1. Cryptocurrency mining causes heavy energy consumption mainly due to its underlying Proof-of-Work algorithm. However, blockchain with other consensus algorithms (PoS, PoA and PoB) are expected not to have serious energy issues.
2. In the energy sector, blockchain can potentially exert great efficiency in three promising businesses in China: peer-to-peer transactions in the distributed power market and CET market, etc, EV charging services among private owners of EV charging stations, and tracking renewable energy from the power plant to consumers.
It is well-known for all that bitcoin mining costs a considerable amount of energy. Due to the concerns over how mining contributes to climate change, Tesla's CEO Elon Musk announced to decline the bitcoin transaction unless reasonable (~50%) clean energy usage by miners is confirmed. (Source: CNBC. 2021.6.14. Musk says Tesla will accept bitcoin again as crypto miners use more clean energy). In China, the cryptocurrency is closed nationwide after the government issued a strict ban.
However, it does not mean blockchain itself is highly energy-consuming. On the contrary, this technology is highly promoted in China covering many areas, including the energy sector. Here, we first explain why cryptocurrency, unlike blockchain, is banned from an energy perspective, and then identify business opportunities for blockchain in the energy industry. You can also check our previous blockchain article about infrastructure, major players and use cases in China[See Without Cryptocurrency, Where to Go for China’s Blockchain? ]
Energy consumption issue with blockchain
As bitcoin gradually becomes the most popular digital asset across the world, it has also been notorious for the heavily energy-consuming. The bitcoin mining business can consume energy at 133.68 TWh per year (estimated based on the lowest-efficiency mining computers), an energy amount relevant to the annual electricity consumption of Sweden.
Thus, places with cheap electricity are attractive for bitcoin mining companies. Across the world, China was an ideal country (before the domestic cryptocurrency-mining ban in July 2021) to place the heavy energy-consuming mining computers, with advantages of abundant resources, sufficient infrastructure, cheaper electricity and labor. In China, the southwest area, especially Sichuan, Chongqing and Yunnan, was the center for megawatt-level mining workshops backed up by tremendous hydropower. In northern China, some provinces can deliver much cheaper electricity mainly because these local governments want to reduce the high curtailed ratio of PV and wind power – including Heilongjiang, Liaoning, Inner Mongolia and Xinjiang. (see curtailed REpower in Four reasons why China promotes hydrogen energy (Part 1))
Figure 1 the map of cryptocurrency mining in China
Source: Integral summarized, Investopedia. 2019.6.25. China May Curb Electricity for Bitcoin Miners: Will Prices Tank?
Why mining bitcoin is so energy-consuming? The major reason lies in the consensus mechanism in its underlying blockchain. Bitcoin is based on a public chain that adopts Proof-of-Work (PoW), a consensus mechanism that requires mining work to solve the puzzle and rewards only one player (bitcoin). Thus, POW-based mining demands costly mining hardware and high power consumption. Also, the mono-winner mechanism triggers fierce competition of computational power in network miners. (Source: Wallstreetcn. 2021.5.22. 肮脏的比特币！挖矿耗电量为什么比一个国家还高？)
Indeed, blockchain is a compound of many different technologies. As the core part of a blockchain, the consensus algorithm works as an agreement to validate transactions, which guides the participants to work on the validation process, by computing work, or by the stake of coins, etc.
The solution to address the high energy consumption issue
However, it doesn’t mean all blockchains have to adopt this very energy-consuming consensus mechanism. By far, there are various types of mechanisms in consideration, such as
Proof-of-Stake (PoS), a mechanism that selects validators in proportion to their token holdings in the associated cryptocurrency instead of using mining work to guarantee safety. It does not incentivize extreme amounts of energy consumption.
Proof-of-Assignment (PoA), a mechanism that allows simple devices to confirm agreements, requiring far lower power than PoW and PoS. These devices can be household appliances and industrial equipment fitted with microprocessors, controllers and memory modules.. This algorithm is adopted to coordinate a series of distributed devices in IoT by assigning simple but important cryptographic. (source: Ambcrypto. 2018.7.23. PoA vs PoW vs PoS.)
