Energy Cryptocurrencies

2017 was a catalyst year for energy focused cryptocurrency projects. Several different companies presented their business ideas with which they aim to disrupt the energy sector. Most of them used an ICO as a method for gathering funds to realize their idea. During the crypto bear market of 2018 however, public interest in these projects has cooled down. In this article, I want to discuss why innovations in the energy sector are required and how cryptocurrencies can support these changes.

Talking about the global energy providing sector as a whole is difficult, because its local submarkets highly depend on regulations in individual countries. Nonetheless, there are similar circumstances and trends affecting the whole market, such as rising demand, rising costs, centralization vs. privatization, need for sustainability, increasing pollution and catastrophe prevention. Let’s take a look at the global challenges in detail:

Probably the biggest trend in the energy sector is rising demand. The global demand for energy is expected to grow by more than 25% to 2040.¹ There is a variety of driving forces behind this surge in demand. On one side, we have a rising demand in electricity.² It originates from the continuously growing digital economy³ or the expected growth in the electric vehicle sector, where the number of electric vehicles is said to rise from 4 million today to 1 billion by 2040.⁴ On the other side, there is rising demand from developing economies such as India, who will account for a much larger percentage of global energy consumption in 2040, than they did in the year 2000. A growing world population of about 1.7 billion people till 2040 will even further enhance the global demand for energy.⁵

However, this rise in demand didn’t necessarily go along with reasonable costs, although it is difficult to compare data on energy costs across different countries. While the crude oil price is at half the price it was five years ago, it is still twice as high as it was 50 years ago (prices are inflation-adjusted).⁶ In the U.S., inflation-adjusted prices for electricity have increased by 7.5% since the year 2000, although they have stayed roughly around the same mark for the last 60 years (with a few ticks upwards and downwards).^7,8 In Australia however, prices for households increased on average by 72% for electricity and 54% for gas from 2003 to 2013.⁹ Additionally, the electricity bill for households in Greece increased by 64% from 2010 to 2017.¹⁰ In Europe generally, the poorest ten percent of households spent 9.8% of their expenditure in 2015 on energy.¹¹

On the contrary to Europe, the U.S. and Australia, inflation-adjusted prices for electricity have gone down by more than 55% over the last 20 years in China.¹² In general, the electricity prices per KWH are way lower in China and in India (ranging around 0.08 USD) compared to the U.S. (0.13 USD), France (0.19 USD), Japan (0.22 USD) or Germany (0.33 USD).¹³ Concluding from that, energy prices are not rising in every country, but there are still more than enough countries who could use innovative approaches to reduce their local energy costs.

As low as costs for energy in China may be, pollution is a major problem in the country. It causes 1.1 million premature deaths and losses of 20 million tons in crop production on average per year in China.¹⁴ A major part of that pollution derives from power plants with China being the world’s largest consumer of energy originating in coal and lignite.¹⁵ In general, cheap energy sources are not only one of the major causes of pollution in China, they also produce CO2 emissions, that are considered one of the causes of global climate change.¹⁶

But it is not only prevention of environmental pollution. The demand for energy since the Industrial Revolution has led to a wide-scale extraction of fossil fuels.¹⁷ Oil and gas reserves are expected to last until 2042 and coal is expected to be available until 2112.¹⁸ However, demand for energy will continue to rise, so there need to be new ways to produce energy, paving the way for mass adoption of renewable energy devices.

Additionally, the environmental catastrophes caused by the nuclear disasters of Chernobyl in 1986 and Fukushima in 2011 underline the need for sustainable energy generating solutions. While nearly 600 deaths are associated with the malfunction of the nuclear power plant in Fukushima,¹⁹ the Chernobyl disaster is estimated to have caused up to 200,000 deaths.²⁰ The financial damage caused by the Chernobyl incident is estimated at around 235 billion USD,²¹ whereas the Fukushima incident caused 188 billion USD in costs.²² Both nuclear disasters also led to massive relocations of hundreds of thousands of people.²³

Unfortunately, the current structure of the market doesn’t help to solve these challenges. The energy providing sector is still dominated by centralized energy production, partly through state owned enterprises.²⁴ This centralization is inefficient, since it reduces competition and tends towards monopolistic practices.²⁵ However, due to these known inefficiencies and facing the above-mentioned challenges, several countries started to privatize their energy market or have already completed the privatization. In Europe for example, the energy market is mostly liberalized,²⁶ while this liberalization is still in an ongoing process in Asia.^27-29

Different cryptocurrency companies are now seeking to turn these circumstances into an advantage for them. While the ambitions of these projects partly differ from each other, they share the same goal, which is to decentralize the energy market. Their core idea is to replace a small number of giant power plants with a huge number of small energy providers. This decentralized nature of their plans is an opportunity to solve the biggest challenges the energy market is facing and offers even more possibilities to make the market more efficient:

First of all, these platforms will give both providers and consumers the possibility to trade energy with each other without the need of middlemen. Small-scale producers who want to sell surplus power can use the platform to offer their energy production to others, while households can choose from a bunch of different producers in these platforms, that best fit their needs regarding clean energy, costs and location.

