Local Peer-to-Peer energy trading through blockchain

A framework analysis to determine the readiness level for implementation in The Netherlands.

In this blogpost, Yvo Hunink from Dutch Blockchain Coalition (DBC) collaborated with Ines Ylla, who wrote her master thesis at the Technical University of Eindhoven on the topic of Peer-to-Peer (P2P) blockchain energy trading in the Netherlands and has developed a framework to assess the readiness of the Dutch market to implement it, for which DBC has provided input. The text is summary of Ines’ thesis, with some additional notes and recommendations from Yvo for the DBC context.

Introduction

In the pursuit of a sustainable and decarbonized energy future, distributed generation has emerged as a key driver of energy transition at the end-consumer level generating energy near the point of consumption (AEMC, 2023). Distributed energy resources (DERs), such as photovoltaic panels, have witnessed significant growth, leading to the decentralization of energy systems and the emergence of new energy business models like energy communities (EC), often referred to as energy hubs, or peer-to-peer (P2P) energy trading. Experts state that the use of blockchain technology can be a crucial enabler for the implementation of P2P energy trading as it decentralizes data verification and storage of energy exchange as well as improve the transparency and traceability of the energy transactions (IRENA, 2020; Wu et al., 2019).

In The Netherlands, P2P energy trading has been on the agenda since 2018, touting some of the world’s pioneers in the space such as Hanzenet or Jouliette from Spectral. However, due to legal constraints on the exchange of energy between households, and the market structure with privatized energy suppliers and semi- public network operators, the interest has cooled down in recent years. Therefore, other countries, such as Australia, India, and some countries in Africa, have overtaken the initial head start into more developed local energy systems. However, in the first concept of the expected Dutch national plan for the energy system, initiated by the Ministry of Economic Affairs and Climate, local initiatives and the decentralized energy grid are explicitly back on the agenda (RVO, 2023). Even in the latest versions of the expected new law on energy, defining energy sharing within communities seems to have a place, at least with the help of a local energy cooperative as a facilitator. Also in the new Agenda on Knowledge and Innovation (KIA) Digitization of the Topsector ICT, which is the vehicle of the Dutch government for public-private partnership, the tokenization of energy with the purpose of local trading, is mentioned as one of the supporting pillars for the mission on Climate and Energy (TopSector ICT, 2023). Also, local smart grid projects such as those by the Municipality of The Hague and Stedin in Living Lab Scheveningen are catching wind, being driven by the problem of congestion in the electricity grid. Therefore, the momentum around P2P energy trading and subsequently the blockchain-based projects, is starting to grow again.

But...how does P2P energy trading works?

P2P energy trading works through the utilization of an energy trading platform. It uses a business model that enables prosumers (individuals both producing and consuming electricity) to trade their surplus of electricity with other peers. It decentralizes the energy transactions as this is done from one peer directly to another peer, without passing though the centralized local power supplier (see Image 1). Although the situation in the Netherlands will still require a central party, being the energy cooperative, to facilitate this exchange, energy cooperatives could decide to adopt a decentralized approach. This effectively allows for automized transactions in the community, without much administration for the often volunteer- based cooperatives.

Since the energy and data exchange takes place on a digital platform, functioning as an online marketplace where consumers and prosumers can, therefore, seamlessly trade electricity (IRENA, 2020). However, P2P energy trading can also have other benefits for the energy transitions:

• It economically profits prosumers as they can monetize their surplus of energy generated, for instance with their solar panels.

• It can be utilized to efficiently manage the energy demand by providing electricity when there are demand peaks.

• It helps generate clean energy mix in the local grid (Tushar et al., 2020).

• It reduces consumers reliance on traditional centralized grid and increase end-user involvement in the energy system (Hext, 2022).
  

What does blockchain add to this equation?

Blockchain links with P2P energy trading systems through similar decentralization characteristics. As P2P energy trading aims to decentralize energy transactions, blockchain aims to decentralize the data verification and storage needed to enable the energy transactions. Having these characteristics in mind, blockchain adds to :

• Reducing the transaction costs of energy trading (Tushar et al., 2021).

• Ensuring transparent energy transactions due to blockchain's immutable characteristics. This provides the integrity and non-change of the energy data among actors of the energy ecosystem (Dutch Blockchain Coalition,2023; Tushar et al., 2021).

• Helping store and process payments with the use of smart contracts, digital wallets, and tokens (Roth et al., 2022).

• Anchoring ownership of energy generation assets through tokenization and linking the production of energy to those assets (2Tokens.org, 2023).

• Providing trading certificates called energy attribute certificates (EACs) or Certificates of Origin (CoO) so the end user can know what type of energy they bought (i.e. renewable energy) thanks to the traceability characteristics of blockchain.
  

Even though blockchain is an attractive solution to help implement the so-called “energy transition” in our society, it is not the only solution capable of ensuring the functioning of a decentralized energy system, of which P2P energy trading is a part. A pilot in P2P energy trading project from Germany functions by storing transactions and data flows in a conventional database (PwC, 2016).

Now that we know what P2P energy trading is and how blockchain can help its implementation in society, let’s talk about how The Netherlands is adopting this disruptive technology.