Proof-of-Burn (PoB), a modified PoW that allows miners to ‘burn’ the virtual currency tokens – that is, send them to a verifiably un-spendable address. Then miners are granted the right in proportion to the coins burnt. It is considered an effective alternative PoW without energy waste. It is the coin-burning activities that keep the network agile and reward miners. (Investopedia. 2021.6.21. Proof of Burn)
Among these alternatives, PoS is expected to be mainstream for the replacement of PoW. Etheruem, based on PoS, recently has caught a lot of attention from investors and market players. Let’s take a detailed look into the comparison of PoW and PoS. Since PoW consensus is based on computation power and only gives a reward to the winner, the mechanism triggers lots of energy consumption. In the consensus of PoS, participants with more coins have a higher probability of validating a new block and collect network fees as a reward, which is way more energy efficient.
In a nutshell, it is only bitcoin mining that causes energy over-consumption issues. However, blockchain is more than bitcoins. The following section introduces three promising uses of blockchain in accelerating China’s energy transition.
Blockchain opportunities in China’s energy sector
Overall, in the momentum of China's blockchain and energy reform, many opportunities are coming up so that integrate the decentralization, anonymity and immutability of these features into the power industry. Here, we identify three potential businesses to engage in the promising fusion area of blockchain and power.
1. Peer-to-peer transaction.
As China has been promoting renewable energy, more and more power consumers have become ‘prosumers’. Prosumersare a type of power user who consumes power partly or all generated by themselves. For example, they install PV panels on the house roof and sell (or store) the excess generated power to other consumers (or save e-bills).
An ideal blockchain-based trading platform allows participants to trade locally the excessively generated energy with their neighbors in a small-scale community, e.g., industrial parks, microgrids. Using a distributed ledger system instead of a central administrator, every transaction only needs to be recorded for once, eliminating duplications and since every participant has access to the data, transactions can be highly secured.
Figure 3 blockchain-based peer-to-peer retail platform in the distributed power market
Source: Emerton. 2017.10.18. Rewiring energy markets:
Energy Blockchain Labs Inc. and IBM have co-developed a carbon asset transactions platform with a blockchain-based distributed ledger that enables participants to track carbon footprints and understand the buy/sell timing of the carbon asset in the market. Also, regulators in the blockchain can more easily assess the de-carbonization process by monitoring the participants' emissions against quotas. (Source: Energy Blockchain Labs Inc.)
2. Prosumer business: EV charging stations.
China's EV market has become a mainstream fashion these days, as an increasing number of drivers purchase EVs. However, compared to the fast-increasing number of EV cars, the growth of charging stations way lags. Currently, it has become a frequently occurring problem for EV drivers to seek an available and functional public charging station (mostly in poor condition), meanwhile, a lot of private EV charging stations are in vacant use. (See Key Insights on China’s Policies on Developing New Energy Vehicles).
By the end of 2020, there were 1.68 million EV charging stations throughout China, including 807 thousand public and 874 thousand private stations*1. The current usage for public charging stations is below 4%, even lower 1.8% in Beijing and 1.5% in Shanghai*2 due to difficult locations and poor maintenance. (Source: 1) Eastmoney. 2021. 2.12. 2020年中国电动汽车充电桩市场发展现状与竞争格局分析 主要分布在东部和中部省市.2) Sina. 2020.12.14. 数量近150万台，使用率却不到15%.) And private charging stations are mostly used at night and are on standby during the daytime, which is massive energy waste. Thus, to solve the inefficient usage of EV charging stations and help EV drivers quickly find nearby charging sites, one solution is to provide access to private EV charging stations for other drivers. Here, blockchain can be applied to guarantee the safety and accuracy of transactions.
Figure 4 the blockchain-based platform for EV charging stations
Source: Emerton. 2017.10.18. Rewiring energy markets:
an opportunity for blockchain technologies?
