Energy in Transition: Achieving Decentralisation With Distributed Technology

This paper is a contribution to the energy digitisation debate. Part of a series on the future internet, it maps a path for using distributed technologies in transitioning to clean energy. It outlines how distributed technologies – such as blockchains, smart contracts and tokens – can unlock new models of operation and organisation as our energy systems decentralise, helping us to better coordinate assets and actors locally and internationally.

Specifically, while transitions lag behind ambition, distributed-technology platforms can mobilise the investment and integration of new clean energy assets needed to jolt the energy system on to a new set of rails.

Globally our power sector accounts for 35 per cent of all carbon emissions. Transitioning it away from fossil fuels towards clean energy will be imperative to limiting global warming to 1.5°C. Making the transition to clean energy will not be trivial. As world population and incomes continue to rise and urbanisation and electrification speed up, global electricity demand will double by 2040. To keep pace, renewable energy – from sources such as wind and solar – will need to meet up to 70 per cent of final energy needs (up from 30 per cent today). We’ll also need to reduce energy intensity by more than 4 per cent each year to 2030 – more than double the previous decade’s average.

Recent evidence suggests our energy transitions are not moving fast enough. Even as renewables become cheaper than fossil fuels in most economies, investment in clean energy lags far behind climate targets. Most benchmarks indicate that global investment must climb by three to seven times to meet net-zero pathways. The CPI, for instance, suggests financing for renewable generation projects must increase fivefold, from $324 billion in 2021 to $1.5 trillion per year by 2050.

Investing in energy transitions is only half of the story. As we grow our reliance on variable renewable energy (VRE), we must do more to prepare our energy system to respond flexibly to an intermittent supply. If the sun stops shining or the wind slows down, we’ll have to taper consumption to balance the system and call on dispatchable energy, such as battery storage and nuclear, to plug any gaps. Flexibility will also help to reduce overall investment needs: both in cutting total generation requirements, and in reducing costly outlays on reinforcing network infrastructure. Again, flexible asset capacity today lags three to four times behind 2050 scenario needs, with technologies such as battery storage needing a 26-fold increase by 2050.

Expediting a Transition

Though pathways ahead are not certain, it is clear that no government strategy or private-finance initiative can meet them alone. The evidence suggests that collectively we have much more to do to mobilise finance from a varied investor base, promote wider participation in global energy markets, and integrate flexibility assets where they are needed most. To achieve the investment and integration of new clean-energy assets at the scale we require, energy transitions must work across national boundaries to encourage greater optimisation in local energy systems and deepen international energy-market coordination. Continuing to fall short will lock us into a path that misses critical climate commitments and will inevitably lead to worsening price and supply shocks in our fossil-fuel-dependent markets.

Decentralising Energy Governance

The future clean-energy system will look and feel very different. A host of new distributed-energy resources (for example electric vehicles and solar panels) will appear on our streets; large renewable installations will overlap geographic boundaries (for example, offshore wind turbines) and energy-market participants will increasingly blend the roles of producer, consumer and service provider.

These changes mark a decentralisation of ownership and distribution of energy away from traditional networks and jurisdictions and pose a challenge for systems that are conventionally highly centralised. In other words, they challenge traditional energy governance, where a handful of system and network operators organise around large fossil-fuel plants and transmission grids, and operate under a single national market framework.

Conventional energy governance laid the ground for plummeting renewable costs, long-term resiliency and (typically) price stability. It is becoming clearer, however, that centralised systems are subject to an inertia that inhibits rapid transitions to clean energy. Central planning has not created a grid able to seamlessly integrate new assets “behind-the-meter” (for example, battery storage, biomass generators). National balancing markets have moved slowly to scale diverse sources of flexibility (for example, demand-side response, grid-scale storage and pumped hydro) and incumbent operators have not been sufficiently incentivised to automate processes or share data for innovation.

Alongside these changes in physical structure, it is open to question whether the operation and organisation of our energy systems also require change. In this paper we explore how new forms of decentralised governance – underpinned by distributed technology – can expedite energy transitions, helping to widen participation and investment in clean energy markets, stimulate new flexible business and service models, and enable better planning and integration.

