Shayle Kann: This is Shayle Kann, head of GTM Research. You're listening to The Interchange, weekly conversations about the energy transition from GTM. I'm here without Stephen Lacey for just one more week, as he continues to bask in the glow of his new marriage. But never fear, he'll be back with me next week and forever more.
But in the meantime we have a great show for you, it's a follow on to an episode that we recorded back in June on blockchain and energy with Scott Clavenna, our CEO at GTM and an amateur quickly turning semi-professional blockchain enthusiast. That episode were we walk through the introduction to how blockchain could be used in energy and how people are thinking about it, that remains one of the most popular episodes that we've done. We've received a ton of really great feedback from all of you on what else we should be thinking about in blockchain and energy, and also a lot of questions, that are questions, many of which I've shared as I've started to think about this issue.
This week we're going deeper. We're going to look at two companies, both of whom are exclusively blockchain and energy companies, and who are commercializing very different blockchain energy businesses. But both of whom have raised a lot of money to get off the ground very recently. We'll compare their ideas and their strategies, and then we'll talk about the broader evolution of blockchain in electricity.
But before we do that, I can't help myself, I need to go on a short rant. I'm sure many of you saw in the news this week, this turned into a pretty big story. It initially came from The Washington Post did an exposé earlier this week on this company, Whitefish Energy. Whitefish Energy won the largest contract that was awarded by PREPA, the grid operator in Puerto Rico, to repair large portions of the Puerto Rico grid. This was reportedly up to a $300 million contract that was awarded to this company, Whitefish Energy.
The information that has come out about Whitefish Energy has been I think disturbing to say the least. Let me tell you what we know from all the reporting that's been done. Whitefish Energy currently claims to have about 280 workers in Puerto Rico, most of whom are subcontractors. But the company itself is only two years old and prior to Hurricane Maria only had two full-time employees.
We've done a little bit of digging around to try to find out more about Whitefish Energy. Their YouTube Channel just started posting videos a week ago. Their website is incredibly sparse, it has very little information on it and it's only working intermittently this week. Depending on when we go the website is down sometimes. There have been questions about whether this was awarded on the basis of cronyism. There are basically two lines to that theory.
The first is that the company itself is from Whitefish, Montana, which is the hometown of Secretary of the Interior, Ryan Zinke. The CEO of Whitefish Energy is friends with Zinke. They've both admitted that, though they say everybody in that town knows each other. Also, The Daily Beast did a small investigation where they found out that the private equity firm that is backing Whitefish Energy was founded by and is run by a relatively prominent donor.
So there's questions about cronyism, but let's set those aside for a moment, here's why this is a big story. The scale of it the disaster in Puerto Rico is far larger than anything that Whitefish has ever handled. As far as we know, the company's won two federal contracts before from the Department of Energy. The first was a $172,000 contract to replace a metal pole structure in three miles in Arizona. And then, shortly after Maria, Whitefish also landed what is its largest federal contract, a $1.3 million deal, to repair and replace parts of a different transmission line in Arizona.
They had won a grand total of federal contracts of about $1.5 million. This is up to a $300 million contract, and we don't know all the contract details but what we do know is what the hourly rates are for the workers under this contract. For example, the hourly rate for a site supervisor was set at $330 an hour, at $228 for a journeyman lineman, for $462 an hour for subcontractors who are supervisors. These are high numbers. Just to give you some context, the Bureau of Labor Statistics says that the average hourly rate for a lineman, not a journeyman lineman but a lineman operating on the grid in the US is about $30 an hour. That is one tenth the hourly rate under this contract. Admittedly, it will be higher for a journeyman lineman, and it will be higher because it's in Puerto Rico and it's disaster recovery, but those are big numbers.
Moreover, PREPA apparently chose Whitefish for this deal instead of enacting what's called a mutual aid agreement. Which would have allowed mainland utilities to help out in the disaster recovery. This is a pretty standard thing to do when there's a disaster, even when there's a hurricane specifically. As a side note, mainland utilities have been doing actually really well in response to hurricanes just this season. In Florida for example, though 60 percent of Florida lost power briefly in the hurricane that hit there, virtually all of them got it back within a week. Meanwhile in Puerto Rico, we're 35 days after the hurricane hit, and only one fourth of the island has power today.
On October 1st, Florida Power and Light, the utility that managed this really great recovery in the state of Florida, had teams assembled to assess damage in Puerto Rico. It posted notices in Spanish and in English on its Facebook page, saying that it was ready to help Puerto Rico, and the governor of Florida, Rick Scott, mentioned the offer in a news release. Florida Power and Light reported to The Washington Post that it never received a reply from PREPA.