In the above picture, blockchain technology can help more efficiently use the private EV charging stations. On a blockchain-based platform, EV drivers can quickly find private-owned charging stations nearby and pay at prices decided by owners on the mobile application. Because of its distributed ledger and immutability, Blockchain technology guarantees transactions to be highly secured, transparent and automatic. Also, the smart contract function allows private owners flexibly to change the price for EV charging stations and add some other payment conditions.
So far, some startups in the world are already piloting the concept of the shared EV charging stations in practice. One famous example is Germany’s Share & Charge, an Ethereum-based project for EV charging services. The platform is an Open Charging Network (OCN) that allows clients (EV drivers) to pay for electricity used directly to EV charging station owners. (Source: Share&Charge).
Inspired by that, other countries also push their initiatives. In China exists a wide gap between the demand and supply in EV charging stations. Since private EV users have become the mainstream to use EV charging services, the private EV charging stations have great potential to become one commodity in sharing economy. In July 2020, China’s State Grid and Double Power Technology (特来电) released a plan about a decentralized sharing platform for EV charging stations. Indeed, even though the business is very nascent, the increasing number of EVs and the insufficient EV power supply indicate a booming potential market. One roadblock in China is the business model, an issue that impacts EV drivers, private owners and business operators of EV charging stations.
3. Green / Renewable energy certificates: traceability.
Traceability is a major function of blockchain, which has been widely adopted in the logistics process (supply chain) for many industries, i.e., food industry, jurisdiction. It can also be used for certification or qualification processes, by tracking the renewable energy from source to consumption and follow the carbon footprints. With the recorded data, power consumers can certify for certificates, and trade it on the Green Certificate Market, a national mechanism to promote the consumption of renewable energy-derived electricity. (See What is Green Certificate in China? Does it lead to new opportunity?). This similar traceability logic can also be applied to carbon credits and trade in the carbon emission market. Besides these two, some other clean energy-oriented qualifications can benefit from the precise traceability of blockchain to avoid double counting issues, such as RE 100, an initiative to call on 100% usage of renewable energy. (See Unveiling RE100 Roadmap : The Way to 100% Renewable Electricity in China)
Chinese State Grid’s blockchain arm, State Grid Blockchain Technology (国家电网区块链科技公司), launched ‘Second Traceable Blockchain Smart All-in-One Machine’ (秒溯源区块链智能一体机) as the first-ever blockchain physical facility in China’s energy consumption area. Its major function is to remove the barrier between the grid and the load and unify the data on and off the blockchain, to precisely collect, monitor and analyze the data of REpower consumption and load. (Source: Coingeek. 2020.9.18. 国家电网子公司推出“秒溯源区块链智能一体机”)
Figure 5 State Grid's blockchain machine for REpower traceability
Source: Integral Analysis, Lianmenhu.2020.9.18. 国网区块链科技公司发布新能源消纳区块链智能装置
Apart from the above, Governments or local authorities may also need a blockchain-based platform to launch, manage a certificate system and maintain, supervise the local energy market (i.e. renewable energy market, carbon emission market, etc..).
The powerful traceability of blockchain originates from its time-stamped property and decentralization. Since each block contains information of the previous block based on time series, the chain is created with strong immutability. Also, because transactions can be monitored by multiple parties, all the records are validated with high accuracy, leaving no room for double-counting issues, errors, or fraud.
Same in other industries, blockchain functions as a catalyst in shifting the power industry. It dismantles the original one-route relations between stakeholder and replaces with ever-distributed and secure connections among all participants, which essentially transforms the value chain and inspires more potential values in the decentralized network. This technology can well fit the uptake of distributed power generation based on REpower. In the nationwide call for carbon neutrality, it is promising to eye blockchain’s guarantee of anonymous transactions in the REpower market and carbon emission market, and its traceability property for certification, e.g., Renewable Energy Attribute Certificate (REAC).