Digitisation will undoubtedly be a key driver of successful energy transitions. Only through sharing information, connecting assets and automating core processes will future clean energy systems function well. Recent progress setting whole-system digital strategies – for instance the UK’s Energy Digitisation Taskforce and the EU’s Energy Reference Architecture Strategy – are critical, and rest on key principles that ought to be adopted by system operators globally:

• Create digital standards for technology and data that will ease integration, ensuring that new dynamic assets, such as electric vehicles, can consume and supply power to the grid.

• Embed system interoperability among core systems and devices to connect infrastructure with assets, supporting the automation of processes such as renewable power dispatch.

• Improve data accessibility for real-time management and monitoring of networks, enabling innovators to build new personalised energy services that enrich existing products.

Applying Distributed Technology

Underpinning Bitcoin and other cryptocurrency, distributed technology has recently gained significant interest. Providing a platform for networks of decentralised actors to coordinate decisions and exchange digital assets – whether money, goods, property, votes or art – distributed technology is often touted as a way to transform industry and upend institutions.

Distributed technology comprises a set of tools including distributed ledgers (such as blockchains), distributed applications (such as smart contracts) and tokens (such as cryptocurrencies or NFTs). Using advances in consensus mechanisms, cryptography and process automation, together they facilitate trust across a network by creating open access, transparent information and traceable exchange.

Fundamentally, distributed technologies are governance tools. They are used best in systems with a large range of participants who face barriers to trust or competing interests, and who need to transact based on a clear, agreed information set. Compared to traditional governance methods – human relationships, legal contracts or intermediaries – distributed technologies require less upfront investment and less trust. Unlike other digital tools, they are not reliant on a third party to grant market access, share data or broker exchange, and they create a transparent and immutable record which prevents data monopoly and tampering.

Naturally, distributed technologies have been linked to ideas of sweeping reform in energy markets, with venture and corporate investments in “energy blockchains” rising steeply in the past five years. Already, myriad distributed-technology use cases have emerged to tackle existing value-chain issues: for example, registries of distributed-energy assets, electric vehicle ride sharing, managing lithium battery supply chains and secure smart-metering data sharing.

Distributed technology is unlikely to be adopted within conventional national-level operations, so this paper focuses on identifying ways that distributed technology can support new decentralised governance approaches and new sites of energy organisation at local and international levels.

Managing tomorrow’s clean-energy system will be extremely complex. Deploying power efficiently will require coordinating distributed-energy resources across vectors such as power, heating, cooling and transport. Keeping the lights on will rely on balancing consumer demand in real time with forecasts of network and variable supply constraints.

Local energy systems (LES) are emerging as a governance mechanism to solve this complexity. LES coordinate and integrate energy assets in a local area to match energy supply to local needs. Organised by actors across the distribution-level value chain (for example, regional networks, municipalities, private operators), LES guide renewable generation and distributed-energy asset investment, and coordinate balancing and flexibility.

Unlocking a new layer of market operation, LES are capable of incentivising broad-based participation in local energy markets among firms and consumers, and can help to strengthen the investment base for clean energy services. When they are designed well, LES strip away barriers that prevent small asset owners competing in ancillary services markets, enable large asset owners to “stack” revenues across both local and national markets, and provide fertile ground for innovative businesses to launch new energy services.

As well as incentivising new investment, LES can improve returns on capital too. Enabling energy suppliers to adopt a “place-based, whole-system” approach to planning, LES can tailor investment and optimise asset integration around specific local network constraints and detailed knowledge of local demand and growth priorities. This includes deploying assets towards community benefits, such as increasing access or cross-subsidising energy. The result is a more efficient use of capital that reduces peak demand needs, minimises curtailment costs and creates tangible social returns.

Using Distributed Technology to Underpin Local Energy Systems

Typically convened by a governing authority, such as a system operator or municipality, LES function around a local market-exchange platform where local generators, asset owners and consumers trade power, flexibility and make settlements. Distributed technology offers the chance to radically improve the implementation of local energy exchanges, engendering high trust between the range of competitive actors, and promoting transparency and accountability across its complex operations.

