Accelerating the energy transition with Web3 technologies

The convergence of sustainability goals and technologies like blockchain and AI offer opportunities to the energy sector.

The Fourth Industrial Revolution signals an oncoming disruption to every industry and market in the world. With the arrival of Web3, energy markets are at the cusp of this revolution. The convergence of AI, blockchain technology, edge computing, and the IoT paves the path to a more decentralized and collaborative version of the internet.

“We are witnessing a paradigm shift from a centralized internet world to a decentralized one, which is characterized by disintermediation and democratization. There is a lot of overlap with how the energy sector is transforming to become more decentralized and distributed in nature,” says Sabine Brink, Shell’s blockchain and Web3 lead.

There are a wide range of opportunities for applications of Web3 and blockchain technology to support the urgent energy transition. For example, Shell and a number of other global firms have launched Avelia, a book-and-claim solution to help scale the supply of sustainable aviation fuel. Technology companies such as Toucan, Moss.Earth, and JustCarbon are tokenizing carbon credits, offering clients a simpler way to offset carbon emissions. Peer-to-peer energy trading is becoming a reality thanks to ventures such as Powerledger, Grid+, and LO3 Energy.

Paul Brody, EY’s global blockchain leader, emphasizes the transformative character of this infrastructure technology: “In a blockchain-based ecosystem, you can have a very liquid, digital interaction, where you can pick from a dozen different vendors, and you can evaluate them all on a digital basis.”

Decarbonization requires decentralization

Addressing climate change has one requirement above all: decarbonization of energy systems. This requires the further electrification of economies and energy-system decentralization.

Given the nature of renewable energy, especially solar and wind power, the electricity generated is not always readily available (without storage), and is often geographically removed from where the electricity is needed. Moreover, with the advent of prosumers—consumers who also generate energy that can feed back into the grid—existing energy systems need a deep overhaul.

“We have a lot more players entering the energy market, as well as a different mix of low-carbon energy products. This requires global orchestration of energy systems on large scales to ensure that we reach net zero across the board. On top of that, transparency, auditability, and accountability will be key.” explains Brink. “Blockchain as a decentralized network technology makes a lot of sense to underpin this.”

These changes in the energy system will exponentially increase the number of transactions, including micro-transactions, which will take place every day between many players and energy assets. These must be recorded and managed in ways that guarantee data transparency, trust, and verifiability. It is vital that transaction systems and regulations evolve to cater to this need.

The role of blockchain technology

Blockchain technology, a digital and decentralized ledger that keeps multiple copies of transactions, makes data tampering close to impossible. Though developed for cryptocurrency, which remains strongly associated with digital currencies, blockchain lends itself to many uses. Its main benefit—incorruptibility—generates a valuable asset for markets: trust.

Blockchain technology is used in other markets, primarily for financial transactions. “Blockchain is reshaping finance, first of all, but it will ultimately, over time, reshape all business-to-business applications, because anything that exists, real or virtual, can be represented as a digital token,” says Brody. “The DeFi ecosystem—the decentralized finance ecosystem—in a relatively short period of time, less than two years, mobilized a couple hundred billion dollars of capital around the concept and built several hundred products and services.”

Digital tokens come in two formats—fungible and non-fungible. They can commoditize products and services (fungible tokens) or digitally represent unique objects (non-fungible tokens (NFTs)). The tokens are registered on blockchains to provide proof of ownership and certify authenticity. Tokenizing goods and services can create digital markets for low-carbon products, such as sustainable aviation fuels or for carbon credits.

“I’m seeing a large opportunity for the energy industry, because there are many new markets emerging which can be designed with new emerging technologies,” explains Brink. “If you think about hydrogen and biofuels, these are markets where we don’t have existing IT infrastructures in place.” Leapfrogging into a digital system is a real opportunity for future energy system markets.

Moreover, blockchain technology introduces the option of using smart contracts, providing a system that facilitates trustworthy automated transactions without the need for human intervention.

“Smart contracts are a way for us to preprogram certain rules into a protocol or a ledger, which self-executes when certain conditions are met,” underlines Brink. “So, you can imagine a world where machine-to-machine connections are adding data to a ledger in real-time thereby creating energy certificates or proofs of emission reductions for a value chain.”

Powerledger, an Australian renewable energy blockchain trading platform, uses smart contracts to facilitate trade in surplus power. Smart contracts, and blockchain technology more generally, can also be used to manage public finances. EY’s OpsChain Public Finance Manager tool serves this purpose and is used by cities such as Toronto and organizations like the World Bank.

Web3 and blockchain are still maturing

As with all new technologies, the beginnings are not always easy. One of the main criticisms of blockchain technology is its intense energy use, and the resulting carbon emissions. This influenced the U.S. government to initiate research into the climate effects of digital assets.

There are signs this may not be a long-term problem. Ethereum, one of the world’s most prominent public blockchains, recently addressed the emissions of its operations by successfully changing its consensus mechanism—the system by which transactions are validated and added to the ledger. It reduced its energy use by a reported 99.95%.

A more worrying challenge might be that using public blockchains is currently “not that different from the early days of the internet,” as Brody puts it. There are actors with bad intentions, and, says Brody, “enforcement actions are coming what feels like many years too late to make a substantial difference.”

Additionally, “just because data is on a blockchain, that doesn’t mean it’s 100% correct data,” explains Brink. “Data integrity is absolutely key for the energy transition.”

Blockchain technology also faces privacy concerns. “Public blockchains fundamentally require that everybody checks each other’s work. The problem with that is, if you want to keep your information private, it doesn’t work,” says Brody.

Technology solutions that enable privacy on blockchains are available, but have yet to mature. Zero-knowledge proof technology, an encryption method that verifies transactions or statements without providing disclosure of all information, is a possibility. “We have to convince regulators that the new existence of privacy is not evidence of a felony,” says Brody.

Regulation plays an important role

Governments and regulators can play a critical role overcoming challenges by facilitating and fostering innovation, and using regulatory sandboxes.

The Australian government set an example in 2019, when it ran a trial as part of the RENeW Nexus Project, and used blockchain technology to monitor transactions between 48 households trading solar energy generated by rooftop panels. The resulting report highlighted the technical feasibility of peer-to-peer energy trading, but also the need for government to ensure the energy price is attractive enough for households to participate.

To fully unleash the next industrial revolution, businesses and consumers must trust the systems created by new digital technologies, and no one is better placed to generate that trust than governments, through regulations and the rule of law.

Brody says, “It’s not about getting rid of trust. It’s about figuring out how to engineer, in a more sustainable way, digital systems, where we behave well because we have a stake in the ecosystem.”

This content was produced by Insights, the custom content arm of MIT Technology Review. It was not written by MIT Technology Review’s editorial staff.