PREPA apparently also has never responded to offers of assistance from mutual aid partners like the American Public Power Association, which is the organization that represents all the small municipal and rural electric cooperatives in the country. Which is, again, a great way to manage the recovery on a grid that is similar to what many of them are facing.
PREPA's executive director has basically made two points about why Whitefish was selected here. The first was that they were the first to arrive. They basically were the first ones to show up. That's not really a legitimate reason in my mind. There was a need, clearly others were going to show up. You don't award it to the first person who comes to your door.
The second thing that he said is that Whitefish Energy being based in Montana has experience with mountainous, rural and rugged areas. First of all, their experience in general seems to be somewhat limited. But beyond that, I think that if you went to the American Public Power Association, which again has a lot of rural electric cooperatives throughout the country, I bet you find others who have that kind of experience.
The third point that PREPA's executive director has made is that Whitefish Energy was willing to work under different financial terms. They were not as scared of the fact that PREPA is bankrupt and can't really afford to pay its bills, so they didn't need a lot of payment upfront. They only took $3.7 million up front out of the $300 million contract. They were willing to work with PREPA. That one I believe a little bit more, but FEMA is footing the bill for this recovery in Puerto Rico right now. One would assume that other companies could have dealt with how to get paid by FEMA. In fact, there are other companies that have been awarded contracts. Floor for example, which is a huge construction firm, was also awarded a pretty big contract and has somehow managed to get passed PREPA's bankruptcy.
I'm personally not all that interested in the conspiracy theories here. I don't know whether there is any cronyism involved. I do know there are a couple of investigation coming where we should find that out. The House Committee on Natural Resources is looking into the deal. Nancy Pelosi just today joined calls for an investigation of Whitefish Energy and whether secretary Zinke was involved. So we'll find out at some point whether there was any cronyism.
But setting that aside, I think we need to be monitoring this really closely. The outage in Puerto Rico is by far the biggest humanitarian disaster in the United States right now. There's really no excuse for bad execution, let alone cronyism. In the meantime, there are lots of ways for all of us to help support the grid rebuilding. You can donate. There's work being done by the Solar Energy Industries Association. There's an organization, Empowered by Light, which has partnered up with Sunrun and doing installations there. Support this and pay attention because it really matters right now. It's somewhat infuriating that you would see something like this happen when it's so important to so many Americans.
Okay, rant over. Let's talk about blockchain. What we want to do is talk about the emerging use cases and business models that are surrounding blockchain and energy. I'm really pleased to have back with me for the second time to talk about this, the head of Greentech Media and Chairman of Power & Renewables at Wood Mackenzie, and as I said an amateur bordering on semi-professional blockchain enthusiast, Scott Clavenna. Scott, thanks for being here.
Scott Clavenna: Hey, thanks. Yeah, happy to be here. I love blockchain.
Shayle Kann: We're well aware at Greentech Media of your love of blockchain. It's really timely for us to be talking about it right now because blockchain energy startups in the US are starting to make some real progress and get big partners and big investors. Just this week, we saw an announcement that LO3 Energy, which is a somewhat prominent blockchain energy company, raised around a venture capital, some of which came from Centrica which is a big European UK-based utility company. So there's money flowing into this from major players.
What we've decided to do for this episode is to pick two of the other prominent blockchain energy companies who are furthest along in their development process, so we can say the most about what they're doing. We picked these two because they have very different strategies and business models from each other. The first one is Power Ledger, which is based in Australia. The second one is Grid+, which is based in the US. Scott, let's start by talking through what each of these companies is trying to do with blockchain in the energy sector. Why don't we do Power Ledger first? What is their basic idea?
Scott Clavenna: Alright, yeah actually we just say what's the point here. I think the intereresting thing having these two companies as examples, it does illustrate two different ways to think about where and how blockchain comes into the electricity market. I guess the point of blockchain is finding ways where value is exchanged in electricity that currently, it's either inefficient or it's impossible because of regulations, or there are intermediaries that add little value but add a lot of cost. You're looking through blockchain versus other new technologies.
If you have a venture capitalist hat on you're always thinking about, how do you come into a market and not be a technology looking for a problem to solve, but you see a problem and then you design something to solve it. The intereresting thing with blockchain is that it is a technology looking for problems to solve. It's such a fundamental platform kind of technology that it actually makes sense for the, sort of unleash people's creative thinking around, okay, you have this new technology, this new toolkit and you just start looking around for problems to solve with it.
Venture capitalists tend not to like that in general, but I think in this case there are so many ways in which blockchain changes the way in which value is exchanged, not just in energy but in everything. Value is stored literally from currency all the way to all the things we're going to talk about. That the range of applications gets dizzying and I think that's where you end finding a lot of hype. But you see a lot of creativity, and so the ends of this spectrum in a way, or at least two ... somewhere along the spectrum are Power Ledger and Grid+.