There are three distinct reasons to embrace distributed technologies within local energy system exchanges.

Creating Efficient, Open Local Energy Markets

If local energy systems are to succeed, they require buy-in and participation of local asset owners. A distributed local energy exchange would offer local actors a radically open marketplace, minimising information asymmetries common to traditional national markets.

Underpinned by a distributed ledger, the exchange would give participants full transparency over supply and demand conditions (i.e. assets and transactions), guiding investors to target their investment and assets towards the highest valuable local needs. Able to scale settlements across the network, distributed exchanges would provide a tool for system operators to implement dynamic pricing and perform real-time balancing, underwritten by a smart contract.

Promoting Independently Operated Local Exchanges That Are Trusted and Accountable

For all its benefits, decentralising governance to local systems creates fresh challenges for regulators and system operators as they manage energy resiliency. It is critical that central institutions can monitor local market operations, assess capacity needs and enforce any necessary sanctions or restrictions.

Decentralised technology exchanges could help promote regulatory certainty in LES. Underpinned by a distributed ledger, local exchanges would produce transparent and immutable records of market functioning across users, asset commitments and transactions. With a holistic audit trail, distributed exchanges offer a tool for central institutions to monitor local systems in accordance with national rule sets.

Armed with a distributed audit trail, regulators could confidently allow independent actors to organise local energy exchanges. If these were operated as “neutral markets”, community or private operators could organise local exchanges where traditional utility- or municipality-operated markets are not feasible. This governance innovation would hasten the adoption of local energy systems, particularly within developing economies where fewer licensed subnational entities exist. In these nations, community organisations or micro-grid developers could use a distributed energy exchange platform to create a new flexible market, improve local energy trading and widen overall access to electricity.

Ensuring Network-Operator-Run Markets Are Transparent and Fair

In many economies, licensed regional network operators such as distribution network operators, or DNOs, will naturally convene and operate local energy marketplaces to balance loads across their own networks, though network operators face several competing interests in selecting between new, clean flexibility solutions (for example, dispatchable storage, demand-side response) and the conventional load-balancing solutions, such as network reinforcement, that they have traditionally provided to the market.

Distributed technologies can play a critical role to mitigate this market failure and ensure network-run systems operate fairly. Employing a distributed ledger would create a transparent record of the network operators’ balancing decisions, helping to foster trust among participants that flexibility markets are conducted fairly. Smart contracts could heighten trust and offer clear price signals to investors, where flexibility criteria are “coded in” to the market design to automate routine balancing processes.

As our greatest coordination problem, tackling climate change has an essential international dimension. After a COP summit fraught with difficulty in late 2021 and with fractures emerging in fossil-fuel supply, successful and broad-based energy transitions depend on finding a way to better coordinate in the international system. All countries will need to do more to align and strengthen their 2030 goals and make this a collaborative global transition in which no one is left behind.

Most countries have committed to reducing emissions from their energy sectors within nationally determined contributions (NDCs), with current pledges seeing a doubling of clean-energy finance over the next decade. However, this acceleration is not sufficient to overcome the gap to a net-zero pathway. A surge in spending to boost deployment of clean energy infrastructure and renewable sources of electricity is the best way out of this impasse.

The investment gap is stark everywhere, but nowhere more so than in developing economies. These nations make up two-thirds of the global population, though today attract just one-fifth of clean-energy investment. As industrialisation and electrification gain further pace, their energy demand is set to rise fastest of all economies over the next decade. To put developing economies on a net-zero pathway, an unprecedented rise in spending is required: by 2030, annual clean energy investment needs to expand more than sevenfold to meet emissions targets. These energy markets are heavily reliant today on public sources of financing and it will be essential to improve the availability of private international capital too. IEA pathways indicate that private capital must comprise over 70 per cent of clean energy investment in these regions by 2030; the current level is under a third.

While policy reform and state financing will continue to play an important role, distributed technology can help coordinate marketplaces across a wide international network of capital providers and help direct investment to where it is needed most. Below are three emerging use cases for distributed-technology platforms in mobilising international clean energy projects.