A comprehensive study was conducted to create a framework to evaluate how ready are peer-to-peer (P2P) blockchain energy trading platforms for implementation within the Dutch energy ecosystem. The study involved (1) the identification of the key elements needed for these platforms to be launched in the market, (2) an evaluation of a current operative P2P-blockchain energy trading platform developed by Distro Energy company located in the Port of Rotterdam, and (3) the creation of the “P2P-Blockchain energy trading platform readiness framework”.

The research differentiates the technological infrastructure domain, the market dynamics domain, the legislative domain, the operations domain, and the societal and user adoption domain as the multidimensional key criteria for understanding the implementation of P2P-blockchain energy trading platforms. Every domain has subdomains and indicators to assertively assess the readiness and suitability of any P2P-blockchian energy trading platform to operate within the Dutch energy socio- technical ecosystem.

Here is an example of what these indicators look like within the framework:

Operational P2P-Blockchain Energy Trading Readiness Framework

For a P2P energy trading platform to work, there must be available distributed energy resources (DER) that can support the exchange of energy. The Indicator A. Distributed energy resources (DER), specifies this. Therefore, the assessor will have to add a value 0, 0.5 or 1 in each indicator according to the level of implementation of that specific indicator.

Distro Energy platform – the applied case study to the framework:

Distro Energy was created as a spin-off from the Docklab (former Blocklab) initiative within the Port of Rotterdam, a partner of the Dutch Blockchain Coalition. The Distro Energy platform is meant as a transactive energy system, which facilitates seamless peer-to-peer energy trading, enabling direct energy transactions between prosumers (individual companies) within the port. Distro Energy application to the framework demonstrate the effectiveness of this framework. Image 3 shows the current readiness level of Distro Energy blockchain trading platform.

The results of the assessment of the Distro case show that the technical and operational domains are nearly in place for seamless integration of P2P blockchain- based solutions into the Port of Rotterdam energy grid. However, market dynamics, legislative domain, and societal/user adoption domains, areas which the company doesn’t have a direct influence over and require the action of external actors of the ecosystem, are lacking behind and require subsequent work to foster widescale adoption. For example, in relation to market dynamics Distro Energy relies entirely on the relationships they create, and the level of investment of those to cooperate with them.

What key learning can be extracted from this?

The framework proves valuable as it provides a means to quantify the level of operationalization achieved by any P2P blockchain energy trading platform operating within the Netherlands. This can be assured, as the information included in the framework has been checked with the feedback provided by various stakeholders in the Dutch energy system. Overall, the comprehensive assessment ensures that all necessary fundamentals are in place for successful implementation.

Additionally, the thesis provides a specific guideline on how to utilize the framework, starting by (1) the definition of the limits of the assessment, (2) the assessment options available to the assessor for gathering information to evaluate the indicators, (3) guideline to utilize the framework, and (4) how to sum up the values of the indicators and create results sheets to visualize them.

Which actors can benefit from this framework?
The information and framework provided by this research has practical applications for several actors:

• Energy Communities: It can help them understand and plan what are the key requisites needed to start or further develop an operative P2P-blockchain energy trading platform. Giving them insights in which readiness level they lie on, what have they achieved, and what do they need to improve to achieve market operationalization.
• Government and Regulatory Bodies: By assessing the readiness level of the energy market and legislative aspects related to this technology, policymakers can formulate appropriate governmental programs to bolster the implementation of this technological system.
• Energy Companies: With the incoming decentralization of the energy ecosystems, the actors and roles within the energy market are also going to shift. This framework can help them to understand how energy companies can support and partner with P2P energy trading platforms for a better functioning of the overall electric grid system.
• Distribution System Operators (DSOs): DSOs have major problems with energy peak demands by partnering with P2P energy trading platforms and knowing the energy flows to the grid, the companies in charge of the balance the energy flow into the grid will have more information to manage these peak demands.

In light of these challenges, specific advice is proposed:

Advice for energy communities: Keep on creating partnerships and join forces with different actors of the energy ecosystem. with energy companies, municipalities and other government bodies can be beneficial for a long-term implementation of P2P-blockchain energy trading platforms. Another interesting aspect to work towards is the better understanding of user adoption of these technologies, for instance, users do not need to understand how blockchain works but they need to trust that it works, secure.

Advice for government and regulatory bodies: We are moving towards a more decentralized energy ecosystem, where the energy mix is going to be more and more diverse. If the governments want to support this change and make it easier for the energy transition to occur, they must start providing an adequate regulatory framework. Strengthening the role of the energy communities, supporting the creation of general-purpose infrastructures for their effective and efficient operations, and easing the path to partner with the already energy companies of the market that have the knowledge and capacity to provide secure energy. 

Advice for energy companies: Energy companies will see their role changing, which can already be seen with the variety of new business models coming up in the sector. Energy companies will switch from energy procurement and sales to facilitating the exchange of energy between prosumers. They should increase the transparency of their operations and improve data availability to support new business models. By expanding in these domains, the energy companies will be able to keep with the energy transition and still be part of the energy market when decentralization occur.

How ready is the Dutch energy ecosystem to implement P2P energy tradingsystems?
In overall, P2P-blockchain energy trading is in its early stages of implementation in the Netherlands. While the technological infrastructure is well-established, there is a lack of legislative support hindering its implementation. However, this appears to be changing. The energy market needs to decentralize operations and improve data availability to support this new business model. Additionally, further research is needed to understand user adoption and societal acceptance of this technology. 

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