December 13, 2022

Shortcomings of ICO's in the energy sector

In autumn 2017, Spectral Energy launched the pilot of its Blockchain-based energy trading platform “Jouliette”. The promise of Blockchain technology in the energy sector is clear; decentralization of the energy market allowing for peer-to-peer (end user to end user) direct trading using a shared and incorruptible ledger, returning control over user-generated renewable energy and how to trade it to the user. End-users can buy and sell freely on an open market, instead of relying on fixed contracts with big energy companies. These companies, in turn, can also become trading actors using the same underlying technology. Everyone wins.

Energy is, in essence, a virtual good. The energy that the end-user purchases from their energy provider is not literally the energy that is pumped into the grid by that provider. There is no direct line from the provider to the end-user. Both end-user and provider are connected to the same grid and the provider matches the end-user’s demand. Assuming that all providers do this, the balance in the grid is kept; as much energy is put in as is taken out. While the balance relationship is clear, the actual energy flow is more random. It is not really predictable which energy ends up where, nor is it relevant. The grid is about balance, not about direct connections.

Being inherently ephemerally virtual, energy is a good candidate for trading on a Blockchain platform. The current way energy is traded and transactions are kept and settled is already virtual, as it does not literally represent the underlying energy flow. Adding a Blockchain layer to the grid is therefore not only possible, but ideal.

A known problem with current settlements in the grid is that energy providers tend to estimate usage and, even with checking, sometimes get the consumption wrong. End-users tend to be fine with whatever they are billed and the cycle of vacuous invoicing continues.

Providing a Blockchain platform for energy trading seems like a no-brainer. The only remaining issue is; what do we put on the Blockchain? When we started putting together the Jouliette, the answer seemed obvious; the Blockchain should contain tokens that represent packets of energy in time to settle live trading and balance in the grid on the public Blockchain ledger. This way everyone could verify that energy was actually produced, where it came from, where it was consumed. The grid operator could take the role of Oracle and verify the Blockchain transactions with the grid input and output.

FIAT settlement was specifically not a design criterion of the Jouliette Blockchain. With a platform that is open to all parties on the grid, energy providers can set their own rules for selling tokens (and thus; energy) and exchanges can freely take shape according to whatever rules the market and consumers want to work under. If people want to give their energy to other parties for free, they should be able to do so. If traditional energy companies want to be able to enter the Blockchain with their energy portfolio and set their own pricing models, they should be able to do so. The Blockchain itself should be used solely to track and settle the balance in the grid and transactions between parties.

This is where the ICO model falls short. Various projects have appeared that offer an ICO for some sort of energy token. But what is that token? How can anyone sell you packets of energy that are not bound in time and have never been produced? One could argue that a secondary, monetary, token for settlement can co-exist on the same Blockchain, but that in turn limits the freedom of exchanges and various producers and prosumers to set their own rules. A monetary token also has nothing to do with energy per se, turning the Blockchain into another crypto currency that just happens to be handling energy tokens as well.

Another problem with ICOs as they currently stand is that they are largely based on hype around a certain product. Success in ICO-land mostly comes down to marketing and not so much to content. White papers are written, but most investors do not read them; they just follow whatever next token is being talked about. The white papers that do exist are either far too technical for a general consumer to understand and/or lay out a plan that is unlikely to work because of external factors. Even the greatest ideas for energy trading must adhere to existing regulations in the energy sector and those regulations differ from place to place. There is no “one size fits all” solution. To get the Jouliette up and running on our pilot site, we had to request (and be granted) a special exemption from the existing regulations regarding the development of a private microgrid, which enables us to freely trade energy behind the meter. Scaling up will require even more careful navigation of the regulatory environment, exploitation of legal loopholes, and certain use-cases simply won’t be possible given existing market constraints. No white paper to date, as far as we are aware, tackles these issues at all. Investors may well be buying tokens that will never see the light of day or fulfill their promises to customers, largely because of regulatory restrictions.

The appeal of ICOs is clear; people with clever ideas raise millions of dollars to implement their platforms. In certain cases, these ICOs really do work and the value proposition is just. In the case of energy, however, we would argue that this case cannot be clearly made. It is not sensible to generate tokens that represent something – in this case energy – if the underlying something does not exist. While it is possible, one would be selling people thin air unless the same amount of energy is generated live to back the tokens. Putting monetary tokens on the same chain moves away from the idea of a decentralized energy ledger entirely. What we aimed to do with the Jouliette was create a platform for live energy trading for producers, consumers and prosumers. The goal was balance and settlement of energy in a complex, live system. The monetary aspect remains out of scope; how transactions are settled depends largely on where the system is implemented and by whom. It may differ depending on existing regulations, scale of operation and who is involved. Ultimately, Jouliette is about energy, not about money and settlement is up to the users/region/laws/etc.. A sentiment we feel should be true for every energy token out there.

© Spectral 2018

Caption: A screenshot of the real-time power-flow map of the De Ceuvel microgrid, which is one of the features of the Jouliette platform that is based on Blockchain technology.

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