Blockchain.

In the information technology world, it’s the word on everyone’s lips, hyped as a revolutionary technology that could transform the very foundation of business transactions.

But the most interesting thing about blockchain might be that it’s gotten so much attention with so few people understanding exactly what it is.

“New technology is always intriguing because people espouse that it can accomplish wonderful things,” says Craig Miller, NRECA chief scientist. But to move from hype to serious consideration, he notes, “we have to pick it up and look at it from five or six directions and say, ‘What can I really do with this?’”

For electric cooperatives, that means recognizing blockchain’s potential and its limitations, both for their business and for the power industry as a whole. It also means asking whether investment in blockchain truly benefits co-op members.

“Software of any kind is a means to an end,” Miller says. “We start with delivering power safely, reliably, and affordably, and in everything we do, you have to ask the question, ‘Does it address those needs?’”

For blockchain, Miller and other experts say that question will probably have different answers at different levels of the energy industry. But determining its likely impact starts with understanding what blockchain is and how it works.

What Exactly is Blockchain?

Blockchain is a software platform originally developed by the creator of the virtual currency bitcoin. Because bitcoin has no physical existence, and trading of the digital currency is not cleared through a central bank or other trusted third party, another method was needed to make sure transactions were fair and accurate.

Blockchain was developed to establish confidence in the integrity of the bitcoin market. In the simplest terms, a blockchain is a digital transaction ledger: a method of recording transactions between buyers and sellers.

“A blockchain is a collection of transaction records— the blocks—linked together in a time series—the chain,” Miller explains.

The chain grows with each new block, which are linked and secured using advanced cryptography.

“The concept is that each transaction record includes a cryptographic key to the prior transaction,” Miller says. And since each key is influenced by the previous key, “any change in any block requires changes to all subsequent records to maintain the integrity of the chain.”

Because any tampering with a transaction record will ripple through the entire blockchain, he adds, “this cascading connectivity makes it theoretically impossible to corrupt a record undetected.”

The other critical aspect of blockchain is that this linked digital ledger isn’t kept in one central location or computer server, but rather distributed across the systems of all participating parties, making it more transparent and, under ideal conditions, reducing or eliminating the need for that third party or “trust agent” to oversee transactions.

This feature accounts for much of the enthusiasm for blockchain, as supporters envision a world where blockchain makes possible direct, verifiable, and more-efficient online transactions of all kinds between different parties.

“A blockchain provides a shared, visible record of transactions in a market that is fast, resistant to tampering, and theoretically less expensive than traditional methods used for recording and validation of high-value transactions,” Miller says.

‘Important Limitations’

Such apparent advantages of blockchain have aroused interest in financial, marketing, and business circles. But Miller and other experts caution that the technology comes with important limitations that can get lost in the excitement about its potential.

One caveat offered by Venkat Banunarayanan, NRECA’s senior director for distributed energy, is that at this point, any assumption that blockchain transactions are less expensive to complete are “hypothetical and unproven,” particularly over the long term.

Additionally, blockchain is best applied to transactions without a lot of complicated conditions attached, Miller says. For example, buying and selling bitcoin essentially involves only two main variables: price and quantity. A more complicated transaction like a mortgage, which can require many pages of documentation to fully record, is a challenge for bitcoin and makes it less effective.

Blockchain works best when the thing being bought or sold is virtual rather than physical—bitcoin, rather than actual rare coins, for example. If the transaction involves a material product, whether it be a new home thermostat or a jumbo jet, some trust agent is usually required to certify that the physical transfer actually takes place.

Banunarayanan also questions the claimed “impenetrability” of blockchain, noting there are many instances of blockchain-based platforms being hacked due to poor implementation, faulty software, or insufficient precautions. In one case, $460 million worth of bitcoin was stolen by hackers.

“Cybertrading platforms and other applications are only as good as their implementation,” he says.

Andre Joseph, NRECA principal for cybersecurity, says these limitations and others in blockchain have tempered some of the early enthusiasm—and dubious claims about its capabilities—around the technology.

“Many of the financial institutions that developed blockchain products are shuttering them,” he says. “I think that tells us the reality is starting to catch up to the hype.”

What Does it Mean for Electric Co-ops?

The lure of the new is a powerful force in the IT industry, which embraces the value of disruptive change. But Joseph points out that an electric co-op, or any business, looking at a cutting-edge technology must answer one key question: “What problem am I trying to solve?”

The problem that blockchain was created to solve— providing a verifiable and secure means of tracking digital transactions between different parties—isn’t really a problem for electric cooperatives, Joseph says. In the near future at least, “I just don’t see [blockchain] for the co-op space,” he adds.

Cooperatives are obviously involved in a lot of transactions: billing and receiving payments from consumers, contracting with vendors, and, of course, purchasing power through contractual arrangements with G&Ts, other power generators, or on the energy markets.