This much increased competition in contrast to centralized energy providing systems will give consumers the ability to choose those energy providers in the market, that charge the lowest amounts for energy. In case all energy providers in the market charge unreasonably high costs for energy, the entry barriers for new energy producers that want to offer their services for cheaper prices than their competition, will be much lower due to the matching engine.

Various companies in the crypto energy space are accompanying their energy trading platform with smart meters, that can be used by consumers and providers to measure energy consumption in real-time. These smart meters also give consumers the possibility to pay for their energy consumption on demand and in real-time. This opportunity is further facilitated by the low transaction costs of cryptocurrencies and the ability to automate the payment process with smart contracts.

The decentralized energy market introduced by these projects also increases sustainability in energy production. The targeted huge number of small energy producers will raise the percentage of renewable energy on overall energy produced, since smaller providers are much more likely to place a bunch of solar cells on their roof than to build an atomic power plant in their front yard. The ever-decreasing costs for solar modules, which have been reduced by 99% since 1980 and are projected to drop another 40 percent in the next five years,³⁰ are further facilitating this change.

Additionally, these platforms offer a new possibility of investing. If one of them creates a cryptocurrency, that is pegged to the price of energy (for example one unit of the coin equals the average costs of one kilowatt-hour across the market), they would basically create a new stable coin, whose value is determined by the current price of energy. It would create a new way of value-keeping, since most other stable coins are pegged to the price of fiat or precious metals.

While all these ideas are promising and needed in the energy market, it remains to be seen, whether the current cryptocurrency energy-focused companies can deliver on their promises. Most of these projects are startups that entered the market around two years ago and were financed via an initial coin offering. After a long crypto winter, these projects might be already running low on the funds gathered in their ICO and they might still be far away from being profitable enough to finance their company with their earnings alone. So, they could go out of business quickly and therefore not deliver on their promises.

Additionally, even if they are not running low on funds and can keep operations live for the next years, they could still not be capable enough to fulfill their promises. Developing a functional peer-to-peer energy trading application is a complex task, as well as equipping consumers with the necessary hardware such as smart meters or renewable energy devices and integrating these devices into a smart grid. It requires deep technological knowledge and understanding, which is also looked for in much bigger companies, that might offer a significantly higher wage and a significantly better work environment than these startups.

However, even if they have the funds and the talent, the progress of these projects can still be very slow. Besides the software and hardware development, which is already complex enough, these plans also include a huge amount of business development and regulatory talks. It is very well possible, that the first few years of these projects are spent on development, followed by several prototypes, while the promised peer-to-peer energy trading for the masses will be available several years later. And even if the product is great, it is not guaranteed that they can successfully onboard enough energy providers or consumers to make the platform interesting for the general public.

This article outlined the challenges the energy market is facing and how cryptocurrency companies can support solving these challenges. Currently, the energy market is suffering from an ever-growing demand across the globe, while the costs for energy consumption are not necessarily staying at a reasonable level. To fight environmental pollution and to prevent catastrophes like the ones caused by malfunctions in nuclear power stations in the past, there is a strong need for sustainable energy production via renewable energy devices. Liberalization of the energy markets is completed in some parts of the world, while it is still in an ongoing process in other parts of the world.

Several cryptocurrency companies are now entering these privatized markets to decentralize energy production by providing users with the possibility to trade energy peer-to-peer. This will increase competition in the energy providing sector and will likely make energy consumption more cost-efficient. With the use of smart meters and smart contracts, users are able to pay for their energy consumption in real-time and on demand. The decentralized nature of this new energy providing market will likely raise the percentage of renewable energy on overall energy produced, since smaller-scale energy producers will rely on renewable energy. The platforms could also provide a new form of a stable coin, if they should choose to peg the price of their coin to the costs of energy.

While these plans are all great, it remains to be seen whether the current energy-focused companies in the cryptocurrency space can deliver on their promises. Executing these plans requires funding, talent and tons of effort, which a lot of startups fail to deliver. However, it will certainly be greatly appreciated if they did deliver and bring innovation to the energy sector, because change towards less centralization and more sustainability in energy production is highly needed.