Facilitating Trusted Cross-Border Infrastructure Investment

The “Green Grids” initiative announced at COP26 breathed renewed life into international efforts to develop shared renewable infrastructure. Directing joint investment towards renewables and highly efficient transmission networks helps countries take advantage of the natural resource potential across borders. Particularly in developing economies where costs of capital are highest, pooling resources across multiple markets may be the only cost-effective route to finance industrial-scale hydro or offshore wind. Bangladesh – which lacks natural renewable resources – has invested significantly in shared interconnection within a regional grid, enabling it to access low-cost solar and wind from India, and hydro from Nepal and Bhutan.

International coordination can easily fail at the first step when it faces meaningful political, financial and coordination risks. Some nations have attempted to establish regional-level governance to drive better coordination, for instance in Europe, central America, southern Africa and east Asia, but the costs and lead times for harmonising market rules and establishing multilateral governance bodies have often proven too long to move the needle on urgent clean energy financing.

To bolster opportunities to invest in cross-border renewable projects in the near term, distributed technology can help underpin trusted and transparent trading relationships between nations and national-system operators, without recourse to new regional governance mechanisms. Where national operators face uncertainty establishing cross-border power arrangements that will be honoured, a shared distributed-ledger platform could use smart contracts to coordinate and automate power supply under a clear framework. By coding in rules for distributing generation capacity across the network, a distributed exchange could execute it automatically. In place of multilateral regulators presiding over transactions, automation could provide certainty and generate enough trust between parties to encourage new shared investments. Such a platform would also facilitate fair payment. Distributed-ledger platforms can facilitate fixed or variable settlements in tokens, thereby avoiding issues of currency fluctuation and making it possible to enact a “beneficiary pays” model that recovers costs fairly over time.

Channelling Corporate Investment Towards High-Impact Renewables

In developed markets, where large companies show an increasing appetite to meet sustainability pledges (see RE100), corporate investment could represent a significant source of new international energy finance. Companies in commercial and industrial sectors already account for around two-thirds of global electricity demand.

Today, some corporates (mostly US-headquartered tech companies) are beginning to use Corporate Power Purchase Agreements (CPPAs) to lead investment into clean energy by striking long-term energy supply contracts directly with renewable generators. Last year, large corporations signed a total of 31.1 GW of clean power supply via CPPAs, equal to 10 per cent of all renewable capacity added in 2021. Typically, these investments are purely financial, creating the conditions for firms to “green” their energy supply without a direct transfer of power in return. Instead, the generator sells the renewable capacity purchased in its local wholesale market, and in return the corporate receives a Renewable Energy Certificate (REC).

As an emerging investment class, CPPAs and REC schemes enable previously untapped sources of climate investment to flow from large companies directly to industrial renewable generators, solar home-system developers and mini-grid operators around the world.

Distributed technology could underpin a marketplace for corporate procurement of renewable energy. A distributed marketplace could democratise access to CPPAs and RECs – complex legal products – by creating a peer-based auction for smaller energy offtake contracts, with a flexible digital contracting mechanism. This marketplace would have clear multisided benefits: enabling generators to evidence contracts to raise further capital; providing corporate customers with a transparent store of their renewable energy certificates; and giving network operators visibility of power-transfer commitments across their networks.

Despite their global reach, to date CPPA investments have tended to concentrate in clean energy projects in the US and Northern Europe. A distributed marketplace would help create the visibility globally to coordinate investment towards areas where they are highest in impact, for example by replacing high-carbon fuels, such as kerosene and coal, in emerging economies. With records stored immutably on a distributed ledger, regulators would be equipped to better direct corporate investments, tackling any market failures of additionality or double counting if capital continues to target mature, low-risk projects in the US and Europe.

Crowdsourcing Funding for Local Clean Energy

The greatest barrier to clean power adoption is the upfront cost of capital required to develop new assets. Taking lessons from financial markets, distributed technologies have shown value using “tokenisation” as a source of fundraising in capital and cryptocurrency markets.

With available distributed-ledger platforms, energy developers can use tokenisation to take advantage of crowdfunding and initial coin offerings to raise the working capital required to fund new infrastructure projects.

