Photo Credit: Emma Foehringer Merchant/GTM
U.S. energy retailer Direct Energy has launched a new offering with blockchain startup LO3 Energy that represents one of the first known uses of blockchain in real-world energy markets.
The offering, called “micro-energy hedging," offers commercial and industrial customers in Texas the opportunity to design and submit orders for energy hedges in increments as short as an hour. That’s much more fine-grained than the daily, weekly or monthly product now available — and it’s all automated on LO3’s Exergy platform, CEO Lawrence Orsini said in a Wednesday interview.
Energy hedges give customers with critical, must-run loads access to energy on the spot market, whether independently or as part of a managed service, as Direct Energy is offering in this case. This exposure offers both risks and rewards, all dependent on how much data is available to construct and execute the right trades throughout the day, said Orsini.
“The big issue there is how to get the data, how to mange the data — and how to secure your data, first of all,” he said. “We secure your permission to expose that data to counterparts you want to expose it to. Maybe the utility can have access to that data or maybe a retailer can have access to that data. The list of people goes on and on.”
Exergy uses “permission tokens” to secure each piece of data to meet its owner’s requirements. Once the structure is in place, all of this data can be freely shared in real time, allowing participants to generate, store and share their energy usage data to better predict their hour-by-hour power needs and how to hedge against them. “Once you do that, you can look at different sources of energy as well,” noted Orsini. “You may be able to buy solar from someone’s rooftop in 15-minute increments. You may be able to buy demand response in very discrete timeframes.”
While starting at a very small scale — Direct Energy is targeting five C&I customers and around 20 submeters running LO3’s Exergy blockchain platform for its first phase — it’s one of the first implementations of blockchain by a major player in the energy industry.
Direct Energy is owned by U.K.-based Centrica, which is one of LO3’s main investors though its $140 million Centrica Innovations fund. GTM Research Grid Edge Analyst Colleen Metelitsa noted that the Direct Energy offering could be seen as a way for Centrica to test out LO3’s blockchain at scale. “If it’s saving customers a lot of money, it could scale up faster than, say, a normal startup pilot environment.”
It’s likely to be better than Direct Energy’s legacy systems for metering C&I customers, she added. “Currently Direct Energy's process works something like a fax machine,” she said. “It can take up to five days to price a customer, and it involves sending around CSV files. They are looking to get real-time, credible information and to have a shared repository for this data.”
LO3 is also testing its technology with Siemens, which invested an undisclosed amount in the company late last year. A filing from November lists a funding round for LO3 Energy at close to $6 million, with other investors including Braemar Energy Ventures and Centrica Innovations.
Siemens’ microgrid controller systems are also being used in LO3’s showcase transactive microgrid project in Brooklyn, New York, which has served as its longest-running Exergy implementation. The system connects about 60 solar sites to about 500 consumers who can buy and sell it in place of utility power via the Exergy platform.
LO3 also has two new projects underway in Germany: The Landau Microgrid Project, a 20-customer local energy market experiment with utility EnergieSüdwest AG and the Karlsruhe Institute of Technology, and a "virtual microgrid" with energy provider Allgauer Uberlandwerk.
In December, it signed a memorandum of understanding with the EPEX SPOT European Power Exchange to explore "solutions connecting the local and the wholesale market using blockchain technology and involving clean energy.”
“You have to prove the use case first. The real value is once you start getting these algorithms down, some of these things can be set automatically,” Orsini said. “Once you scale up, if you’re an energy wholesaler, or even a retailer, you can sell smaller and smaller blocks of energy. When you do that, you can increase the diversity of companies you can do that with."
GTM Research data shows that more than 120 energy-related blockchain companies raised a total of more than $324 million last year. Three-quarters of that was in the form of initial coin offerings (ICOs), the novel and largely unregulated practice of getting investors to trade real money for shares of cryptocurrency in various forms. Still, $90 million in venture capital for energy-related blockchain companies in the past year represents significant interest in ways that have nothing to do with cryptocurrency or ICOs.
Direct Energy’s work with LO3 is an example of why interest is growing. The project uses blockchain's advantages over traditional technologies in an incremental fashion, while laying the groundwork for meeting the problem of DER management at a grand scale.
“Blockchain offers the possibility to coordinate data exchanges much more effectively,” Metelitsa explained. “Imagine that you’re getting data pulled into every system in real time. You don’t know if people’s load profiles are changing, and you want to have the most recent, up-to-date data to make those decisions.”
Whether Direct Energy and LO3 can use blockchain’s capabilities to price those hedges, “and whether that can be a good business model for them, remains to be seen, as they start looking at these cost curves,” she said.
What will blockchain in energy become? We explored that question in a recent episode of The Interchange. We discuss two possible scenarios for the tech.