If you look at Power Ledger, they are definitely looking at utilities and looking to be a partner with utilities to participate in the transformation of utilities to more digital savvy, digital platform companies. They may end up with the same applications as someone like a Grid+, but they're looking at it as a way to work with utilities to help improve their operations efficiency, the way they interact with customers, services they offer and that kind of thing. Power Ledger is a little different in that what they're fundamentally focused on, from what I understand, these are all really early stage companies that are just getting products or getting their platforms of commercially grade out there in trials.
But what it appears is creating a foundation or a platform that participants can then build applications on top of. Those applications then tend to be applications for utilities to either just improve the way they interact with customers or actually support new kinds of services that weren't there before, like peer-to-peer energy trading, that's definitely the biggest one.
Shayle Kann: Yeah, so lets talk about that one. Because like you said, I think the way that I understand Power Ledger is they want to be able to develop a bunch of different types of applications and use cases, but this first one that they've already tested out I think in a few places in Australia and New Zealand is peer-to-peer. Can you talk about what that is and how blockchain enables it?
Scott Clavenna: Yeah, peer-to-peer is really the key thing that's caught everyone's imagination in blockchain for energy, because I think we're all observing the rise of distributed generation and we're also observing the rise of the prosumer, people who want to take more control of their energy, not just reduce its cost but actually either improve their resiliency to storms or certainly in the case of distributed PV, lower their carbon footprint. As that keeps happening there's a greater sense that culturally, personally, people want to also break away from the traditional utility model.
What peer-to-peer then signals to them, the ability of blockchain to have a digital transfer of value that's quite secure and trustworthy and distributed, it matches in a way the same trend that's bubbling out of the growth of distributed generation. Peer-to-peer, it also has a value. That might not be obvious at first but in blockchain for energy the way to really stress-test blockchain and to really prove its value is to get as many participants as possible. So even though you could and you can use blockchain for wholesale power trading, which tend to be very few trades, they're bilateral, they're fairly easy.
There might be some expensive intermediary but end of the day these are big trades at the ISO level. There's just not as much scale associated with it. So if you really want to think about having a technology improving its scale, then you look to where can you do that, and that's definitely in the residential space and doing peer-to-peer. That's stress-testing everything about electricity, market participants, market design and structure.
That's why they want to do that now. Basically, if you have the ability to generate, right now instead of just using what you use and then exporting the rest onto the grid and having no sense of where it goes, you create a small market. It's a permission blockchain, meaning that you can't just trade with anyone, it's only the folks that are on that particular blockchain with you. In some cases, like the first cases with Power Ledger, it was behind a meter, it was in a little community, almost like a micro grid.
All the participants were literally behind, I think it was in a retirement village or something like that, so they were behind a single meter and they had the ability to, some of the roofs had solar, some didn't. They had the ability literally to trade with each other inside that little micro network. Power Ledger's taking it a little bigger and finding more campus micro grids, things like that, where you can have the ability to monetize your excess generation in a peer-to-peer way, rather than just to the utility.
Shayle Kann: Right, and Power Ledger also talks about one of the other use cases. Which is I guess probably less about peer-to-peer trading but another benefit you could have by using blockchain, is for a multi-tenant property. One of the reasons why it's been so hard to get, for example solar on the roof tops of multi-tenant apartment buildings is that you have to somehow allocate shares of the value of the solar generation from a single array that usually has a single meter, to a bunch of individual tenants. They can allocate that via blockchain, that's another example of a use case that they're talking about in the early days.
Scott Clavenna: Yeah. It's fascinating. You know, if you look at where distributed generation is going, where more and more distributed PV is getting paired with batteries, then you have not just a distributed point of generation. So a home isn't just, when I use it I use it, when I don't I export it in real time. You actually have the ability to be a dispatchable generator. It gives you some more flexibility to actually relate in real time with your local marginal pricing of energy and be a market participant.
I think the key think that probably makes people's head spin a little bit thinking about peer-to-peer as a residential consumer is, do you really want to sit at a trading desk all day and try and eke out an extra $5 a month. It really doesn't make a whole lot of sense compared to wholesale power trading, but the beauty of ... It's also happening where everyone has smartphones, everyone has wifi, the intelligent agents are the software platform that you get depending on what blockchain service you're using.
You have the ability really to just set in a bunch of constraints and preferences and just let the network behave according to your preferences. Which is also one of the real nice things about blockchain technology based on Ethereum, which has this programmable smart contract layer on top of it. You can program, you, your identity, your house, whatever, as having a set of preferences for price, for comfort level, for settings for when you're there, when you're not there, all that. You just try and maximize the amount of money you can save or the amount of income you can generate based on your home.
