by Antonio Andrés Franco
Public Utility Woes
The integration of distributed ledger technology (i.e., blockchain) with our nation’s electric grid could yield sustainability benefits while providing solutions for many of the grid’s problems. The electric grid needs to be modernized, a reality that played out with California’s wildfires, some of which appear to have been triggered by malfunctioning electrical equipment managed by the Pacific Gas & Electric Company (“PG&E”). California’s largest utility now faces Chapter 11, a bankruptcy of historic proportions, while operating in the heavily regulated electric power business, where investors’ return-on-investment (“ROI”) is guaranteed by federal and state regulators.[1]
Under the Bankruptcy Code’s protection, PG&E still finds itself in the crosshairs of regulators and ratepayers who claim PG&E violated its duty to sufficiently maintain reliability on the portion of the grid it manages.[2] With $5.5 billion of debtor-in-possession financing, PG&E must determine how to invest in infrastructure that promotes grid reliability while meeting the rising demands of California ratepayers for renewable energy alternatives.[3]
Understanding why it’s hard to make “the grid” sustainable
Discrete investments in emerging technologies, like the LO3 Exergy (“XRG”) blockchain, may accommodate sustainability initiatives while providing a more integrated framework for grid processes, which remain highly fragmented under our current system.[4] Of course, with any energy-related investment, the investor must recognize that the interstate system that delivers our electricity was designed for fossil fuels, not renewable energy alternatives. It is based around big power centers that continue to generate most of our electricity. Today, however, many of the electric power industry’s problems occur at the grid edge, far away from traditional generation centers, where consumers are increasingly disrupting grid functions by tapping into the grid with solar panels and smart energy devices (think: your neighbor with too many solar panels).[5] These environmentally conscious prosumers have a far-reaching impact on the national grid, which is interconnected like a web.[6] Because the sprawling national electric system is low-tech, it is also difficult to detect failures, which results in additional costs that are ultimately passed onto ratepayers.
Blockchain Benefits in Retail and Wholesale Power Markets
To accommodate changing realities on the grid’s edge while advancing sustainability agendas, the electric power industry should observe LO3’s Brooklyn Microgrid. LO3, a company that aims to “[reset] the rules of the [electricity] marketplace,” established a microgrid in 2017 that utilizes a distributed ledger in Brooklyn, New York. Microgrids like LO3’s could effectively contain grid failures because they are independent from the centrally managed grid infrastructure. With distributed ledger technology, microgrids provide a testing ground for prosumer generation, smart metering, storage devices, and more, far away from traditional power centers.[7] In addition to advancing sustainability initiatives, blockchain can mitigate ongoing electric industry concerns regarding grid cybersecurity because of blockchain’s capacity to encrypt secure information. Over time, the cost of electricity would be reduced with a distributed ledger that can accommodate renewable energy, since alternatives like solar can be generated very cheaply.
Imagine buying your neighbor’s excess solar power. With blockchain, sunny days could become even brighter for ratepayers, who could buy cheaper renewable power from neighbors within their peer-to-peer network. Using XRG tokens to purchase their electricity, Brooklynites who are tapped into the LO3 microgrid are the first in the country to reap blockchain’s sustainability benefits, albeit, on a small scale.[8] If deployed in emerging markets, where energy demands are rising, LO3-like microgrids have the potential to deliver sustainable power to communities that remain without it today.
Finally, buyers and sellers in wholesale power markets stand to benefit from a blockchain protocol, which would streamline the process for validating energy transactions through self-executing smart contracts. Unlike the current system, which relies on a “byzantine” network of intermediaries for most electricity transactions to take effect, a blockchain could record wholesale transaction data in real time, encouraging competition with the added transparency that a publicly accessible ledger provides.[9] Scaled effectively, prices would be more accurate, because supplies could be logged into the blockchain automatically with the integration of sensor and storage technologies, giving market participants a better idea of their options relative to competitors. Grid malfunctions could also be more easily detected, and the related expenses reduced, with a protocol that layers blockchain and other forms of emerging tech, such as artificial intelligence.
