger (Grewal-Carr, V. & Marshall, 2016). Therefore,
only participants who are allowed to participate can use the ledger and its information.

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4.2 Smart Contracts – A Key Element for Future Energy Trading
Besides the general advantages and characteristics of a blockchain, there is another central and
important opportunity that arises with this new technology: smart contracts. According to Vitalik
Buterin (2016), a leading programmer and co-founder of Ethereum, a Next-Generation
Cryptocurrency and decentralized application platform that has been heralded as bitcoin 2.0, a
smart contract is: “… a computer program that directly controls some digital asset.". First
discussed by Szabo in 1997: “Smart contracts constitute computer protocols that aim to facilitate,
verify and enforce the negotiation or performance of a contract” (Brenig et al., 2016, p. 4). More
precisely, a smart contract is an agreement which is represented as a software application and
which can automatically initiate certain actions under certain conditions, e.g. if a payment has
been made or is missing (Bogart & Rice, 2015). Today, companies like Ethereum use Turing-
complete scripting languages to implement smart contracts which then can be executed on
suitable computing systems, such as distributed ledger systems (Blockchains) (Ethereum, 2015).
As nicely illustrated by Brenig et al. (2016, p. 4) this kind of program architecture: “… increases
the complexity of applications, since the automatic fulfillment of contractual obligations can be
conditional on the occurrence of external contract-related events sending information to the
programmed contract.”.
According to the Government Office for Science from the United Kingdom (2016), smart contracts
offer high potential in terms of low cost for contracting, enforcement and compliance.
Furthermore, due to their self-enforcing nature, smart contracts generally cut administrative costs
(Schatzky & Muraskin, 2015). Consequently, and opposed to the past, by using smart contracts it
will, therefore, be economically applicable to form contracts over an infinite amount of low-value
transactions (Government Office for Science, 2016).
This fact brings us to the actual potential of smart contracts running on a blockchain for the energy
sector. As mentioned before, until today energy trading was only possible at energy stock
exchanges such as the EEX on a larger scale. The minimum trading amounts of 0.1-1 MWh
however, are primarily set that high due to transaction costs as smaller trading amounts would
not be economically feasible. By using the aforementioned blockchain technology and combining
it with the idea of self-automated and self-enforcing smart contracts, the transaction costs for
energy trading could be significantly reduced and therefore allow small scale, low-value
transactions on micro-generation level.
As until today, the energy market remained a playing field of institutionalized energy suppliers,
consumers, and prosumers were hindered from exploiting the economic advantages of micro-
generation markets (Government Office for Science, 2016) such a strengthened local economy or

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notably reduced energy prices. With a new system architecture of using the blockchain and
connecting it with smart-metering technology as well as local battery systems (such as Tesla’s
Powerwall or sonnenBatterie from the company Sonnen), a new possibility arises to open the
energy market to prosumer production. This new viable system architecture will be explained in
more detail in the subsequent chapter.
4.3 Microgrids as Foundation of an Implementation of the Blockchain
and Smart Contracts in the Energy Market
First of all, it is important to mention that a revolutionary development of a functional energy
market which leverages energy trading on a residential level by means of blockchain technology
and smart contracts, is based on the general idea of so-called microgrids or community grids.
The U.S. Department of Energy (2011, p. 4) defines a microgrid as
“A group of interconnected loads and distributed energy resources within clearly defined
electrical boundaries that acts as a single controllable entity with respect to the grid and
that connects and disconnects from such grid to enable it to operate in both grid - connected
or island mode.”.
In other words: “A microgrid is a number of generation and storage resources that can connect
and disconnect from the grid ….” (Grimley & Farrell, 2016, p. 6). The advantages of microgrids are
obvious: According to Grimley and Farrell (2016), microgrids are the method of choice when it
comes to efficient management of local distributed energy generation as opposed to the classical
grid architecture which was not designed for this kind of bottom-up approach. Furthermore, they
name higher resilience and better cost-effectiveness as arguments for microgrids. This cost
effectiveness is due to the missing loss from Transmission and Distribution opposed to regular
grids as energy is consumed where it is also produced (Bundesnetzagentur, 2011). Therefore, the
need for grid development and its associated costs are drastically reduced. This costs
effectiveness, therefore, could be reflected in lower energy prices for the end customer. Another
argument is, that microgrids obviously strengthen the local economy as the created value remains
within the community which is also part of the sharing economy idea. Eventually, facing new ICT
and the emergence of the idea of smart grids, microgrids have the potential to provide the means
for an environment where not only utilities but everyone can produce and trade energy (Grimley
and Farrell, 2016).
A showcase of a first prototype of how to implement the blockchain in the energy market can be
observed in Brooklyn, New York where a new start-up company called TransActive Grid enabled
the first ever P2P paid transaction of energy (Microgrid Media, 2016; Allison, 2016). As mentioned