Shayle Kann: Yeah, so a use case, or I guess a specific example that I like to think about in the peer-to-peer world is, if I imagine that. I have an electric vehicle, I'm a home owner with an EV. You're a home owner who has rooftop solar and a battery. There's some point at which I need to charge my vehicle, but maybe it's peak hours, or maybe it's not the normal time that I would want to charge.
It's going to be pretty expensive for me to charge right now. But you have access solar generation, that either you're generating right now or that you stored in a battery, so you have a full battery at your house. Maybe I want to buy electricity from you at this moment rather than buying it from the grid, because you'll offer it to me for less than you would be able to sell it to the grid for. So I save money but you make more money. That's a transaction you might see on this network.
Scott Clavenna: Yeah, exactly. That would just be programed into my preferences. I wouldn't even know you and we wouldn't have to have this conversation. It would just happen. I would be available on the market and I would come home and find out I had made a few dollars that day. It's actually a really elegant platform. When all the technology gets worked out, the potential of it, it's really vast. It's obvious very attractive to utilities, because they don't want to miss out. That's where Power Ledger is playing, to allow them to have that capability and communicate and offer that kind of stuff to their customers. And then Grid+ and others are on the other side, saying, "Forget the utility. At some point we can just use the wires and do this ourselves."
Shayle Kann: Right, so that's a good transition. Just to recap, Power Ledger wants to be the friend of the utility. The idea with Power Ledger is to be able to setup these little bespoke blockchains that are permissioned, that would serve any number of purposes eventually, but initially a lot of them, one imagines, are allowing for peer-to-peer transactions within these little disturbed grids. Now let's talk about Grid+ and what they're trying to do and how it's different.
Scott Clavenna: Yeah, Grid+ is newer. They're not out yet. Power Ledger has the benefit of having worked with utilities, having pilots, having some commercial ready products now. They're out ahead. They did just raise a bunch of money in a token sale, so they're well funded and moving right along in Australia. Grid+ is a little newer. We probably won't see them actually in the market, like actually a product in the market in Texas, until first or second quarter of next year. But they've got the concept pretty well designed. They also did a token sale so they've got some money, or they're still going through the process of that.
There's a recognition that they've got a good platform and a good enough team. Well maybe actually saying a successful token sale is a validation of a company, but that's probably saying too much these days. But they have money thanks to the token sale. The difference that they have is they have a very specific plan and a very specific business model. They're not really building a whole platform and looking for utilities to partner with them to develop applications on top of it. They basically have the application, it's to be a competitive retail provider in Texas and provide customers with the ability to hopefully have much lower costs than traditional, either the incumbent retail utilities or other competitive retailers who still have relatively high prices.
Even if they come in a little under the incumbent it's still relatively high. There, the whole premise of a blockchain based competitive retailer is you're not fully disintermediating the utility but you are coming up with a way to have real time price exposure, real time settlement of that. They feel like they don't need to markup the whole sale power price as much as a traditional competitive retailer would. They have a number of reasons why, blockchain is one of the reasons, or at least it's the foundation for the reasons. But they also have some other things that aren't necessarily associated with blockchain. Having prepaid to get rid of counterparty risk around debt, prepay does exist outside of blockchain, so that's one thing that they have that I wouldn't say has to be unique to blockchain, but they do have at least a platform in place that there isn't necessarily a utility sitting between you and the wholesale market. It's more of an electronic platform that you have direct access to.
Shayle Kann: Right. So the way that the retail market, competitive retail markets like Texas, sort of work today is, there's a wholesale electricity price but then there's this retailer that sits in between that wholesale market and you, the customer. That retailer is buying power on the wholesale market but then doing a whole bunch of things to end up getting you, the customer, a relatively simple value proposition. They're probably charging you either a fixed rate for electricity or a relatively simple rate for electricity, so your prices don't go way up and down in concert with wholesale prices. They also do all this metering and billing work, as you said.
They have to take on the risk of the fact that you might not pay, so debtor risk. So Grid+'s argument is basically, all those things are, one, unnecessary, and two, expensive. So they estimated that the average markup on wholesale prices for a retailer in Texas is like 50 percent. What instead Grid+ wants to do is say, "We're going to expose you to those wholesale markets. You will be subject to those price fluctuations but we'll only get a markup power of 20 percent." So you're pocketing that 30 percent difference. You and I have talked a lot about the kind of risks that come with exposing retail customers to wholesale markets. Do you want to talk a little bit about that? Why that makes both us ever so slightly nervous?
