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Power Ledger: Exploring the Malaysian government blockchain energy market test


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It's easy to theorise about the impacts of P2P blockchain energy markets, but what happens when they're put into practice?

Australian blockchain and cryptocurrency startup Power Ledger is focused on creating a peer-to-peer (P2P) market for homemade electricity.

In theory, this deceptively simple objective brings a lot of beneficial side effects.

Allowing peer-to-peer energy trading could boost the potential value-for-money of home solar panels, helping people make the switch sooner. It also introduces new energy sources to the grid, potentially driving electricity prices down. At the same time, it lets consumers signal their preferences for actual green energy, it removes some of the wastage associated with traditional green incentives like feed-in tariffs, and it provides a stronger incentive for power companies to source more energy from renewables.

But it's easier said than done. One big catch is that the extent to which you can actually translate the Power Ledger peer-to-peer energy marketplace into all these kinds of beneficial effects depends on people in the new marketplace behaving as predicted, the cost of energy in each market, what the local energy companies look like, how the electricity market is regulated, and countless other hyper-local factors.

So, until you can see how and whether the introduction of the Power Ledger marketplace actually translates into positive effects in specific regions, this sequence of cause and effect is still largely on the theoretical side of things.

Hence the tests.

Cause and effect

Last week, Power Ledger commenced a partnership with Malaysia's Sustainable Energy Development Authority (SEDA), the government body tasked with greening up the country's energy and managing the existing system of feed-in tariffs. The 8-month test is expected to begin before the end of 2019.

The test is functionally focused on validating this chain of cause and effect, and seeing whether Power Ledger can help push the country towards its ambitious renewable energy target of 20% by 2025.

"The country has very big ambitions for renewables," said Power Ledger co-founder Jemma Green. "It's currently got about one and a half gigawatts, and it intends to get to six and a half gigawatts by 2025."

For a (very) rough sense of perspective, one gigawatt is equivalent to one chunky power plant or a few hundred giant wind turbines, capable of powering several hundred thousand homes.

There are several specific areas where SEDA is hoping to test this Power Ledger sequence of cause and effect.

P2P energy market = more home solar panels?

"They're looking at the mechanisms that they could put in place to encourage the deployment of renewables, and one area where they see an opportunity is by using peer-to-peer trading," Green explained. "That is particularly where you have different types of users pay different tariffs. And so, somebody that is perhaps on a low tariff could install solar and then sell it to somebody in a higher tariff. It's a kind of arbitrage opportunity, using peer-to-peer."

"They see that this market mechanism, facilitated by the blockchain, could encourage the more rapid deployment of solar in the Malaysian market."

These tariffs refer to the cost of energy in different regions of Malaysia (and Australia). They encompass the cost of energy in specific locations, the cost of hooking up properties and delivering energy and the cost of using it. Higher tariffs mean more expensive energy, low tariffs mean cheaper energy.

This also extends to feed-in tariffs, which is what you get when you make renewable energy and sell it into the grid. In Malaysia, feed-in tariffs are determined by SEDA, while in Australia, feed-in tariffs are offered by energy retailers at different rates, depending on the provider and the location, as a selling point.

The problem is that if your energy is cheap, or if you don't consume a lot of energy, there's not much motivation to install home solar panels. Neither your usage nor the feed-in tariffs will be worth your while.

Plus, at times when you have a surplus (sunny but perfectly temperate days, etc) other people are more likely to as well, so the feed-in tariff system can actually see energy companies forced to buy unwanted and unneeded surplus energy.

Also, the feed-in tariff system is also largely geared towards a one-size-fits-all price, despite all the variations in how much a different home can usefully produce and the costs of delivering energy in different areas. How's the roof angled? Are the solar panels shaded for part of the day? What's the cost of delivering energy to and from that location? How much energy does the household consume relative to its own production?

The actual cost of energy in a specific location and the amount that a prosumer (the people making and selling homemade energy) can make at home are hyper-specific, but tariffs bulk-wrap everyone in a similar set of rules and prices.

That's where the Power Ledger marketplace comes in. Rather than having an outside authority dictate the value of energy across a large area, you now have an open market with more granular pricing. This is what creates those "arbitrage" opportunities where they didn't exist before.

Now suddenly a lot more people can sell energy into the grid locally for a higher price than they'd get from the feed-in tariffs, so suddenly there's a much greater incentive for more people to have solar panels.

That's the theory, at least. There are a lot of ifs and buts, which is why it's being tested.

"Malaysia has more than four million buildings with rooftop solar potential in Peninsular Malaysia," noted SEDA CEO Sanjayan Velautham. "SEDA's partnership with Power Ledger is a great opportunity to testbed energy trading among prosumers and consumers using blockchain technology, and to understand surplus energy trading in Malaysia's energy marketplace."

P2P energy market = deregulated energy market?

Power Ledger's envisioned contributions to Malaysia's energy targets don't necessarily start and end with home solar panels. It's also being tipped to change the status quo in other ways. For example, by creating a framework for opening up Malaysia's energy market.