These distributed fundraising methods can be applied to meet a broad range of investment needs. When financing large industrial-scale projects, for instance, smart contracts offer institutional and corporate investors flexibility to enforce bespoke conditionality: for example, conditioning funding to release upon achievement of a new development phase, or unlocking reduced interest rates if developers are able to evidence a certain carbon emissions standard. Within domestic investment projects, tokens enable residents or micro-investors to pool funding together for new infrastructure projects that benefit a whole community, with tokens purchased discounting future energy services.

The evidence suggests we need a surge in new spending and effective integration of new clean energy infrastructure (such as wind turbines, electric vehicles, battery storage) to reboot our energy transitions.

Distributed technologies – for example, blockchains, smart contracts and tokens – are governance tools that can underpin new arenas of energy system organisation, helping to hasten clean energy transitions by supporting more efficient local marketplaces and coordinating across international investor networks.

Establishing local energy systems (LES) will help diversify the range of institutions, investors and communities that invest confidently in clean energy assets, creating an attractive new layer of market operation where they can deploy assets and launch services. Distributed technologies – centred around a distributed local energy exchange – can support local markets to achieve deep trust and transparency in their operation, making them attractive places to investors, businesses and local communities.

Driving participation in LES will be a vital challenge. Without a critical mass of market actors and energy assets, their impact will be blunted. This key risk can be mitigated in market design, with the use of national licensing to push asset owners towards local systems. Moreover, the use of distributed technology will, by virtue of its trust and openness, help to drive participation.

It should be noted that distributed technologies deployed in transactive platforms at this scale must actively adopt sustainable and scalable architecture. Most truly public blockchains, such as Bitcoin, demand considerable power resources and can be major contributors to emissions. Recent innovations in consensus mechanisms that move away from “proof-of-work” protocols and towards “proof of stake” or “proof of authority” have begun to resolve this issue. These “sustainable” practices must be designed in at the outset.

Creating the conditions to better coordinate international investments in power infrastructure and diversify the private sources of capital available to renewable generators can also act as a powerful lever to scale global clean-energy investment quickly. In particular, focusing on driving investment towards financing lower-cost infrastructure in developing economies can maximise capital’s returns to reduced carbon emissions. For example, despite having the highest solar potential in the world, Africa is home to less than 1 per cent of all global solar assets.

Distributed technology platforms can play a key role in connecting and coordinating financing among disparate networks of corporate and private investors, as well as strengthening trust between state actors to share operation over cross-border renewable assets.

In scaling distributed technology solutions internationally, it will be important to address potential issues of platform governance. If they are facilitating large amounts of international capital, how these transparent marketplaces are themselves governed will be contentious. Typically, blockchains use “on-chain” governance to promote a rules-based method of “voting” among the network, though this may be highly impractical at truly global scale. Any international platform will need to wrestle with this governance issue from the outset.

To support the development of distributed local market exchanges, policymakers should:

• Regulate against energy data monopolies, actively promoting the use of distributed technologies by energy system and network operators to achieve trusted data transparency. For example, in the UK, the “Presumed Open” licence codes for network operators have improved conditions for open data, and further obligations could be introduced to ensure distributed technologies are considered within industry digital strategies.

• Create a national market and balancing framework able to decentralise system operation functions to local areas, where independent actors can be trusted to convene local markets if they meet standards for data transparency and immutability.

• Design a regulatory structure that enables local energy systems. For example: ensure grid operators provide accessible data on local network status; ensure new clean power assets enjoy a level playing field to compete in local balancing markets; and introduce locational grid fees that enable variable nodal pricing.

To support the growth of distributed technology platforms that coordinate international clean energy investment, policymakers should:

• Condition any new interconnection capacity investments on deploying a distributed technology platform that underpins simple, trusted bilateral or multilateral power sharing across borders.

• Back emerging independent distributed investment platforms, such as D-REC or WePower, to scale by aligning international standards that facilitate peer-based energy procurement, directly between corporates and generators.

• Entrust a neutral international body, such as the World Energy Council or Energy Web Foundation, to preside over “off-chain” governance models for global distributed technology-energy platforms.

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