Scott Clavenna: Alright, I've got two reasons. Actually the exposure I'm getting more comfortable with, because I do think the exposure to the wholesale price fluctuations, say in Texas to INTERCOT, there's still basically a way to manage that by programming your settings in this platform. So you can set the amount that you want to be exposed to it through the software. It takes some customer education, it definitely is like a prosumer. Someone needs to sit down and think about ... Hopefully there's ways for them to look at scenarios for what they're choosing, the upper and lower bounds and how they're setting their price floors and ceilings and the like.
But in general, I'm kind of comfortable with that. I'm still not totally comfortable with competitive retail in general, as a thing that exists in the United States. I tend to hate competitive retail. So it's hard for me to say, "Oh, blockchain solves the things I hate about it." Because competitive retail to me is just the world's worst customer acquisition activities. I literally, while you were ranting about Puerto Rico, I got a robocall asking me to switch from Eversource to a competitive retailer. Literally, while I sitting.
Shayle Kann: Really? That's great.
Scott Clavenna: I get them a couple times a day. It's super obnoxious and most of the time what happens with those calls, if people go for them, is that you get a low ... like six months you get 15 percent less than Eversource, and then month seven it's often 25 percent, 30 percent, 40 percent over. You don't even know what's going to happen. There's tons of animosity among regulators, consumer advocates and customers around competitive retail, because it tends to draw the shadiest characters into the business, and they tend to prey on low income elderly. It's just classic lousy business model.
Part of what needs to be fixed in competitive retail isn't just a better software infrastructure, it literally is better business practices. I would still bucket everything that Grid+ is doing and they are challenged by the lousy business practices of competitive retail and they have to make sure they don't fall into those traps of egregious fees for disconnect and reconnect, and all the shady business practices around customer acquisition.
So say they do, then you do have, if they're bale to get passed that, and there is something about this that doesn't necessarily land itself to that because it is a prosumer, you are looking for customers that are very engaged with energy, and so necessarily going to be as inclined to for that, and are going to be watching the performance of it more closely. With that though, I think at first when they start it's actually fairly straightforward. I think phase one is pretty simple. You're not so much expose to, or you can choose not to be exposed indefinitely. Then they're going to turn on more features as it goes from alpha to beta, to more commercial launch.
Even when you do, I think it's all around, can you optimize your energy use around the prediction engine that's going to be built into this. Some of the value of this is going to come down, again, not to actually the blockchain offer this value, but other factors around Grid+ being able to do goof price prediction so you can adjust your settings or have certain things built in so when prices hit certain levels then that's when you run your appliance or turn your AC on.
Shayle Kann: Right, yeah. I mean in theory it's a way to test out time of use prices in a way that we've barely seen anywhere else. When we have time of use prices for the most part for retail customers in the US, you'll have peak prices and off peak, but those are nearly as volatile as wholesale prices are, especially in places like Texas. This is more exposure to that, which will be an intereresting test for the prosumer types and the really engaged types who actually might want to mess around with their load and install controllable devices in their home to turn on and off the demand for power. I think I want to come back in a minute to talking and comparing and contrasting these business strategies between the two of them. But before we do that let's go off on a side road for a minute.
You've mentioned a couple of times token sale, so I want to talk about that for a minute. One of the reasons that we picked Grid+ and Power Ledger is that both of them either recently held, or in the case of Grid+ are just about to hold, it's called an initial coin offering, also a token sale. They raised what to me seems like an amazing amount of money. Grid+ has announced that they've raised over $40 million just in pre-sales, Power Ledger raised I think $34 million Australian, which is about 26 US. They're raising a lot of money in these initial coin offerings. For those of us who are not deeply living within the world of blockchain, can you explain what an initial coin offering, and then why each of these companies did it?
Scott Clavenna: Yeah, sure. Alright, first we should probably, if we're going to get into detailed semantics we should probably say what these two companies did, because they are basing it on Ethereum. They're actually not selling a currency. They're not operating or generating a currency that people will use as just a simple store of value. They are creating utility tokens. Utility here meaning the traditional sense of the word, not electric utility. Meaning that this token has some utility within the system that you're a market participant in.
In general, ICO tends to be the sort of mass media term, but these two companies had token generating events, or token sales. Typically when you're talking about a company that is based on Ethereum it's more around the token than it is around a coin. In these particular token sales, what generally you're buying, it is a utility token. You're not buying a stake in the company. It's not a security, so it's not regulated by the SCC, though a number of these ICOs and token sales start to push into a gray area, just based on how the SCC defines what is a security or not, but in these cases, these two specific cases, you weren't buying a stake in the company, so you're not hoping that your tokens increase in value because the company, its value goes up. You're actually buying token that you can use within that system.
In each case they're a little different, but when you have a token there's something that you can use it within the system. In Grid + for example, if you buy grids you get ... basically you can exchange that token within the Grid+ network for 500 kilowatt hours of wholesale power at cost. By participating in the token sale now, it's almost like getting a coupon. Like, for the first hundred customers you get 500 kilowatt hours of power at cost. Then later, if you run out of those tokens, you have to refill your agent with bolts, a separate unit that they have that just translates to dollars.