"In the early stages, [SEDA is] looking at feed-in tariffs, but longer-term they're looking at the market mechanisms that can be put in place that are going to facilitate, not only the uptake of renewables, but the kind of market that they want to head towards – a deregulated market," Green said.

Currently, peninsular Malaysia has a single energy retailer, Tenaga Nasional Berhad (TNB). It's a publicly listed, government-linked company with a monopoly over the energy production and distribution for a large part of Malaysia.

This means you have one entity that simultaneously needs to remain financially viable as a business, ramp up its production, transition to cleaner energy, keep its costs low enough to serve the people, provide wide-ranging customer service as an infrastructure owner and energy retailer, satisfy its shareholders and be prepared to swallow government-mandated costs such as paying feed-in tariffs for potentially unwanted energy.

It's by necessity tightly-regulated.

Breaking up the TNB monopoly and opening the market has been on the cards for years now, but it's difficult in practice. TNB's involvement in the entire energy supply chain means that new competitors have no choice but to sign contracts with TNB to use its infrastructure, and TNB can legitimately underbid emerging providers.

Plus, in the absence of multiple providers, there hasn't really been any actual energy marketplace. Opening up the industry would mean building one.

Enter the Power Ledger marketplace, an energy marketplace that you can more or less take out of a box, constructing an actual market where previously there was just a company and its customers.

"[SEDA can] see technologies like the blockchain providing a level of sophistication in the market to make that hang together," Green said. "And they have 9 million customers and the government-owned retailer, TNB, there, so it's a very big market."

P2P energy market = global REC and carbon trading markets?

"The other opportunity [SEDA] sees partnering with Power Ledger is around marketplaces to trade renewable energy certificates," Green said.

Renewable energy certificates, or RECs, are "a pretty global thing", she explained. Each REC is essentially one megawatt-hour of green electricity, but the price of a REC varies enormously in different markets, ranging from about a dollar to several hundred.

Basically, energy producers create RECs based on the energy they produce. These RECs are then put into a marketplace where consumers can purchase them. By purchasing enough RECs of a certain type, a consumer becomes legally able to make announcements like "100% renewable energy powered".

Sometimes people will buy RECs because it's nice to make green claims, other times it's a legal requirement. And while you obviously can't fire blobs of green energy around the world, RECs are a form of tokenised energy that can also benefit from a blockchain marketplace.

"You've got two types of RECs: compliance RECs and voluntary RECs," Green explained. "Compliance RECs are when a country or a state has actually specified a target of renewables, and so any retailer that's in that market needs to buy that percentage of renewables, and that creates a price for the REC. So in the US, you don't have national targets for renewables, but 34 states in America have set renewable energy targets, and so there are 34 discrete RECs markets there."

"About $3 billion of RECs are issued in the US every year... that's a compliance market driven by state targets. Those [compliance] RECs vary in price from $20 to more than $300."

"In the voluntary market, prices are much lower. Like, a REC could be traded for around $1. And that's where companies or organisations have voluntarily decided to offset their emissions, and so they purchased the REC in a voluntary market."

As you can imagine, these massive price differences create clear arbitrage opportunities, where a company in an expensive compliance REC region could buy RECs from a cheaper voluntary area to meet their obligations at a lower price. But as you can also imagine, RECs trading is kind of complicated, and it involves an extensive and expensive series of contracts, third-party audits and local standards and compliance authorities.

It's a good match for blockchain, especially if you have ambitions of seeing it go international or facilitating the interchange of separate schemes such as RECs and carbon credits.

"In carbon markets, carbon credits and renewable energy certificates can be used interchangeably," Green said. "And that, I think, will be interesting. If you can create a very low-cost way of trading across borders – across countries – that will allow countries that are implementing their Paris Climate Agreement goals to be able to buy credits from another place to equip against their carbon reduction commitment obligations."

"That was the other clear messaging from the Prime Minister of Malaysia and the energy minister," Green said. "Malaysia has pledged to reduce its carbon emissions by 45% against 2005 baselines, which is a very bold target."

Malaysia, with its largely centralised and state-driven energy industry may be a prime candidate for Power Ledger, but RECs and carbon credit trading across borders means that other countries will also need to pick up what Power Ledger is putting down.

"In certain countries, they may allow international [carbon] credits into their country. So it's really up to a state as to whether they will do that," Green said. "If they do, the institutions will want a low-cost way of transacting. I think that the countries that are allowing international credits could have a marketplace that would be common to them, to buy and sell credits."

It's easy to say what should happen in theory, but every market is different and it's tough to account for factors like resistant incumbents, and the need to build network effects.

Theory and practice

"Some incumbent players in utilities are resisting what's happening in the markets and not really looking at innovating or doing innovation on the side," Green noted.

"But what I really like about what's going on in Malaysia is that it's authentic, and they want to get ahead of the curve and really set up their market so that it's going to work really, really effectively."

"I think they see us as, you know, building the operating system for the new energy marketplace, that our technology can really help them make that transition, and they really want to lead. So I think it's exciting, because they want to leapfrog to energy future rather than drag their heels."

It's funny how decentralised technologies are often at their best when championed by central authorities.

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Disclosure: The author holds BNB and BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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