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before, the biggest potential of the blockchain for the energy markets is on the local level which is
also why the development of grids towards microgrids will play a major role.
Inspired by the Microgrid Sandbox of TransActive Grid (TransActive Grid, 2016) in Brooklyn and
a comprehensive blog entry by Gaston Hendriks (Energy 21, 2016), Director at 21-Energy and co-
Founder of Quantoz (a blockchain technology company from the Netherlands), a general idea of a
blockchain implementation in the energy market could be structured as follows:
The system will first be introduced on a small scale, meaning for only one micro-/community grid.
After that, a large scale adoption will be shortly discussed. First, there is a need for a distributed
blockchain system. The community participating in this market model needs to provide at least
one or ideally more nodes within this blockchain, acting as the foundation of the before in chapter
4.1 explained necessary consensus mechanism. As the actual electrons cannot be traced and
traded via a blockchain, an energy representing digital currency or so-called tokens must be
introduced at a fixed exchange rate of e.g. 1 KWh per token. For the system to work properly, a
neutral community grid operator should be in charge to manage the operation of the microgrid
and conduct the settlement of the energy exchange. This operator could be a local entity from the
community itself, the already existing TSO/DSO or even a specialized third party such as an
electric utility company with a completely new business model as opposed to today (The future
development of the Business model of the classical utility company will be later discussed in
Chapter 5).
Additionally, every participating household within this defined small scale community grid needs
to be provided with a smart metering system which then is reliably recording consumption- and
if available, also production patterns of the respective household. Furthermore, every smart meter
is connected to suitable appliances within the household or Smart Home. Such appliances could
e.g. be storage units or own solar panels on the rooftop. The next step is then to connect every
participant's smart meter or Home Energy Management System (HEMS) with the community
blockchain. As aptly described by Gaston Hendriks (Energy 21, 2016), the (local) energy market
can be subdivided into three stages: The planning phase, the operation phase, and the settlement
phase. While at the EEX, the timeframe from planning to settlement takes 24 hours, within a small
community grid, however, where the scale is much smaller and automated systems are available,
instead of every 24 hours, a circle could be reduced to 15 Minutes or even less. This is also the
timeframe for the Program time unit (PTU) in continental Europe (Jaehnert & Doorman, 2010).
The PTU is the time interval in which a Program Responsible Parties (PRP), in our case every
market participant, has to forecast his estimated production and consumption (Van den Bosch,
Jokic, Frunt, Kling, Nobel, Boonekamp, De Boer & Hermans, 2010).

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Starting with the planning phase, every smart meter or HEMS (if available), will make an
estimation of consumption and production for the next PTU (15 Minutes), based on certain
criteria such as historical consumption profiles, weather conditions or even personal preferences
of the house owner. Based on these individual factors, the system then automatically calculates
trading positions (buy or sell energy) and sends them to the community blockchain as smart
contracts. Just like at the energy exchanges, shortly before the next time interval, the blockchain
will calculate a matching price where the approximated demand of energy meets supply. The
resulting price will be the fixed price for every matched market participant for the following PTU.
By means of smart contracts, the blockchain will then automatically convert the matched positions
into transactions. However, it is not said, or even quite unlikely that demand matches supply at
all times. Therefore, every position that in terms of its smart contract before considered the
matching price as too low or too high, will not be activated.
As this market model does not consider the idea of energy curtailment, it offers three solutions to
cope with unmatched positions and grid imbalances that constitute the operation phase:
1. A belated mechanism that takes actions within the timeframe of the PTU if demand
unexpectedly exceeds- or falls short of supply (or Vice Versa) by updating the matching
price accordingly to incentivize the market participants to react to the changed price and
cover the imbalance.
2. To cope with grid imbalances this market model provides the idea of small scale storage
units such as Tesla’s Powerwall which can then act as real-time drain or input from and to
the grid. Those units could be either owned by private participants or be provided by the
system operator.
3. The last resort to balance the community grid is to use the connection to adjacent
community grids and to connect the own blockchain with other sidechains to enable
energy trading. This part of the model also corresponds with a newly published paper of
the Technical University of Vienna which offers an approach named Link which states that
a multitude of microgrids that can generally function autonomous, should be linked
together to improve efficiency and flexibility (Ilo, 2015; Ilo, 2016).
The last of the three market stages is the settlement phase which takes place right after every
PTU. In this part, all the balances, whether positive or negative, the forecasts and the actual values
for every participant are first calculated and the results then uploaded to the blockchain which
following shows the financial balance of every user. To keep transaction costs reasonably low, the
clearing of balances, which is either the payoff or the billing of every user, should not be done
every 15 minutes but rather weekly or monthly.