Shayle Kann: Yeah, let's hold on. Let's spend a minute on that.
Scott Clavenna: If you're buying a token, you're buying some unit of utility that you can use within their network.
Shayle Kann: Right, okay. One thing that has confused the hell out of me in all of these coin offerings, and this is true of both Grid+ and Power Ledger, is that they have two token systems. In the case of Grid+ they have Bolt, which is one, and Grid which is the other. In the case of Power Ledger, one of them is Power and the other one is Sparkz. In either case basically as I understand it, one of those is basically sort of a translation. It's a translation from fiat currency, say dollars, into some token that you can trade within this platform. But you know, a Bolt is equal to one dollar, it's pegged to a dollar.
So it's just a dollar's worth of token, but then once you have a Bolt what you really want to do with it is you want to transfer that into Grids at whatever the going price is for Grids. A grid is the thing that actually allows you to do something with it. As you mentioned, in the case of a grid it is purchase 500 kilowatt hours of electricity at the wholesale cost.
Scott Clavenna: I don't think you necessarily have to translate it into Grids, you just translate into, yeah, electricity consumption. It's how you pay for electricity when you're a Grid+ customer.
Shayle Kann: So what is the benefit of-
Scott Clavenna: The Grid on is more ... I believe the Grid token, and we might be entering there is where I'm at the edge of my knowledge, but my sense of the grid token is when you're wanting to buy 500 kilowatt hours in this token sale. It's like this first issuance of these coupons to help fund the company and they're giving 500 kilowatt hours of wholesale power at cost, so it's passed through, there's no markup on that. Bolts would include a markup then. Both, you're trading dollars for a token you can us to buy power, but that power would likely come with a markup.
Shayle Kann: Right, so from Grid+'s perspective they get to raise 40$ million plus to fund operations. This is non dilutive capital. They're not raising equity, venture equity. So they get to retain ownership of their company, but they get $40 million. Which is crazy, right? It's like, if this was a series A we'd be like, "Holy shit, a $40 million series A."
They raise a ton of money and the folks who bought in on the ICO, they don't a share of Grid+ directly, but they're, I guess in theory there are two ways that they can earn a return on that money. One would be they can act turn in that token, so they find somebody who has demand, find somebody who actually uses electricity in Texas territory and they go them and they say, "Look, I have a to. I can buy 500 kilowatt hours of this at the wholesale cost. Normally you would pay the whole sale cost plus 20 percent. You get 20 percentsavings, that difference is worth something to you and I'll sell it to you. That's going to cost you a little bit more than what I paid for the token in the first place. That's one mechanism to get a return on your investment. The other mechanism-
Scott Clavenna: Yeah, that assumes that there is a secondary market for grid tokens. A secondary market can be, I guess as small as Craigslist, so yeah. There is no regulated secondary market or exchange for these so you'd have to make your own.
Shayle Kann: Right, right. Okay.
Scott Clavenna: But you could do that.
Shayle Kann: So that's possible, or you're just maybe an actual Texas electricity customer who participated in the ICO themselves and then they just get a discount on their electricity. The other way is the one that I can wrap my head around a little less, which is I think a lot of folks who participate in these ICOs do so under the assumption that the value of these tokens will increase. So they think of it almost like they are buying stock, where they are planning to hold it and the value should go up. That's happened.
Scott Clavenna: They were wrong.
Shayle Kann: But isn't that ... are people thinking that?
Scott Clavenna: It's possible, yeah, for sure. I think that one of the ... it would be interesting to see the fraction of the 40 million actually thinks that they have a buy and hold strategy on grid tokens, because I can't imagine a scenario where that makes sense. If it's just a coupon for wholesale power at cost, I don't see how that gets you anywhere in terms of buy and hold strategy. I really think it's like you're a beta user so you get a coupon. You're taking the risk that Grid+ will fold, and you'll never be able to redeem it. So for that risk you're taking at this early stage, is that when they do start operating, you get your 500 kilowatt hour, your first 500 kilowatt hour chunks of power at wholesale, and then later you'll need to pay the markup when you burn through all of those.
Shayle Kann: I guess the other thing to talk about, and then we should talk about the Power Ledger ICO and how it's different. But the other thing that I was trying to figure out is, if you're Grid+, you raised $40 million to fund operations. Now you have a reasonably big balance sheet, but you've also in exchange for that, you've offered to sell a whole lot of wholesale electricity at cost. So, you run this risk of your return is baked into that 20 percent markup that you're planning to offer, but for as much as people bought grids, you don't get to do that. Is there any risk that you run out of cash before you actually get to start making money on what you're doing, just because everybody bought grids?