But co-ops have systems in place to deal with all these transactions that function well and, most importantly, have established their integrity in managing these transactions.

“They are the trust agent. They’re a reliable, trustworthy agent, and our members express that fact,” Miller says. “Blockchain provides another way to establish trust, but do we need it? Not really; we’re doing a heck of a job.”

For this reason, Miller also sees no immediate need for co-ops to embrace blockchain technology.

“We’ve sat here in my office, my team, and we’ve tried to envision applications in our space, and we haven’t been really successful yet,” he says. “Maybe we just haven’t tried hard enough. I hope other people prove us wrong, but we haven’t come up with strong applications.”

Miller says blockchain software isn’t particularly hard to write, but if a legitimate need develops for cooperatives to adopt blockchain as part of their operations, they will be better off purchasing the software platform from a vendor, as they would many other IT solutions.

“My view is that no co-ops should ever write their own blockchain,” he says. “It’s going to be something you buy.”

Some vendors in the energy sector are already touting blockchain as part of their software solutions. Joseph says to approach such claims with caution and to ask vendors to explain their blockchain technology and what advantages it provides over existing software.

“When somebody starts to fumble, and you hear answers that don’t quite make sense,” he says, “it might be a red flag.”

What Could it Mean to the Power Industry as a Whole?

For now, much of the enthusiasm for blockchain is focused in the distributed and renewable energy sectors. Start-up companies in the United States, Australia, and Europe are experimenting with using blockchain-based platforms to allow peer-to-peer energy trading between rooftop solar owners or other distributed generation.

“There is this contingent in the energy industry that wants this transactive energy—basically the idea that I can make some energy or take some energy-related action [such as conservation], and it can be traded with basically anyone,” says Keith Dennis, NRECA’s senior director for strategic initiatives.

The idea is that neighbors can trade or sell energy directly to each other without their electric utility serving as the trust agent that keeps track of power being sold into or purchased from the grid.

LO3 Energy, a startup backed by multinational technology conglomerate Siemens, is using blockchain on a small scale for peer-to-peer energy trading on community microgrids. The company’s highest-profile project is a microgrid in Brooklyn.

Some companies are building energy sales approaches around both blockchain and use of a “token,” a virtual currency specifically designed for electricity payments.

ConsenSys, a blockchain technology company, has managed to raise $40 million for Grid+, an energy company that will initially operate as a commercial utility in deregulated markets. Customers will pay for electricity using Bolt, a virtual token they purchase that will have a fixed dollar value. The company says payments will be made automatically at the time of consumption, using blockchain to keep track of transactions and eliminating the cost of collection or bad debts, thereby lowering the cost of providing power.

Eventually, Grid+ also plans to create an energy-sharing marketplace where users can buy or sell surplus or battery power in peer-to-peer transactions using Bolt, with its blockchain software enabling the trading.

Dennis says these projects have an attraction for a particular kind of green energy enthusiast who would like to see power supply undergo a radical transformation, moving away from large-scale generation and the national grid to a distributed system largely based on renewables. Blockchain is hailed as software that can make such an approach feasible.

But he doubts that the idea has broad appeal.

“The average person is not thinking, ‘Gee, if I could only get solar power from my neighbor,’” Dennis says. “I don’t see the widespread interest.”

Miller notes that the idea of a decentralized peer-to-peer network also neglects the importance of baseload generation, grid management, and system maintenance provided by co-ops and other utilities. The approach “fails to recognize our role as the guarantors of reliable service,” Miller says. “We bear the fundamental responsibility for keeping the lights on.”

Dennis and Miller say blockchain platforms could play a meaningful role in energy trading on a larger scale, such as transactions in the regional power markets.

“The people who should be looking at blockchain are probably on energy trading floors,” Dennis says.

ACES, the energy management company that helps electric co-ops and other clients buy and sell power, has been tracking the development and spread of blockchain, says Chris Haas, ACES senior vice president and chief information officer.

Haas says blockchain could prove an advantage to bilateral energy trading because it allows both parties to make sure they have the same set of data and “there’s less after-the-fact checking and settlements that have to occur.”

But he notes that a significant portion of energy trading now operates through markets established by independent system operators (ISOs) and regional trading organizations (RTOs), which serve as the trust agents who clear trades. In general, the ISOs and RTOs do a good job as centralized clearinghouses, he says, with strong security systems in place for protecting and managing data.

“For those entities to invest in blockchain would be a major initiative for them,” he says. “The return they get on that investment may not be worth the effort. In some cases, centralized data as opposed to distributed data in a blockchain network still has its place.”

Haas does believe blockchain will play a role in energy trading in the near future.

“I just don’t know that it’s going to be really extensive in the next four to five years,” he says.

In the end, he adds another caution to temper the hype around the technology: “Blockchain is not a magic bullet. It’s very good for some things, but not so good for other things.”

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