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While the energy currency of the community is already in the blockchain, it would be suitable to
convert the balances into other cryptocurrencies – which, given their current upswing and
development will be quite popular in future. Of course, there should also be a possibility to do a
normal bank transfer into a national currency.
A large scale adoption of the presented marked model would be relatively easy to implement due
to the fact that the system can be implemented for almost every community grid on its own, and
can then be connected with other microgrids that follow the same approach to eventually form a
large scale grid that is interconnected but opposed to today’s grids, mainly balanced on a local
level.
The before mentioned market model is only a rough estimation of how the blockchain could be
used to improve the energy markets in terms of stability and also economic efficiency. While the
model is generally based on the existence of a microgrid, it would also be possible, however, to
implement it on top of an existing grid like we use it today, as an interim solution to the future one
could say. This is also what TransActive Grid does in Brooklyn. In such a virtual community grid,
where every participant is then of course conventionally connected to the main grid, the
transmission system operator of the main grid, however, would need a direct connection to the
system and all its data and calculations to being able to balance the grid and prevent congestion
in some parts. Furthermore, every user would have to pay the usual grid fee which is usually
higher than in a microgrid.
Nonetheless, a virtual version would definitely be a major advancement compared to the systems
that are running today and could be seen as an introduction to slowly but steadily transforming
the grid infrastructure towards smaller, more decentralized community grids. Finally, this
proposal of a market structure is subject to several other factors such as energy- and fiscal policy
or the further development of smart homes and HEMSs. Also, a steady increase in decentralized
production, as well as the wish of the masses to further participate in the energy market, will be
decisive for its success. To analyze these factors in more detail would go beyond the scope of this
working paper and should be targeted in future academic works.
The next chapter will discuss the implications for the roles of classical utility companies that arise
from the findings of the previous chapters.

14
5. Evaluation and Discussion
Historically, executives in electric utility companies were used to have planning periods of at least
5, but rather 10 to 20 years, working on the premise our customers need energy; we have that
energy so we provide it. There was no need for the utility companies to address change and move
away from their surefire business model, where a little exaggeratedly expressed not much actually
changed since 1880 when Edison started building power plants until the start of the 21st century.
Nobody could have anticipated that within 20 years, almost every sector of the industry would go
through a fundamental change, mainly due to digitalization. Although the energy sector never was
a likely candidate for disruption, yet it is one of the last industries to follow this development and
therefore needs to embrace change in terms of reacting to a multitude of new factors that have
arisen in the face of the (digital) energy transition.
In general, the value chain of the energy sector can be subdivided into three stages: Generation,
Transmission and Distribution, and Retail. The latter, however, also includes value added services
that have any kind of connection to energy. This is also the part of the value chain where it is most
likely to retrieve the utility companies with new business models in the future. This is due to the
circumstance, that generation will be mainly decentralized and privately owned, facing nuclear
and coal phase-outs in more and more countries. Furthermore, in liberalized energy markets,
transmission and distribution usually is heavily regulated by the state and therefore should
definitely not be considered the best option for new business models.
The original electric utility business model is integrated as it covers all three areas, from owning
the power plant (generation) over managing the distribution (T&D) to the meter of the customer
(retail). Today, however, this former centralized, top-down system which used to be mainly
analog, is giving way to a new digital version that is highly distributed, increasingly internet- and
data-driven and thus also interactive. The energy sector is on the cusp of transforming into: “the
internet of energy” (Doleski, 2016, p. 22). Characterized by monopolies in the past, the electricity
business is becoming a highly competitive industry, that, due to global warming and major cost
reductions for solar panels, is shifting from high carbon- to low- or no-carbon electricity
production (Schwieters and Flaherty, 2015).
While until recently, there was not much choice for consumers when it came to electricity, today,
in times of the sharing economy, however, consumers can not only choose from which provider
they want to buy energy but also from which source it should originate. Following, it is not
sufficient anymore to just deliver electricity as before. The customer of today, demands up to date
solutions and superior services. The increasing number of prosumers are highly interested in
solutions for their photovoltaic panels in combination with energy storage, smart homes and