Meeting Peak Load with Principles of Equity
As renewable energy demand rises, lawmakers and public utilities must test new strategies to achieve greater sustainability while maintaining a safe and efficient grid infrastructure.[10] Facing criminal liability for deaths resulting from the California wildfires, PG&E’s Chapter 11 woes demonstrate the high costs of failing to modernize. While revamping the decaying electric grid will be expensive, continuing to invest in antiquated systems runs against mounting evidence that greenhouse gases will have a devastating impact on economic growth—in the US and abroad.[11] Given this reality, investors in public utilities should expect a long-time horizon on ROI, regardless of the path energy leaders choose to facilitate grid modernization.[12] Notwithstanding the attractiveness of cheap natural gas, it is worthwhile for regulators and utilities to test emerging technologies like LO3’s blockchain given their ability to do so on a cost effective small-scale provided by microgrids, which are widely accepted. They should do so before abandoning laudable sustainability initiatives.[13]
Works Cited:
[1] FPC v. Hope Natural Gas, 320 U.S. 591 (interpreting Section 5 of the Natural Gas Act to mean that public utility investors should expect returns that reflect the risk-return ratio for investments bearing similar risks).
[2] Pacific Gas & Electric Co., Annual Report, Federal Energy Guidelines (FERC) https://www.pge.com/pge_global/common/pdfs/about-pge/company-information/regulation/FERCForm2.pdf (disclosing PG&E’s grid maintenance expenses were about $1.5 billion in 2017).
[3] Tomi Kilgore, PG&E Secures $5.5 Billion in DIP Financing to Fund Operations Through Bankruptcy, MarketWatch (Jan. 22, 2019 8:00 AM), https://www.marketwatch.com/story/pge-secures-55-billion-in-dip-financing-to-fund-operations-through-bankruptcy-2019-01-22. (explaining when bankruptcy courts permit debtors to retain control of their assets while being able to raise funds from new creditors, who receive an advantageous position in the reorganization process, much to the dismay of unsecured debtholders).
[4] Lawrence Orsini, et al., Introduction to Exergy, Exergy: Business Whitepaper (Dec. 14, 2017), https://exergy.energy/wp-content/uploads/2017/12/Exergy-BIZWhitepaper-v3-2.pdf. (explaining the US grid’s complexity, which is connected by about 450,000 miles of high-voltage transmission and includes a network of over 7,000 power plants).
[5] Julia Franz, California’s electrical grid can’t handle all the solar electricity the state is producing, Public Radio International (July 20, 2017 9:30 AM), https://www.pri.org/stories/20 17-07-20/california-s-electrical-grid-can-t-handle-all-solar-energy-state-producing; see also
[6] Axel Gautier, The Prosumers And The Grid, 53 Journal of Regulatory Economics (Jan. 2018), https://www.researchgate.net/publication/322564139_The_prosumers_and_the_grid (Prosumers, households that both produce and consume electricity, cause issues for grid operators because the excess electricity they produce with devices like solar panels re-enter the grid, which functions like a one-way street).
[7] Cassandra Sweet, South Australian Businesses Launch Blockchain App to Cut Costs, Trade Local Clean Energy, GreenBiz (March 20, 2018 1:45 AM), https://www.greenbiz.com/article/so uth-australian-businesses-launch-blockchain-app-cut-costs-trade-local-clean-energy (describing LO3’s project in South Australia, a business-to-business trading platform which includes over a dozen companies).
[8] See id. (explaining that Australia’s more flexible energy regulations permitted LO3’s project to connect with battery storage services; to incorporate IOT devices to improve demand-side response).
[9] Mike Orcutt, How Blockchain Could Give Us A Smarter Energy Grid, MIT Technology Review (Oct. 16, 2017), https://www.technologyreview.com/s/609077/how-blockchain-could-give-us-a-smarter-energy-grid/ (describing transaction costs associated with forward and futures contracts, which ultimately result in higher electricity bills for ratepayers).
[10] John Wolfram, Utility Rates: Fair, Just and Reasonable, Catalyst Consulting LLC (2013), http://www.catalystcllc.com/wp/wpcontent/uploads/2016/02/Utility-Rates-Fair-Just-and-Reasonable.pdf (explaining the precedent that rate setting regulators must balance between the interests of public utility investors and ratepayers).
[11] U.S. GLOBAL CHANGE PROGRAM, NATIONAL CLIMATE ASSESSMENT (2019) https://nca2018.globalchange.gov (detailing how the rising effect of green-house gases will stunt the U.S. economic growth outlook).
[12] Jim Vess, Aging Electrical Gird Could Cost $5 Trillion to Replace, Energize Weekly (March 29, 2017), https://www.euci.com/aging-electrical-grid-could-cost-5-trillion-to-replace/ (reporting extensive modernization that is needed to continue ensuring grid reliability)
[13] Christian Roselund, Michigan Dismantles Net Metering, PV Magazine (April 20, 2018), https://pv-magazine-usa.com/2018/04/20/michigan-dismantles-net-metering/.
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