Scott Clavenna: Yeah. No, that's interesting. It's definitely on them to sign up as many customers as possible. Because I think there is a fee you pay to just become a customer, so there's a membership fee if I understand the business right. The key thing that they'll probably spend some of that 40 million on is customer acquisition, because they need a lot of customers now, because they want you to burn through your grid tokens and then start loading your systems up with bolts, using real money.
Shayle Kann: It's super interesting, you could have imagined just stepping outside the blockchain world for a minute, this strategy as a way to raise money. You don't need blockchain inherently to do it. I'm just imagining if SolarCity in its early days had said, made this big announcement online and said, "Alright, we're going to offer up to 10,000 residential solar systems at cost, and all you've got to do is sign up for our initial solar offering, our ISL." People do that, and then SolarCity gets a ton of money that's non dilutive, and then they have to sell a bunch of solar systems at cost. Is that really any different here?
Scott Clavenna: It doesn't feel that different. No. Yeah, I'm trying to think if the token has value beyond that. I think part of it is that you want to become a long term market participant. Where with SolarCity, if they just gave away X number of solar systems, or sold X amount of solar systems at cost, they don't have much of a way to continue to make money from you over time.
Shayle Kann: That's a good point. This is also a customer acquisition strategy.
Scott Clavenna: Yeah. This, I still feel like the analogy of selling, of building a casino by selling a ton of chips to people first. So you raise money through chip sales and then they all come in and spend their chips, and the basic logic of a casino is that the casino always wins, and so you know you'll get all those chips back, and then people will start spending their own money there.
Shayle Kann: Yeah, that makes sense. Alright, so let's switch over to Power Ledger for a second, because they also held an ICO. Theirs is actually done I believe. Like I said they raised $34 million in Australian dollars in their ICO. But theirs is a little bit different. Where the Grid ICO, if you buy a token through Grid+ you know exactly that you're getting. You get the right to buy those 500 kilowatt hours at the wholesale price. To me the Power Ledger token seem a little bit less straight forward. How do you understand those tokens to have value?
Scott Clavenna: Yeah, it is less to me too. It's almost like those tokens allow you access to the platform, but you don't know exactly how they're going to be exchanged in the future. It is less clear. I think what seems to be good about Power Ledger is how well they've developed the platform, in that how you have a sense of confidence that through all the relationships with the utilities, that the platform is getting stress tested by the right people. But I actually haven't spent enough time studying that token to see how you exchange it, what are the ways that you exchange it for value there. Other than, yeah, exchanging it for power.
Shayle Kann: Right. Definitely you can exchange it for power, but the interesting thing will be because of Power Ledger's model, where they're going to go around to a bunch of different places and create these, I think, bespoke blockchains for specific uses, you, the holder of the power token, can kind of look out across all these different applications and decide where to redeem your tokens, where to purchase electricity. So you, if it works, theoretically have more flexibility with what you can do, but it's also less straight forward than just, this is worth X kilowatt hours.
The other thing that they talk about that I thought was interesting, that Power Ledger talks about, is they say the token holders can also participate in what they call an asset germination event. As I understand it, that means that they might offer token holders the opportunity to become part owners of a generator, of a renewable energy generation facility. So you would use, you'd redeem your tokens for an ownership stake in a solar project, and then you'd be an equity owner basically of the solar project and could make money off of the sale of electricity. Let's spend one minute contrasting the business strategies of these two companies.
Then I want to ask you about broader developments within the world of blockchain for energy. Obviously these are two very different models. Grid+'s seems to me to be more targeted and at least from the reading that I did I got a much clearer sense of exactly what that business is going to look like. On the other hand, Power Ledger seems to be going after a broader array of different potential applications. Obviously like you said they want to befriend the utility as opposed to disintermediating it. How do you think about these relative to each other from a strategic standpoint?
Scott Clavenna: Yeah, I think the interesting thing about energy blockchain is that it really is, fundamentally it's a platform technology, so it makes total sense to develop it for this marketplace as a platform, really leverage that and say you don't quite know the applications, which one is the killer application. So let's open it up to developers and participants to really develop that with us, and to utilities to help decide that.
I like that. The one thing that I found in the Power Ledger white paper that wasn't as attractive to me, just having spent a lot of time in a previous career working with venture capitalists and looking at deals, is there's a case where when someone is too ambitious, when they're product roadmap has over a dozen things on it, in a way you think, "Please, you need to focus." Any one of these things takes a lot of time and attention to get right. It's always more complicated than you think. A roadmap of that complexity and that size always bothers me.