15
HEMS’s. Therefore, if they want to hold their position in the energy market and beat the numerous
newly entered upstarts, the long established inert energy giants must refine their business models
from being simple energy suppliers towards customer orientated energy service providers. By
offering an ecosystem of valuable, customer-orientated solutions, the utility companies could
succeed in building up a loyal customer base, which in times being able to change one’s electricity
provider via a few clicks, must be a fundamental part of future business models. Therefore, the
customer must be in the center of attention for future business models.
With regard to the upcoming digital transformation towards the Internet of Things, utility
companies could even completely withdraw from being classical electricity retailers, and
transform into digital energy service providers along the value chain. Since the rise of big data,
smart analytics and internet based applications, IT-systems, in general, have become significantly
more intelligent and start to interact with the daily habits of people, leading to altered electricity
usage. This, in turn, also opens up new ways to start new business models for IT-companies from
other or adjacent industries in the area of energy management and related services. A survey
among European utility companies by IDC Energy Insights (2015) showed, that Google, closely
followed by telco companies and ICT companies constitute the most serious contenders to the
future business models of the electricity utilities. As a reason for this result, the IDC (2015) white
paper names the facts that non-utility companies have better consumer appeal, stronger ability to
extract value from data and deeper relationships with their customers. Small startups from the
sharing economy e.g., on the other hand, are much more agile and can, therefore, better adapt to
the needs of consumers and changing market conditions than incumbent utilities. Google,
however, already entered the US energy market by rushing ahead into the home automation
market when taking over the home automation company nest labs on the one hand and by getting
an electric utility license on the other hand. Startups like Sonnen from Germany e.g., are building
up purely customer orientated business models in the area of smart home storage systems around
their rising community, thereby trying to be the new apple of the energy industry. According to
David Crane, CEO of NRG Energy: “The battleground over the next five years in electricity will be
at the houses” (Goossens, Chediak & Polson, 2014). This kind of business models purely lie within
the third, the retail stage of the value chain. Indeed, there is a large amount of different business
possibilities in the area of (home) energy management and related services which puts energy
efficiency at the center of attention.
However, also other areas could offer interesting ways for utility companies to escape their
business models’ death spiral. Electric utilities could, e.g., take the role of an intermediary or
Broker for future Customer-to-Customer (C2C) market solutions, by offering convenient digital
platforms that manage energy trading in future market designs like micro grids as depicted in

16
chapter 4.3. In such a blockchain based market model, a utility company could be the third party
that manages the micro grid in terms of providing the digital infrastructure such as a running
blockchain or the needed onsite installments and implementations such as smart meter
connections and HEMS’s. Furthermore, this intermediary would manage the connections to the
transmission grids (and their respective TSO’s) or other neighboring community grids that could
be traded with. The profitability basis for such a business model could then be compensating fees
payed by every single consumer for the provided services.
Nonetheless, although declining, there will still be the need for a few large power plants in near
future as the process of decentralization of energy production will not take place overnight, which
is why it is likely that some utility companies will just carry on as they always did and operate as
an energy supplier. In future however, producing utilities will rather sell the energy to the
wholesale market instead of to the end customers. The number of those companies, however, will
probably be drastically reduced to just a few leftover companies as more and more energy will be
produced in a decentralized manner in future.
As the blockchain technology in terms of implementations in the energy market based business
models is still in its very infancy, it is not possible to give binding statements about the exact
consequences of this new development for this industry and also for the grid stability today.
Furthermore, there are many different ways along the energy value chain that utility companies
can choose to start new business models and thereby remain competitive on the market, although
most of them are will be in the area of retail and beyond. The further development of the energy
sector, however, not only depends on the technology-powered push but also on the customer-
driven pull, which in turn, will likely depend on the further spreading of decentralized energy
production and therewith connected advancements in the home storage market. The desire of the
people to increasingly participate in the energy markets, however, will finally persuade the
government and thus the energy policies where change is imperative for a future-oriented
development of the energy market.

17
Limitation and future research
This work has offered a comprehensive outlook over the energy transition and the problems that
arise with it. Furthermore, the blockchain as new revolutionary technology for the energy sector
has been introduced, along with a viable possible market model that is based on this technology.
Finally, this work has depicted consequences for the classic business model of electric utilities
that come up with an ongoing decentralization of the energy markets and newly developed
technologies.
However, this work is limited in terms of examining the impacts of these new business models on
the energy markets, firstly because yet there are no practical implementations of such business
models and therefore no empirical research was available. Future research could therefore test
the practical feasibility of such new business models and their impact on the markets with respect
to grid stability and energy price development.

18
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