But I think in terms of how they're executing, starting with peer-to-peer is the right way to go because I do think, and Grid+ the commonality there is that they're starting with peer-to-peer. Even though it's one of the hardest things to pull off it is the way really to scale a blockchain platform and really understand its limitations, and start to really change the dynamic in a market, instead of just address back office things that it's invisible to everybody.
Shayle Kann: Right. Okay, so you know it's worth noting that Power Ledger and Grid+, they're not the only two blockchain for energy companies out there. There seem to be more all the time. There are whole use cases and applications that we haven't even touched on at all today, and hopefully will at some point in the future. But let's step back for a minute, what are the other big developments in the blockchain energy world right now? I know we should talk about some of the non company specific activities that are going on, that are trying to get utilities involved and figure out how to basically scale blockchain within electricity faster than it would happen on its own. What's happening from a broad perspective?
Scott Clavenna: Yeah, there's a lot happening. It's hard to keep up. I guess some big ones that are important to watch are, certainly in the US RMI partnering with Grid Singularity and form the Energy Web Foundation. That is somewhat like Power Ledger but in the sense that it's very focused on utilities, working with utilities, building a relatively bespoke blockchain for utilities. So it's not like Grid+ uses just a public Ethereum blockchain, Power Ledger has their own unique blockchain adaptation of Ethereum, and same with Energy Web Foundation, they take Ethereum and add some little protocol work, a layer on top of it to make it what they say more friendly to utilities and these applications.
A lot of utilities are at least participating with that, so that's off to a good start. Then they just announced a test network, so we can start to see their blockchain in action. Then in Europe there's the Interchain. That also is working with big energy companies. They just demonstrated their first wholesale energy trade in Europe a few weeks ago and have, again, a lot of utility participants. So there does seem to be ... And then there's a bunch of little startups around.
I think those are the two ends of the spectrum that we're going to keep finding, is one group that's really working directly with the incumbents and the utilities helping them take advantage of blockchain. Like IBM, as much as they are a technology company, they're also kind of a consulting company so they're going in as a partner with utilities with their hyperledger, which again is an open-source blockchain that is designed or they're adapting features of it for utilities and going to actually run networks for utilities. In a way that's how IBM's going to make money, is to have this blockchain that they don't just put out there as something for utilities to use, they actually run the blockchain networks for them.
Shayle Kann: Wait, can I ask a question about that?
Scott Clavenna: Yeah.
Shayle Kann: What does it mean to run a blockchain? Isn't the whole point of blockchain that everything is decentralized? What would IBM do?
Scott Clavenna: It is. It is, but you do have to run ... I mean especially because these are all permissioned, so you're really managing the bringing on market participants, handing out the keys to the network and managing all that. Actually there's a decent amount to it. And just the computing infrastructure associated with it, in a way it's a big cloud computing network that needs to be managed, just at the physical layer.
All the computers that are running it and the kind of activity among them. I think when you're talking to big enterprises, like utilities, they actually are not as interested in disintermediation, they actually like the idea of having a partner that they can call if things start behaving weirdly. Versus the more entrepreneurial or anarchist sides, where they don't want anything to do with any corporate structures and they're all just going to run it themselves and put up with the wonkiness that can come with that.
Shayle Kann: Right. My last question for you is, on our last podcast you coined this phrase to describe the world of blockchain, people as this loose federation of weirdos. Do you feel like the emerging ecosystem of blockchain for energy is similarly a loose federation of weirdos? Or is it a little bit more like buttoned up business oriented folks who are just trying to get in on this hot new technology fad?
Scott Clavenna: Yeah, it feels that way. I don't meet too many weirdos in this space. I see them all out in the Ethereum meetings and meetups and things like that, talking about new currencies and all kinds of news ways to tokenize everything, identities and you can tokenize donuts at this point. They're looking at that as a way to create like almost a separate layer of society, where you don't need to have anything. It's definitely an anarchist vision using blockchain.
You don't see that as much here. Utilities and the electricity sector are going to be much more conservative, because it is. When you look at it, electricity is such a fundamental need and in a way you're not willing to trade that away. The reliability of it and the predictability of it, you're not willing to trade that away, like you would for currency or other things that people are using blockchain chain.
Shayle Kann: Right, who needs currency? I should not for the listeners, in case they didn't pick it up, that's your note of nostalgia about the weirdos. You're on the side of the weirdos, or at least you want to be.
Scott Clavenna: Yes.
Shayle Kann: Great, well I've taken up all the time that I can justify from you, so thank you again for joining. This has been really useful for me.
Scott Clavenna: Sure, thank you. This was great.
Shayle Kann: You've been listening to The Interchange. We'll be back next week. Stephen will be here with me, so you won't have to listen to my voice quite so much anymore. I'll have a pretty big announcement of my own to make on that episode. So tune in next week and thank for listening.
